Economic Analysis Series No.129
Dynamic Interdependence among the Asia-Pacific Economies

March, 1993
  • Ippei Yamazawa
  • Yasutaka Nagatani
  • Izumi Nakato
  • Nobuki Sugita
  • Akira Hirata
  • Hidenobu Okuda
  • Hiroyuki Kojima
  • Hitoshi Kinjo
  • Giovanni Capannelli

OVERVIEW

This project is one of the first projects initiated by the new Division of Research Cooperation in Economic Research Institute, Economic Planning Agency and focuses on the interdependence of economic development between East Asian economies. East Asia includes Asian NIEs and ASEAN countries as well as Japan. China is closely associated but not focused upon in this project. The period covered by this project is mainly the 1980s but the preceding decades are often mentioned in reference to the changes in the last decade.

Dynamic growth of East Asia

The growth performance of the East Asian economies for the past three decades has been remarkable. (Table 1) Four NIEs achieved the high growth of 8 - 10 percent and the four ASEAN (other than Singapore and Brunei) achieved the high growth of 6 - 8 percent. Japan's growth rate almost halved from 10 percent before the oil shock to 4 - 5 percent level thereafter but still the highest among developed economies. In the early 1990s, while the world economy suffered from the slow growth, Asian NIEs maintained 7.1 - 7.3 percent growth and East Asia excluding Japan maintained 6.7 percent growth (Asian Development Bank).

Why do the rapidly growing economies concentrate in East Asia? The Asian Miracle project of the World Bank picks up this issue and lists up the following factors contributing to the rapid growth of the East Asian economies.

trade orientation

industrial policy

development finance

macro-economic discipline

Confusious work ethics

geographical proximity

Each of these factors explains the success of high growth of some East Asian economies but not all of them. The Bank tries to give a synthesized explanation of all these factors. Our project, however, focuses on the last factor, geographical proximity. But it is not enough to find that they are located in the same area. We identify the fact that the high growth of the East Asian economies are interrelated and that this dynamic interdependence supports the high growth of all economies in this region.

The role model of interdependent growth

This dynamic interdependence is characterised by active foreign direct investment (FDI) and transfer of industries from advanced to developing economies in response to changes in their comparative advantage and resulting establishment of new trade network among both countries. This transfer of industries is often described as the "Flying Wild-Geese" develop- ment, in which multinational enterprises (MNEs) of advanced economies play a leading role. The Japanese MNEs, motivated by the rapid appreciation of yen and acute labour shortage, relocated their productions to NIEs and ASEAN countries. NIEs' MNEs were driven by the same motives to join in the similar FDIs in ASEAN later. ASEAN countries have received all FDIs in the area and achieved rapid industrialization through investment boom since 1987. Activated FDIs are accompanied by intensified trade flows in the region because the new ASEAN industries are supplied with parts, materials, and equipments by their parent MNEs.

The same interdependent mechanism is observed in the development of some sub- regional economic zones (SREZ) in East Asia ; Growth Triangle, Baht Zone, South China Economic Zone, Yellow Sea Economic Zone, and Japan Sea Economic Zone. Their develop- ment are characterised firstly by "natural economic territory" in the neighbouring subregions belonging to different countries. Secondly there are identified in each SREZ a center and peripheries, the former development being transmitted to the latter through active investment, trade, and labour movement. Thirdly there are least formal commitment made by central governments of related countries, thus minimising the reliance on governmental supports. The interdependent growth within each SREZ is based on complementarity between divergent stage of economic development and resourse endowments and quite consistent with the market mechanism.

They differ in their development stages and their development records are hard to be identified in national statistics of related countries. The last four SREZs were located along the border between market and socialist economiec and their development as natural economic territories had been deterred by the political conflict but have been accelerated since the open market policies of China and the demise of the cold war. As individual SREZ expand, they are being overlapped so as to make a greater East Asia, which happens to coincide with the East Asian Economic Group (EAEG) proposed by the Malaysian prime minister.

