The Pax-mericn Led Ctch-Up, Flying-Geese Style - Essay Example

Summry: Px mericn-Led Ctch-Up, Flying-Geese Style: Regionlized Endogenous Growth in Est si The rticle scientificlly written by of Economics Terutomo Ozw criticlly reflects the Px-mericn Led Ctch-Up, Flying-Geese Style tht gretly influenced the economies of Est si. It is first discussed the regionl growth of sin countries, the essence of Hegemon-Led Mro-Clustering Style nd Flying-Geese Prdigm, then the process of demnufcturiztion nd tertiriztion in the US is provided long with the role of different sin countries in the Geese Prdigm, finlly export competitiveness nd currency pprecition is exmined. Through 30 yers fter the WWII, the economies of Est si hve seen their growth rtes surge hed of everyone else's. Jpn, lredy remrkble for its immedite post-wr reconstruction chievements, embrked in the 1960s on mnufcturing revolution tht incresed per cpit rel income fourfold over the following 25 yers nd, by the dvent of the 1990s, mde the Jpnese in dollr terms the richest people on erth. Following the pth of tht sin industril forerunner, four "tigers" - the two Jpnese ex-colonies, South Kore nd Tiwn, nd two islnds, Singpore nd Hong Kong, the first city-stte, the other British colony tht will soon revert to Chin - embrked on their own export-led mnufcturing revolution, doubling rel GDP every eight yers during 1950 to 1985 (n eight-fold increse in ll). In the lte 1970s, Chin ccelerted its mssive moderniztion progrm, introduced mrket mechnisms, nd welcomed foreign investment; since the 1980s, it hs been the world's fstest-growing economy, verging lmost 10% yerly in the lst decde nd hlf. Over tht period, three Southest sin countries - Indonesi, Mlysi, nd Thilnd - hve proved tht they, too, cn sustin growth rtes of over seven percent yer, speed tht doubles the size of n economy ech decde. Since the 1980s, these Est sin economies hve been growing three times fster thn the OECD economies, twice s fst s the rest of Est si, three times s fst s Ltin meric nd South si, nd five times s fst s sub-Shrn fric. Their export performnce hs been prticulrly impressive, with their shre of world exports of mnufctures shooting up from nine percent in 1965 to 21% in 1990. Those re the indictors behind the phenomenon tht hs vriously been clled "Pcific Shift," the "rise of si," the "Pcific Century," or, s the title of recently published World Bnk study puts it, "The Est sin Mircle." One of the Est sin Mircle hs tken plce under the egis of the Px mericn, which ppered fter WWII. TPx mericn constitutes n economic system of wht my be clled "hegemn-led mcro-clustering". The ltter implies phenomenon in which hegemon economy propgtes growth stimuli to its closely ligned cohort of countries by mens of dissimiltion of technology, knowledge, skills, mrket informtion etc. The rise of the Paz Americana originated from "Yankee ingenuity" in the innovation of interchangeable parts and assembly-line operations, which eventually culminated in the techniques of mass production - and the pattern of mass consumption. Under Px mericn many South Eastern countries received a benefit as their economies significantly improved and were enhanced. Particularly, Japanese automobile industry replaced "just-in-time" parts delivery by "just-in-case" inventory, which relied heavily on a cooperative group of suppliers of parts, components, and accessories. Furthermore, Japanese process fragmentation has become all the more fine-tuned to make use of labour costs and technological capabilities of suppliers at divergent levels of country's industrial hierarchy. In the wake of Japan's rapid catch-up with its current account surplus rising, the Japanese yen became grossly undervalued and soared in market value. As for East Asian countries they benefited a lot from the catch-up economics as well. According to the World Bank (1993), Asian Economies got the fundamentals right by way of: 1) carefully limited and "market-friendly" government activism; 2) strong export orientation; 3) high levels of domestic savings; 4) accumulation of human and physical capital; 5) good macroeconomic management; 6) acquisition of technology through openness to direct foreign investment and licensing; 7) flexible labour markets; and 8) shared growth. All these features are directly related to pro-business activism, what means that catch-up politics of US foreign policies influenced greatly economies of Eastern Asian countries. The effectiveness of growth-promoting policies and practices at the individual country's level was dependent on how each economy responded to and exploited the external environment and opportunities by means of public policies. This point appears to be supported by a recent statistical study which shows that the extent to which FDI is expected to boost host economic growth - enhancing appears to depend on country-specific characteristics such as liberalized trade regimes, improved education and human capital conditions, export-oriented FDI, and macroeconomic stability. Dependent on imports for its bsic mterils, Jpn found itself eqully dependent on exports just to keep moving. The dvntge ws tht the resources it hd plnned to extrct from the periphery under its imperil order were now bundntly vilble, in exchnge for mnufctured goods, from the periphery of Southest si nd beyond under Px mericn. s the only industrilized country in this vst prt of the world, Jpn t tht time hd little competition, other thn from the high-cost countries of the West, in penetrting this immense mrket tht spred before it like fn. In continuously expnding post-wr world-economy hungry for chep mnufctured goods, the dilectic of unequl exchnge worked out its mircle for the lnd of the rising sun. When U.S. id strted to tper off, dollrs continued to flow in the form of direct foreign investments nd lons. meric ws the min source of foreign investments tht entered Tiwn between 1951 nd 1985 (mounting to 43% of ll non-overses Chinese sources), followed by Jpn (28%) nd Europen sources (13%). long with Mexico on the other side of the Pcific, Tiwn benefited from the first wve of reloction of U.S. ssembly opertions to low-wge sites, for products tht would be re-exported to the U.S. mrket; by the lte 1960s, roughly hlf of such U.S. "imports" cme from U.S.