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The “flying geese” model of Asian economic development: origin, theoretical expansions and regional policy implications Kiyoshi Kojima Presented By: Sonia Afrin Student ID.: MSS 141505 Ayesha Jerin Student ID.: MSS 141524 Economics Discipline Khulna University Introduction This article presents a comprehensive evaluation of the “flying geese” (FG) model, which recently has became quite well known throughout the world as a way of describing rapid economic growth in East Asia. This famous concept was introduced from Kaname Akamatsu’s work in the 1930s. Through statistical analysis of industrial development in pre-war Japan, the author of this paper followed Akamatsu in developing theoretical model called Kojima I. And his subsequent works produced Kojima Models II and III. Akamatsu’s original FG model : The wild-geese-flying pattern of industrial development indicates – “the development after the less-advanced country’s economy enters into an international economic relationship with the advanced countries” (Akamatsu, 1962). Aim of this model: FG model aims to address the catching-up process of industrialization in latecomer economies. Basically it is a theory to explain a sequential development of manufacturing industries in developing economies. Basic Pattern of Development of Industry We know that wild geese fly in orderly ranks forming an inverse “V” shape, just as airplanes fly in formation. This flying pattern of wild geese is metaphorically applied here. To understand the basic pattern of development of industry we considered three time series curves each denoting import (M), domestic production (P) and export (E) of a certain industry. From the empirical study Akamatsu drew the basic sequential curves for a consumer good, X ( say, cotton textile) and for a capital good, Y (say, textile machinery) in country A (Japan) ( Akamatsu, 1950, 1965). Figure 1: Flying Geese Pattern of Industrial Development Explanation of the above graph: In figure 1.a the import of consumer good X increases from t1 to t2 time period because when an underdeveloped nation first enters the international economy the imported industrial product for consumption from advanced nation. At t2, domestic demand becomes large enough to set up optimal scale plants and making it possible for profitable domestic production to begin. Therefore, at t2 the P-curve start to increase and the imports (m) of capital goods (Y) also rise shown in fig 1.b Now, t3 is the time period when the domestic consumer industry turns into the export industry (E.) Around t* export (E) increases whereas import (M) declines making trade in balance. At the same time P becomes equal to domestic demand (D) in fig 1a. This situation reflects the successful implementation of the catching up process which is the basic pattern of FG model. Now, the industry is able to turn from import substitution to export-led growth. Explanation of the above graph (Cont..): Another feature of this stage is capital good (p) starts domestically produced in fig 1b. Now for a lead goose country (A), the phase of post catch situation occurs after t* in fig 1a where E curve continue to rise up to a peak at t4 and then to decline because such labor-intensive consumer goods say textile are losing comparative advantage due to rapid rise in wage. Now a follower gosse say country B, whose wage level is much lower begins to produce textiles. This production is facilitated if lead gosse country A’s firms offer FDI in form of capital, superior technology and managerial skill to country B. This situation leads A’s foreign production Pf in fig 1a. After that, country B’s product are sold both local and foreign market and some portion is imported back to country A that is shown by reverse import M` curve in fig 1a. Meanwhile, country A’s export of capital good to country B increases with an enlarge scale of production and reduced cost in fig 1b. Variant Pattern of Diversification: The diversification of products (or industries) is classifiable into two pattern: Intra-industry pattern: Intra-industry cycle created by the emergence of new product within an existing industry. For example: from cotton woolen synthetic. Inter-industry pattern: Inter-industry cycle exhibiting the development of a new industry. For example: from textile to steel to shipbuilding to autos to computer. Each cycle, either intra-industry or inter-industry the basic pattern of FG model remaining the same. Kojima Model: I Diversification and Rationalization of Industries Kojima introduced a theoretical model in which the accumulation of physical and human capitals causes the economy to diversify first to more capital intensive key industries and to rationalize them so as to adopt more efficient production methods. This constitutes the first theoretical pillar for the FG model. Diversification of industry occurs- in figure 2, The factor endowment ratio, i.e. total capital (K)/total labor (L) is represented by the slope of a λ line. The line goes through a1, this implies the economy completely specialize in X-goods production, which is laborintensive industry relative to Y-goods. This situation leads to demand for labor. Then it becomes rational for the economy to move from a1 to a2 in X industry and from b1 to b2 in Y industry. This is a structural change of industries towards up grading diversification. Rationalization of industry is possible by technological progress, economics of scale, learning by doing and accelerated intraindustry product cycle. In