Risk Latte - Japan shrinking, East Asian Exports plunging – are the “Flying Geese” finally dead?

Japan shrinking, East Asian Exports plunging – are the “Flying Geese” finally dead?

Rahul Bhattacharya
May 21, 2009

To paraphrase Marx and Engels, a specter haunts East Asia and Japan. The specter of dying geese!

Today’s financial headlines in Asia scream that Taiwan’s first quarter GDP for this year dropped by around 10.5% and Singapore’s GDP contracted by 14.6% annualized in the first quarter of this year after shrinking 16.4% between October to December last year. Yesterday, the financial press reported that Japan’s economy shrank by around 4% in the first quarter of 09, an annualized 15.2% fall.

For the past many months now there is a kind of gloom hanging over the economies of Singapore, Taiwan, Korea, Hong Kong and yes, even China. Singapore’s exports have plunged, Hong Kong’s re-exports are dropping off the cliff and our great neighbour to the north has acknowledged the huge uncertainty about the possibility of generating an export led growth out of this deep recession.

Debate will rage on amongst government officials, the academia, the private sector, the financial press and the banks about the numbers, the GDP, the export growth, the import-export imbalance, the quantum of stimulus packages, and a host of other economic variables and statistics. But there is one debate that may not take place ever.

Perhaps, one of the greatest theories of economic growth in development economics is finally being put to rest.

One of the biggest marvels of modern development economics is the Flying Geese model of economic growth. Japan’s rise as an economic and industrial power and its accumulation of vast economic wealth after World War II is the result of what the economists call as the "Flying Geese" model. It is indeed the model behind East Asia’s rise to economic prominence and the prosperity it brought to these economies in the last four decades beginning the 1960s. This theory was first proposed by the Japanese economist Kaname Akamatsu.

In the 1930s, Professor Kaname Akamatsu, started developing a theory of economic development in international context for an emerging economy such as Japan’s in the thirties, drawing upon Japan’s experience in the previous decades. Professor Akamatsu’s intention was to outline the industrialization process of latecomer economies from intra-industry aspect, inter-industry aspect and international aspect. Of course, his work would remain hidden from the Western world until his papers got translated in English in the early 1960s. Besides, it was the efforts of the Saburo Okita (1914-1993), well-known Japanese economist and a foreign minister in the 1980s, that in a large measure introduced the “flying geese” pattern of economic development to the Western political and business audiences.

The crux of Akamatsu’s theory was that an undeveloped economy – Japan in the 1930s – can become developed quickly by adopting labour intensive industries from the developed ones. Later on as it moves up the development and industrialization ladder, it can shed the labour intensive industries and outsource them to lesser developed economies. Initially, an undeveloped (or underdeveloped) economy produces for the domestic market but soon the exports start to pick up as domestic demand is fully met. The economy starts with the production of crude, cheap and unsophisticated, i.e. labour intensive, products but soon the quality of the products picks up. Eventually, it starts to export high quality, technologically superior products to the other developed economies. And the development of such high quality and highly sophisticated technological produces is possible because the economy invests a huge amount of money into Research and Development and all production becomes capital intensive. The labour intensive components of the industry is farmed out and outsourced to other less developed and undeveloped economies. This was a multi-tier, hierarchical model of economic development.

Perhaps, what Akamatsu had not realized then was that this whole model of economic development would primarily come to hinge on only one factor, the exports. When translated from theory to practice, and when combined with Government’s interpretation of it, the flying geese model became a de facto model for export led growth of Japan and the East Asian economies

As Japan started industrializing rapidly after World War II, it played catch up with the West. Eventually, it started moving up the industrial value chain fast and began to produce high value added and advanced technological products such as heavy machinery, electronics, automobiles, etc. Slowly, in the late 1960s and 1970s it started outsourcing more labour intensive industries to East Asian economies such as Malaysia, Taiwan, Thailand and Singapore. After a point in time Korea started the same process and became part of the process. By 1980s this process was in full force and the East Asian economies were caught up in a frenzy of economic development, chiefly through exports.

A beautiful flying geese pattern could be seen forming on the Far and South East Asian economic horizon. Japan was the lead goose, leading second tier geese (less developed countries of East Asia) which in turn were leading the third tier geese (the least developed countries of East and South East Asia). And eventually China joined in.

The Asian miracle had begun.

However, an economy totally reliant on exports to the developed world is always at the mercy of the consumers in those developed economies. For the past thirty years, beginning early 1980s, the United States and the countries in Western Europe has seen tremendous growth in its citizens – including corporate citizens – well being. There has been a vast accumulation of wealth and an equally great accumulation of debt by these economies and that has fuelled the uninterrupted consumption frenzy for thirty years. Retail and corporate consumers in these countries were buying anything and everything, cars, toys, refrigerators, TV sets, laptops, computers, video cameras, heavy machinery, construction equipment, garments, fashion accessories, just about anything. And that “just about anything” was being produced in the factories of Japan, East Asia and China. Even before, in the decades of 1960s and 1970s, American and Western Europe was industrializing fast and their appetite for Japanese exports, both industrial and consumer goods was rather high.

All this had to end someday. During the Asian Financial Crisis in 1997, many pundits had predicted the death of this flying geese model. Many had cast doubt, inappropriately though, that most of Asia, excluding Japan, was all about sweat and cheap labor and that unless it moved up the value chain to incorporate brainpower, technology and research and development it was doomed to fail sooner or later. These pundits were proven wrong. The Asian financial crisis came and went. The East and South East Asian economies reformed, Governments in these countries adopted austerity measures and the economic growth was put back on track. Labor intensive manufacturing in China and other East and South East Asian economies continued to boom, exports from these economies roared ahead, fuelling a boom in the shipping industry never seen before and the geese kept flying, perhaps, more so than ever before.

After the implosion of the global economy and especially those of the developed world in the U.S. and Western Europe, beginning late 2007 the whole paradigm of development economics has changed. With the sole exception of India, every other major developing and developed economy of North, East and South East Asia, including China and Japan are grappling with the other side of the equation of development, i.e. domestic consumption. And this time around the problem seems deep and structural. It is clear that there is no easy way out.

Perhaps, the flying geese are finally dead!

Reference:   http://www.grips.ac.jp/module/prsp/FGeese.htm

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