Flying Geese Model in the Development of North East Asian Economies - Case Study Example

Flying Geese Model in the Development of North East Asian economies Institution Course Professor Date Introduction The fundamental of flying the geese model (FG) and its concept was developed by Akamatsu in 1962. As matter of fact, the flying geese model was initiated as “one-country with one product” pattern that describes production of one specific commodity, import and exports (Akamatsu 1962, p.08). Akamatsu expounded this basic paradigm by illustrating it with flying pattern of wild geese forming three series curves, each designating domestic production, import and export of manufactured goods in under-developed countries to overseas countries which have admirable best economies (Akamatsu 1962, p. 11). The FG model is the main basis of restructuring of modern pattern of expansive economic development. This essay compares and contrasts the role of FG Model in the development of North East Asian economies. It also includes how international enterprises have evolved in this region. As Akamatsu stated in his research, “the economic growth of the developing countries in 20th century was impossible to study and analyze without considering the mutual interactions with economies of advanced countries” (Akamatsu 1962, p.1). In this context, his assertion still holds true in that the economic development of the modern world can never be self-sufficient but will depend on interactions between advanced states and developing states. In essence, the growth on economic status of states lies in the steps of climbing the ladder of comparative advantage (Ozawa 2001, p.478). The commodity makeup of exchange of goods in the Asia-Pacific regional countries is undergoing radical changes. Asia's developing countries' manufactured export have grown drastically leading to growth on traditional arrangement of intra-regional trade dominated by exchange of primary commodities with manufactured ones in between low earning countries and economically well off countries like Japan(intra-industry trade) (Ozawa 2011). Composition of commodity trade in North East Asia Life cycles of industries in process of economic development can be best described through the flying -geese model (Akamatsu 1962, p.23). The expansion of economic dynamism over the region made countries to specialize on production of export product in which they enjoy an enormous comparative advantage which they upgrade industrial structures via augmenting technological and capital endowment. The process is sustained through foreign direct investment by more advanced nations to less developed ones basically through relocating firms from the former to the latter. The representation of a life cycle of a particular industry can be trace by the trends on volume of primary production, imports and exports. For instance, in a particular industry the level of domestic production first rises and the declines. The same scenario is witness on both imports and exports. When these factors (production, imports and exports) are plotted on a graph paper against time, they form a standard inverted pattern of overlapping V-shaped curves the same as wild-geese flying in an organized ranks, Fig (1). Comparative advantage indicator is a simplified analysis of production, imports and exports (Widodo 2009, p.58). There are five stages that each industry passes in the life cycle. The first stage is the introduction stage (domestic production) which starts by transfer of technology though imports dominate domestic market. In import-substitution stage, imports starts to fall due to faster expansion on domestic production as compared with demand in the market. At this stage, the industry moves to export stage as domestic demand fall as compared with production which expands thus production surpass domestic demands hence surplus for exports. The next stage is the maturity stage whereas both production and exports starts to decline as a result of escalating production costs and investment in under-developed countries accelerates. Reverse-import stage is the final stage, and entails the industry being the net importer again, getting imports from overseas subsidiaries of the country concern. A shift from textile industry to chemical industry and subsequently to steel and automobile industry and further to electronic industry is a typical sequence witness in North East Asian countries like Japan, see Fig (a). In an open economy, flying -geese model is used to illustrate shifting of industries from well developed countries to countries yet to advance their economies (countries catching up from behind). For example, inverted V-shaped curves now representing the same industry in different countries, as in shifting of textile industry from Japan to the Asian newly industrialized economies(NIEs) and furthermore to Association of Southeast Asian Nations(ASEAN) countries and China (Beeson 2007, p.35). By contrast, owing to the emergence of China in East Asia, the flying-geese model led by Japan, seconded by NIEs, then ASEAN members , the typical orderly catch-up process has been interrupted (Sanidas 2009, p.115). The 2001 White Paper on International Trade published by Japan's Ministry of Economy, Trade and Industry, argue that, by receiving direct foreign investment, China has been successfully competitive in both Technology -intensive products and labour-intensive products. Improving productivity through competition has led to regional economic upgrade and thus increases development in the long-term prospect. However, in short-term prospect, increase competition in between China and ASEAN member states automatically triggers contrary repercussions on the former, as was seen in1997-98 Asian Financial crisis (Garay 2003). Fig.1. Asia's Flying-Geese Paradigm of Economic Development Volume Consumer goods Capital goods Time Underdeveloped stage advanced stage Source: NIEs As Akamatsu stated, “the economic growth of the developing countries in modern times is impossible to study and analyze without considering the mutual interactions between these economies and those of advanced countries” (Akamatsu 1962, p.1 ). Note: Vertical Axis: Volume of: (1) import, (2) production, (3) export. Horizontal Axis: The passage of time. b) For a particular industry (textiles) Source: NIEs Yamazawa's framework as presented in Kwan (1996, p.162). Globalization Globalization can literally mean opening up national economies in underdeveloped world whereas in developed world means initiating fusion of national economies. Cities act as management and logistical centre of global economy with technology connecting the global world systems rather than limiting it to just local regional markets. Globalization can be precisely noted as a map of