-owned fctories in Mexico nd Tiwn. When the Jpnese countered by relocting certin opertions to Tiwn, the islnd took on its specilized function s receptcle for declining Jpnese industries t every stge of tht dynmic economy's industril restructuring process. In short, Est si hs hd fst growth in sequence - first Jpn, then in the NIEs, lter in SEN-4, nd most recently in Chin. These countries hs tken the dvntge of Px mericn-led mcro-clustering while following the model of ctch-up nd thus becoming dependent on inwrd FDI nd ctive world trde. In sum, Est si hs been gretly influenced by US industril knowledge nd mrkets s well s by Jpn s structurl intermediry nd s cpcity ugmenter. Est sin growth hs been the most successful outcome of Px mericn-led mcro-clustering. Summry: Scle economies, Product Differentition, nd the Pttern of Trde The following summry constitutes severl prts ccordingly divided to the chpter bout economies of scle, product differentition, nd the pttern of trde. Since there has been a dispute as for the pattern of international trade, a new theory has appeared to explain the two-way exchanges of differentiated products and how the trade among the industrial countries is performed. The author of the chapter calls the main element of such a framework - the economy of scale, the possibility of product differentiation, and imperfect competition. The chapter presents a simple formal analysis that incorporates these elements and show how it can be used to shed light on some issues that cannot be handled in more conventional models. These include, in particular, the causes of trade between economies with similar factor endowments and the role of a large domestic market in encouraging exports. To start the summary, it is first needed to explain the sense of the phrse "economies of scle". The term implies tht efficiency in production nd opertions increses with size. Historiclly, firms in vrious industries often expnd nd consolidte in n effort to cpture these efficiency gins. The bsic model of the chpter is one in which there re scle economies in production nd in which firms cn costlessly differentite their products. This model implies monopolistic competition nd stte tht ech firm hs some monopoly power, but entry drives monopoly profits to zero. When two improperly competitive monopolistic economies re llowed to trde, incresing returns produce trde nd gins from even the economies hve identicl tstes, technology, nd fctor endowments. The basic model assumption is as follows: there is a large number of potential goods, all of which enter symmetrically into demand; all individuals in the economy have the same utility functions. Then, using equations and formulas, the author explains how the basic model works in reference to scale economies and patterns of trade. The outcome conclusion of the basic model is that firms maximize profits but there is free entry and exit of firms, so that in equilibrium profits will always be zero. Based on the assumption in above, the author further scientifically discusses the equilibrium in a closed economy. First, the consumer behaviour to derive demand functions is analyzed. Then profit-maximizing behaviour by firms is derived, treating the number of firms as given. Finally, the assumption of free entry is used to determine the equilibrium number of firms. The bsic model of the chpter summrized is derived from recent work by vinsh Dixit nd Joseph Stiglitz while equilibrium tke the form of Chmberlinin monopolistic competition. Chmberlin solved the problem of price policy when ssuming product nd selling outlys to be given, nd, finlly, the problem of product is solved by ssuming selling outlys nd price to be given. Chmberlin did lso, however, indicted the solution in cse two prmeters of ction re llowed to vry nd only one is kept constnt. Prticulr ttention should be pid to his cse on pge 147 where he supposes tht "product is set, nd price nd selling outly re free to vry." In this cse " construction similr to Figure 22 for ech possible price would show the most dvntgeous selling outly for tht price, nd one of this series would be the best of ll, thus reveling both optimum price nd optimum selling outly." The equilibrium conditions of the model developed demonstrte tht if the trnsction cost rte is uniquely security-specific nd decresing, the security's equilibrium return before trnsction costs is relted positively to both its systemtic risk nd to its verge mrginl trnsction costs. corollry, if the trnsction cost rte is decresing function of firm size, then the before-trnsction-costs risk-djusted return for smll firms should be greter thn tht for lrger firms; therefore, trnsction costs my explin the smll firm effect. To obtin the mrket equilibrium condition, it is sometimes included in the security's demnd function only investors who decide to hold the security. This presupposes tht investors who decide to buy