We have highlighted the activities of the MNEs but never underestimate the role played by local enterprises and local governments. Local enterprises are recipients of industrial transfer. They are eager to acquire new technology in order to catch up with their counterpart MNEs. Which of MNEs and local enterprises become the main catalyst in industrial development depends upon industry and recipient country. For industries such as textiles and steel with matured technology, it is local enterprises which carry out the catch-up activities. However, in industries such as electronics and fine chemicals with ever changing technology, the role of MNEs inevitably becomes larger. Further recipient countries endowed with entrepreneurship are capable of catching-up development led by local enterprises. On the otherhand, when demand for new products is limited at domestic market, export orientation is necessary from the beginning. Thus dependence on MNEs becomes inevitable as they are familiar with overseas markets. In some cases both catalysts actively work together in industrial transfer.

Governments of recipient countries often provide favorable conditions for industrial development. Many governments in the East Asian economies are given credit for their guiding role. First they maintain cautious stance in managing macro economic policies so that they could avoid hyper inflation and economic instability, thereby encouraging firms and labour to contribute to industrial development. Second they adopted outward-looking policies and attracted FDIs and maintained competitive pressure from abroad necessary for competitive industrial development. Third they sometimes picked up industries and gave promotional measures, whose effectiveness are given divergent appraisals between the East Asian economies.

All of these factors, MNEs, local enterprises, and local governments are included in the list contributing to the East Asian success but they are combined effectively in the framework of dynamic interdependence. This justifies our approach in this project.

We have discussed so far the supply side of the industrial development of the East Asian economies. But of course due attention should be given to the high prospect for future demand growth derived from the rapid growth of the East Asian region itself. The United States has long been the main absorber of the East Asian products but it is now being replaced partly by Japan, NIEs and ASEAN themselves. They now absorb 45 percent of their products and 15 percent of the world imports. East Asia is now emerging as a world market as well as a world factory. This bright demand prospect will tend to strengthen the dynamic interdependence and contribute to further growth of East Asia.

Regional economic integration proliferates in the current world and there are identified some tendency toward formal integration in East Asia as well. However, its regional integra- tion differs from those in Western Europe and North America because their development mechanism differs from those of the other two regions. Both the European and North American growth rely on the prospect of larger markets, while the East Asian development is based on its diversity and interdependence within the region. They rely more on trade and investment with outside regions and need the global free trade regime to further realize their growth potential. The "open regionalism" best fits the economic integration efforts within East Asia.

Statistical overview

Table 2 compares the growth performance of East Asia's market economies (NIEs, ASEAN, and Japan) with those of North America (the U.S., Canada, and Mexico) and EC12 in the latter half of the 1980s. The group growth rate of East Asia was maintained at 5 percent level while those of North America and EC12 were at 2-3 percent except for 1988. In 1990 and 91 North America's growth rate declined to minus and that of EC12 down to 1-2 percent, while East Asia's growth rate remained at 5 percent level.

To compare the economic size of the three regional groups, Europe and North America are about of the same size. EC12 falls short of North America in both population and GNP, but if we add six EFTA countries to EC12, Europe with 376 million population and 6,514 billion dollars exceeds the other two by 40 percent in population but falls short of by the same 40 percent in GNP. However, if the recent divergent growth performance continues into the next century, East Asia will exceed North America in 2011 and Europe in 2016.

It is, of course, a simple extrapolation of the recent trend and it is unlikely that this reversal of the relative economic size will be realized. The widening gap of growth perfor- mance with the other two groups will inevitably cause frictions and tend to affect East Asia's growth performance. In addition, in the East Asian group, the growth of ASEAN will continue to be high, that of NIEs will most likely decrease to a moderate level throughout the 1990s.

The rapid growth of East Asia is reflected in their trade performance as well. Table 3 gives a consolidated trade matrix of the Asia Pacific. It is based on a detailed trade matrix of individual countries in the region but it will be easier to analyse the consolidated one to identify big trends. It includes Australia-New Zealand (ANZ), North America (US, Canada, Mexico), EC12 as well as Japan, East Asian NIEs (Singapore excluded), and ASEAN (Singapore included), and China. Figures for the three years 1980, 1986, and 1990, are shown. Since the 1980s observed a wide fluctuation of world economy, it is hard to distinguish between the volatile and stagnant period (1980-86) and the rapid expansion period (1986 -1990).

The growth of the world total trade shown at the bottom on the righthand gives a reference rate. The world total trade did not increase for the first half but increased 1.7 times for the latter half. Since prices of petroleum and other primary commodities fluctuated widely during the former period, these figures exaggerate changes in trade volume to some extent. The last column on the righthand gives total exports of individual country groups, while the bottom row gives their total imports. The East Asian NIEs and ASEAN recorded the highest growth rates in both exports and imports. They have been catching up with Japan in the size of their total export and import as shown below.