networks of cities with leakages to global economy on manufacturing, mining and agriculture (Beeson 2007, p.36). During economic crisis of 1997-1998, this afflicted the cities of East and South East Asia causing economic meltdown. Adjustments to this crisis depend on logics on the issue of globalization and emerging regional influences among each other and their tendencies to overcome it. Furthermore, regional dialogue was initiated and Asian countries also projected their voices to international context for assistance. Following this, countries with the same commonality in the region over a number of areas converge to form regional identities with trans-regional policy to assist in solving international issues (Beeson 2007, p.48). Theorist has criticized the sustainability of flying-geese model on development and economic states of stricken nation. According to Radelet and Sachs (1997, p.45) faster return to FDI-led growth as a way of curing the aftermath of economic meltdown is a key solution. They stressed that financial instability is often followed by rapid economic growth. Thailand, South Korea and Indonesia were bailed out by the intervention of International Monetary Fund (IMF) and United States at the wake of this currency crisis though it was attributed to their own act making. In another perspective, the crisis was regarded as a result of non-regulation of financial markets that permitted Asian industries involved in huge overseas borrowing caused by misappropriation of resources as well as incompetent borrowing (Garay 2003, p. 69). Critique of the flying-geese model The assessment of the validity of the flying-geese model has been undertaken by various scholars. Ozawa (2001) is among few scholars who have tried to criticize the success of the FG model on the East Asian development scenario. The critics are summarized with the following topics. The ambiguity on the technological transfer mechanism As stated by Akamatsu in his original document, effects of commerce specifically on imported manufactured goods can energize effectively catching-up process by the local producers. It is unclear then to believe how local firms can favourably overcome competitive pressures of imports under such harsh situations (Beeson 2009, p.29). Though local firms can find new markets and enlarge consumers’ tastes and preferences, competition emanating from imported products can totally undermine their progress leading to monopolization by imported goods in local markets. The FG model stresses the use of foreign direct investment (FDI) as the predominant provider of know-how. However, a scarce positive effect of FDI as per empirical analysis has been established. Adoption of improved technology has been beneficially associated with the extent of competition and production gap between both foreign and domestic firms. According to Hill and Athukorala (1998, p. 42) large gap makes technology adoption by local firms strenuous. Even though, the flow of FDI is justifiable as per hypothesis of the FG model, critics observes that the second phase of the model concerning both NIEs and China manifest shallow industrialization where minimal technological transfer to local economies is incurred. Furthermore, exploitation of cheap and unskilled labour for assembly functions by transnational corporation (TNC's) is witness (Farrell 2007, p.191). The “reverse -import” based on maturation pattern of production and technology. According to FG paradigms, the last stage of life cycle for each product depicts the firms less cost competitive nature and subsequently begins to exit the market, leaving overseas shifted imports to dominate the market. Maturation pattern, in outputting the product assumes that gains in production process over sometimes slows down then eventually stop. Thus the life cycle of the product is generally the production steps. The validity of FG model in this case can only exist where domestic production is reduced for relocation of international production firm to coincide with it. The question of contrasting catching-up process The FG model pillars on an assumption that there is linearity in all economies during industrial restructuring (Ozawa 2011, p.278). For example, NIEs (first-tier) of today are matched with past Japanese industries. The second-tier (NIEs and China) are believed to be imitating their forerunners (Japan and first-tier NIEs). The export composition of second phase firms does not portray industrial experience. Argument by researchers shows that, minimal value addition is present in intra-transfer pricing. A lot of concern has been also raised on contrasting differences in the development paths among the first-tier NIEs (Korea, Taiwan province of China, Hong Kong China and Singapore). According to Cronin (1992, p.30) Taiwan province of China and Republic of Korea are more competitive in relation to Japan as compared with Hong Kong (China) and Singapore. The presumed diffusion of Japanese-style business practices and institutions Japanese entrepreneurs used the FG model as “prescription” at its inception days. It is evident that other nations especially NIEs, and ASEAN should emulate and embrace in their strive to achieve national economies (Bernard & Ravenhill 1995, p.184).Policies used by Japanese such as “Just-in-time “operation instead of “just -in case” in production lines does not necessarily fit to other countries but may rather cause further new problems . Stability in regional hierarchy Stability of regional hierarchy has a lot to do with competition among the firms in East Asian economies. Firms depend on each other’s interdependence on production and trade linkages. Nevertheless, “negotiated confrontation” is a common relation between foreign investors and domestic producers (Kregel 1997, p. 232). In order to maintain regional tie, relocation of industries should occur in a systematic manner. Relocation of obsolescent industries to immediate follower by forerunners and the same to the next firm in hierarchy will bring problems, as it will be perceived that other firms are taken as dumping grounds for obsolescent industrial activities (Ozawa 2011, p.272) Conclusion FG model plays a critical role in fast tracking the economic development among Asian countries as exhibited by their increasing integration (García & Palazuelos 2014, p.110). FDI flows and bilateral trade cannot be under emphasised as it is a key item for economic growth and development. Remarkable economic performances have been achieved through proven merits of FG model and therefore Asian countries should broaden their current economic linkages although over reliance on extra-regional market will heavily affect coherent development pattern as manifested by FG paradigms. 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