figure-2, instead of the movement along the Y-isoquant where Y goods produced by an inferior α-mode of production, the rationalization of an industry shift to Y*-isoquant represent a superior β-mode under the same factor price ratio and factor intensity. This shiftment is a Hicks-netural technological progress. Kojima Model II: pro-trade-oriented (PROT) foreign direct investment (FDI) The regional transmission of FG industrialization has been facilitated by the “pro-trade-oriented FDI” mechanism, through which an investing country’s comparatively disadvantageous production is transplanted onto a host country in such a way as to strengthen the latter’s comparative advantage. Such pro-trade-oriented FDI constitutes a second theoretical pillar for the FG model. Investment Frontier Through intensive statistical works Kojima (1995) found that Japan’s FDI has been of the PROT type, which exhibits a pattern of an “investment frontier” . Assumption: a. An economy’s industrial structure is diversified and upgraded in a sequence from X (textiles and other labor-intensive goods) to Y (steel, chemicals, and other capital-intensive goods), and further to Z (machinery and other capital/ knowledge-intensive goods). This industrial shift occurs horizontally over time. b. The FG pattern of industrialization is transmitted through PROT-FDI from economy A, the lead goose or Japan, to follower geese B (or, NIEs), C (or, ASEAN 4), and D (or, China) according to the order of industrialization stage. This geographical spread takes place vertically over time. At period I, Japan graduates from catching-up process in X-industry, and no outward FDI yet. At period II, Japan achieves a comparative advantage in Y-industry and invests in B’s X-industry. At period III, Japan upgrades its comparative advantage to Z-industry, and invests in country B’s Y-industry and country C’s X-industry. At period IV, Japan invests in country B’s Z industry, country C’s Y industry and Country D’s X industry. Kojima Model III: Agreed Specialization Agreed specialization is a very normal affair within the firm. Specialization within the plant or within the department is a de facto agreed specialization, which is planned by the headquarters and agreed upon by each sector. A third theoretical pillar for the FG model. Supporting researches to FG regional growth: 1. Tran (1992) analyses the transmission of Japan’s synthetic fiber industry sequentially to NIEs, ASEAN 4, China, and Vietnam, beginning from downstream to upper stream products. This findings is supportive of Kojima’s “Investment Frontier” map in Fig. 3 above. 2. APEC Economic Committee (1995) did an intensive statistical study on correlations between the trade and investment patterns of individual APEC member economies in 1980, 1990, and 1992, and found that direct investment and trade are complements, not substitutes, meaning that FDI in this region is PROT. The correlation between trade and FDI shares of all APEC member countries for 1992 is found to be positive, large and significant. This supports the FG pattern of FDI-led growth. Similar research is done by Urata (1996). 3. In 1996 paper, Shinohara investigates the rapid increases in machinery trade during the 1975 to 1992 period between (i) Japan and Asian countries (NIEs, ASEAN 4, and China), (ii) the USA and Asian countries, and (iii) NIEs and ASEAN 4. These increases reflect both the expansion of intra-industry trade and the interaction of mutual industrial development in the Asia Pacific region. Comments on the FG model : A number of criticisms have been raised about the FG model. Some are political and ideological in nature. Some are: 1. Bernard & Ravenhill (1995) criticize the FDI-led growth strategy in the following way: Such strategy creates dependence on borrowed technology, capital, management, and marketing and does not encourage any indigenous innovation. 2. The FDI-led growth of Asian geese, which the Japanese economy led, resulted in “triangle trade” in which capital goods, components, and other inputs are purchased from Japan (and increasingly from Taiwan and Korea). This triangle trade caused a large trade deficit for Asian countries vis-a`-vis Japan. 3.In progress of FG pattern industrialization, the structure of industries and exports becomes more or less similar between the lead goose and the follower geese. This creates many problems such as overproduction, dumping and protectionism in the importing countries. But the most promising approach to mitigate such problem is agreed specialization. The 1997 to 1998 financial crises: The financial crises in East Asia originating from Thailand in July 1997 have raised serious questions about the sustainability of the FG pattern of development. Because, the Asian geese were no longer flying but lying sick on the ground. Mainly, the financial instability was caused by the huge speculative movement of hot money. In this respect, Radelet & Sachs (1997) were quite foresighted in expecting the recent economic rebound in East Asia and advocating a quick return to its FDI-led growth formula as a way of moving forward. Conclusion The regional transmission of FG industrialization has become famous as an engine of Asian economic growth. A number of comments, some of which are supportive and others are critical, are reviewed and discussed in order to broaden the range of issues that the FG model should explore. Asian developing countries within APEC should concentrate to drive regional economic development along the lines of the FG model. Thanks to all…………………