Yen Bloc: Toward Economic Integration in Asia

Chapter 2: The Rise of Regionalism in Asia

The pattern of economic development in Asia during the postwar era has been likened to a flock of wild geese flying in formation. The development process began in Japan, with the Asian NIEs and, later, the ASEAN economies and China catching up from behind. Traditionally, these economies depended heavily on the United States for trade and investment, but the trend toward intraregional economic interdependence has accelerated since the Plaza Accord in 1985. The end of the cold war also promoted the integration of the socialist countries into the regional economy. The virtuous circle between growing interdependence and rapid economic growth, however, turned into a vicious circle in mid-1997, when a currency crisis started in Thailand and spread to the rest of the region. The new reality of interdependence has called for closer cooperation among Asian governments. A Virtuous Circle between Interdependence and Economic Growth Intraregional interdependence among Asian economies has deepened and widened during the postwar period. Through trade and investment, the wave of industrialization that spread from Japan to the Asian NIEs in the 1960s subsequently spread to ASEAN and China. 15 2 The Rise of Regionalism in Asia    The Flying Geese Pattern of Economic Development In the flying geese pattern of economic expansion, countries specialize in the export of products in which they enjoy comparative advantage commensurate with their levels of development and at the same time seek to upgrade their industrial structures through augmenting their capital and technology. Foreign direct investment from the more advanced economies to the less developed ones, through relocating industries from the former to the latter, plays a dominant role in this process. The flying geese model was first used to describe the life cycles of industries in the course of economic development, with the focus on specific industries in specific countries.1 Subsequently, it has been extended to study the dynamic changes in the industrial structure (that is, the rise and fall of different industries) in specific countries and, further, to the shift of industries from one country to another.2 The life cycle of a specific industry can be traced by following the time path of an indicator of comparative advantage, such as the ratio between production and consumption. This usually takes the form of an inverted V-shaped curve, showing that competitiveness first improves and then deteriorates over time (figure 2-1). Capital accumulation (including the inflow of foreign direct investment) and forward and backward linkages with other industries, by changing the comparative advantage of the country concerned , usually lead to an upgrading of industrial structure. This can be represented by repeating the inverted V-shaped curve showing the production-consumption ratio for emerging industries, which are usually more capital- and technology-intensive than the preceding ones. A typical sequence seen among Asian countries is the shift from the textile industry to the chemical industry, the steel industry, the automobile industry, and the electronics-electrical industry. When extended to the context of an open economy, the flying geese model is used to describe the shifting of industries from more advanced countries to countries catching up from behind. This is shown in figure 2-2, with the inverted V-shaped curves representing the same industry in different countries .A typical example is the shifting of textile production from Japan to the Asian NIEs and further to members of ASEAN and China. Following the flying geese pattern, a sophisticated division of labor among Asian countries has also taken shape in the electrical and electronic industry. 1. Akamatsu (1962). 2. Chen (1989); Yamazawa (1990).     Foreign direct investment has played an important role in sustaining the flying geese pattern of economic development in Asia. In the investing countries (usually countries at higher levels of economic development), the relocation of declining industries releases resources (labor and capital) for emerging industries, making it possible to upgrade the industrial structure. In the receiving countries (usually countries at lower levels of economic development), the inflow of foreign direct investment helps to introduce Figure 2-1. Asia’s Flying Geese Pattern of Economic Development, by Industrya Comparative advantage Time Textiles Chemicals Iron and steel Automobiles Electronics/ electrical Source: Nomura Research Institute. a. For a particular country. Figure 2-2. Asia’s Flying Geese Pattern of Economic Development, by Regiona Comparative advantage Time Japan NIEs ASEAN China Vietnam/ India Source: Nomura Research Institute. a. For a particular industry.    the funds, management know-how, and technology needed for...