The trade performance of Japan and China was ill-balanced ; imports grew more than export in Japan, but vice versa in China. East Asia as a whole recorded the size of trade comparable with that of North America, almost the same import value but its export was 25 percent greater than North America's.

This rapid expansion of East Asia's trade stimulated other groups as well, in particular by its import growth from others. North America, ANZ, and EC all recorded the growth of exports to East Asian NIEs, ASEAN and Japan as rapid as trade within East Asia. On the other hand, East Asia's exports increased greatly to EC with high import growth, while its exports to North America and ANZ were stagnant.

How big is the intra-regional trade of the three regions, which is shown in squares on the diagonal of the trade matrix of Table 3 and summarized in percentage terms below? The intra-regional trade is almost the same in East Asia and North America, whereas it is 50 percent higher in EC than in other two. It is on the increase in all three in the 1980s.

Structure of the study

So far is the basic approach adopted in this project together with the statistical overview of trade and investment relationships among the East Asian economies. The following chapters help to clarify various aspects of dynamic interdependence among the East Asian economies. Chapter 2 (by I. Yamazawa) provides readers with the basic framework of industrial transfer in East Asia, Flying Wild-Geese development. The development hypothe- sis was originally proposed to explain the catching-up development of the Japanese industries during the high growth period. However, Japan has already outgrown this catching-up pattern and the hypothesis is now applied to the rapid catching-up process of the NIEs and ASEAN industries.

Chapter 3 (Y. Hirose) and chapter 4 (G. Capannelli) give case studies of two important industries in the region, textile and clothing and electronics. Textile and clothing industry has been the pioneer of industrial development and export expansion in the Asian developing countries but its further development has been impeded by the tightly managed trade system under the Multi-fiber Arrangements. The electronics study examines the process of industrial development transmission occurring from Japan to Malaysia in the industry. The dramatic growth of investment and resultant changes in trade and production substantiate the dynamic interdependence in East Asia.

Chapter 5 (H. Okuda) examines the financial aspect of the interdependent growth in East Asia. In order to analyse the financial interdependence, the role of foreign capital in the East Asian economic development is analysed in the framework of balance of payments and investment flows. Chapter 6 (Nakato and Kinjo) again picks up the electronics industry but cross-country comparison is attempted to derive important micro-economic characteristics of the industry relevant to interdependent growth in the region.

Finally Chapter 7 (Yasuda) gives a general appraisal of the Flying wild-Geese model applied to the East Asian development. It compares East Asian development experience with that of Latin America and concludes with the author's emphasis on such supporting factors as government policies, entrepreneurship, workers' morale, and elimination of vested inter- ests in the development process.

It is our sinsere wish that our analysis of the East Asian development may also convey some usefull messages relevant to readers from other regions.


Table 1.Real Growth Rates of Asia Pacific Countries Table 2.Size and Growth Performance of the Three economic Groups Table 3.Consolidated Matrix of the Asia Pacific Trades Table 4 Relative size of E A NIEs and ASEAN to that of Japan and table 5 Percentage shares of intra-group trade in total trade

Structure of the whole text(PDF-Format 4file)

  1. page5
    Chapter.1別ウィンドウで開きます。  The asia pacific development and interdependence : overview (PDF-Format 224 KB)
  2. page14
    Chapter.2  Transmission of industrial development and international industrial adjustment
  3. page37
    Chapter.3別ウィンドウで開きます。  Trade and industrial interdependence in the pacific region : textile and clothing (PDF-Format 492 KB)
  4. page67
    Chapter.4  Transfer of japanese electronics industry to malaysia
  5. page119
    Chapter.5別ウィンドウで開きます。  Flying wild geese pattern economic development and the changing pattern of international capital flows in nies and asean countries (PDF-Format 367 KB)
  6. page142
    Chapter.6別ウィンドウで開きます。  Interdependent development of eastern asian economies-cross country comparison of household electric and electronic industry (PDF-Format 496 KB)
  7. page164
    Chapter.7  Can wild geese continue to fly over the world? - the theory of flying wild geese development and will for economic development
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