Growth Dynamism in Asia

Senior Fellow, RIETI

Various topics about Asia such as its economic integration, free trade agreements (FTAs) / economic partnership agreements (EPAs), and the East Asian Community are drawing much public attention of late. In December, the inaugural East Asia Summit will be held in Malaysia, with the leaders of Japan, China, South Korea and Association of Southeast Asian Nations (ASEAN) countries joined by their counterparts from India, Australia and New Zealand.

What is the secret of high growth rates of Asian economies?

A cross-region comparison of economic growth performance over the past 40 years clearly points to the relatively high performance of the East Asian region. What has made the difference? To find an answer to this question, various approaches have been taken. Cultural and institutional diversity among Asian countries has made combinations of explanatory variables highly complex. Thus, in the course of development, some factors and aspects that initially received a negative assessment have been subsequently revaluated and redefined under a positive light. For instance, the role of government has been, in many cases, assessed negatively in studies on developing countries. However, studies on the East Asian economy have often commended the role of government and/or bureaucrats of East Asian countries as compared to those of Latin American countries, for instance in improving income distribution in the newly industrialized economies (NIEs) and maintaining political neutrality over macroeconomic policies in the ASEAN member states. The development of comparative institutional approaches significantly contributed to examining more deeply the roles played by the governments and institutions of East Asian countries. The East Asian Miracle: Economic Growth and Public Policy, published by the World Bank in 1993, though it is based on relatively traditional analytical methods, can be defined as a culmination of studies in the early 90s on the theme: What has made the difference?

The secret of high growth is not always the same?

In the report, the World Bank cited the equal and equitable distribution of the fruits of the economic growth as the single most important factor behind the success of eight high-performing Asian economies (HPAEs) -- Japan, the "four tigers" of Hong Kong, South Korea, Singapore and Taiwan, and the three newly emerging countries of Indonesia, Malaysia and Thailand -- from 1965-1990. This factor, however, does not provide a convincing explanation for the ongoing growth of China and India. Likewise, the role of government, another factor cited in the World Bank report as explaining the success of the HPAEs, is not as noteworthy with respect to China and India, though there is no denying that the factor holds a certain degree of validity in explaining the success of the two countries. At least there is not much evidence showing that a network linking the public and private sectors, such as Japanese shingikai advisory panels for the government, has helped reduce the domain of rent-seeking behavior and expand the domain of competition.

From the 1980s through the 1990s, movements spread across the ASEAN countries and China to learn from Japan and the four tigers, emulating some of their past policies. Many Japanese policymakers and business leaders at the time were also enthusiastic in helping China and Southeast Asian countries make use of Japanese experience for the development of their economies and companies. Southeast Asian countries and China have since surely achieved high economic growth but the mechanism in which each of them has grown is completely different from that of Japan.

Lately, a strengthening view is that the growth pattern of Asia is to consider the growth pattern of Asia as being driven by foreign direct investment (FDI). Such an FDI-leveraged growth pattern, though holding true for ASEAN countries, is not the case for Japan as well as for half of the four tigers -- South Korea and Taiwan. Indeed, the view that FDI played an extremely important role in the growth of ASEAN and China is now shared by almost all with the role of multinationals, the cross-border dispersion of their production processes and the formation of industrial agglomeration being recognized as key factors explaining the growth mechanism of these countries.

If the "secret" of the economic growth of ASEAN and China is in the utilization of FDI which is greatly attributable to multinationals' strategies of internationally dispersing their production processes, as well as to the formation of industrial agglomerations, a government policy to promote the formation of industrial agglomeration with an eye on having FDI play the central role -- in which measures to enhance expectations of multinationals would have non-negligible importance -- must have been crucial in pursuing growth. Such a policy has failed to work in Japan, South Korea and Taiwan or, at least, none of them has had much experience with such a policy.

Furthermore, multinationals' accelerated moves to internationally disperse production processes are, in the first place, primarily attributable to the changing circumstances of the investing side (multinationals), i.e. the development of information technology and the modularization of product architecture. Given this, it is probably fairer to say that ASEAN and China have been picked for FDI by multinationals through their path-dependent decision-making process rather than because they are in some way superior to other developing countries. Should this be the case, one might go so far as to say that the importance of "differences" between Asia and other regions is only secondary. More important is the historical path dependency of factors affecting investors' technological development and investment decisions which expand the possibility of international dispersion of production processes.

Will the growth center move?

With the development of technologies that enable the fragmentation and optimum distribution of production process based on the condition of each selected location, multinationals would come to more precisely examine differences in the locational costs in selecting the destination of new investment. Indeed, a subtle difference in the investment environment may ultimately result in a huge difference. This situation, considering the self-propagating mechanism and path-dependent nature of agglomeration, has a high possibility of leading to a winner-takes-all situation, that is, when looked at in terms of agglomeration units. At the same time, however, there also exists a high possibility that a relative change in investment environment may cause a sudden and drastic change in the FDI flows under certain conditions where the lock-in effect of agglomeration works only to a limited extent. Specific cases of industrial agglomeration include those that look extremely stable and those perceived to have an extremely unstable structure. In the case of the copier industry, for instance, almost all the related companies have their production bases in and around the Hong Kong and Shenzhen regions because of the historical development, and this situation is not likely to change unless some sort of extraordinary event -- a fundamental change in technology, a drastic change in the supply-demand structure -- occurs. On the other hand, the agglomeration of home appliance manufactures in and around Selangor, Malaysia is heavily concentrated in a few kinds of products such as air conditioners. Given product life cycles and other factors, the situation poses the risk of a rapid decline.

Using a bit of imagination, the following hypotheses can be put forward:

Hypothesis 1: Agglomeration formulated over a relatively long period of time is thickly layered -- i.e. there is a large stock to draw upon -- and thus resilient to changes in the external environment, whereas agglomeration that has grown rapidly in a short period of time is thinly layered -- i.e. little stock to draw upon -- and thus vulnerable to changes in the external environment.
Hypothesis 2: The advancement of technologies that enable the geographical division of production processes and the self-propagating nature of agglomeration together generate the kind of agglomeration that is thinly layered and develops rapidly in a short period of time.
Hypothesis 3: The growth center of Asia is subject to shifts.

The hypotheses listed above have not been tested and it is not easy to prove them in advance. However, it would be possible, at least to some extent, to empirically verify retroactively the existence of cases falling under the patterns described in the hypotheses.

November 29, 2005

November 29, 2005

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