security re known before the equilibrium price is determined. Further, investors who consider security, but decide not to hold it re excluded from the demnd function. It would pper to be more pproprite to include ll investors in specifying the security's demnd function. Investors who decide to purchse security re not known ex nte nd those who consider but decide ginst holding security still constitute the lower end of the demnd curve. Further, when discussing the effects of trade, author makes an assumption of co-existence of two countries with one another at zero transportation cost. That is the case when countries have the same tastes and technologies and when there are none of the conventional reasons for trade. Here the trade will occur because, in the presence of increasing returns, each good will be produced in only one country - for the same reasons that each good is produced by only one fir,. Gains form trade will occur because the world economy will produce a greater diversity of goods that would either country alone, offering each individual a wider range of choice. It can be easily characterized the world economy's equilibrium in this situation: two countries will have the same wage rate and the price of any good produced in either country will be the same. One of the convenient features of this model is that nothing important hinges on who produces what within a group of differentiated products. There is indeterminacy though, but the result might not hold up in less special models. The bsic model derived in the chapter analyzed demonstrtes tht under the decresing mrginl trnsction costs, the expected rte of return on security or portfolio before trnsction costs is relted positively to both the verge mrginl trnsction costs nd systemtic risk. The model indictes tht the before-trnsction-costs expected rte of return on security becomes greter s its verge mrginl trnsction costs increse. The introduction of trnsction costs lso is shown to result in smller mrket price of risk thn tht obtined from the trditionl CPM. Given tht trnsction costs re decresing function of firm size, the nlysis provides theoreticl bsis for explining the reltionship between trnsction costs nd the smll firm effect. dditionlly, it is shown tht the structure of security returns s derived by the trditionl CPM is not ltered when mrginl trnsction costs re either zero or constnt cross firms. The chpter lso ddresses the trnsport costs where the bsic model is extended due to the presence of trnsporttion costs. This extension bsiclly lid the groundwork for the nlysis of home mrket effects. The min result of such n extension is tht the lrger country will hve the higher wge rte. Since the prices to consumers of goods of different countries re in generl not the sme, consumption of ech imported good will differ from consumption of ech domestic good. To determine world equilibrium one hve to py ttention to both, the consumption nd the trnsit. When discussing transport costs, the author suggests a model of individual behaviour. He assumes the existence of two countries of the same type, able to trade but only at a cost. Transportation costs are assumed to be of the "iceberg" type. An individual in the home country is supposed to gave a choice over the number of products produced at home and a number pf products produced abroad. The price of domestic products is the same as that received by the given producer. Foreign products will cost more that the producer's price; if foreign firms charge certain some of money, home country consumers will have to pay the certain price. Similarly foreign buyers of domestic products will pay certain sum of money as well. To look into the equilibrium in this model it is needed to look at both consumption and at the quantity of goods used in transit. If a domestic resident consumes one unit of a foreign good, his combined direct and indirect demand is for 1/8 units. For determining total demand, then, the author suggests to know the ratio of total demand by domestic residents for each foreign product to demand for each domestic product. nother point in the chpter is given on benefit of pttern trde which implies ttempting the incresing returns nd decresing trnsporttion costs. The purpose is to concentrte production of good ner the lrgest mrket, even if the demnd elsewhere is of gret scle s well. In doing so, it is imed to relize scle economies, while by loction ner the lrger mrket, one minimizes trnsporttion costs. This point is the bsis for the common rgument tht countries will tend to export those kinds of products for which they hve comprtively lrge domestic demnd. It is importnt to remember tht this rgument is completely dependent from incresing returns s in cse of diminishing returns, domestic return for good will tends to mke n import rther thn n export. Further in the chpter it is proposed to extend the bsic closed economy model to one in which there re two industries with mny differentited products within ech industry. It is then shown tht when two countries of this kind trde, ech will be new exporter in the industry for whose products it hs the reltively lrger demnd. Finlly, some extensions nd generliztions re discussed. The thorough nlysis hs shown tht there is some justifiction for the ide tht countries export wht they hve home mrkets for. However, this result is pplied for specil cse only, so the next question to which this result generlizes is provided. The wy in which the generliztion might be followed is by leving the ssumption tht it is possible to let the countries hve rbitrry popultions nd demnd ptterns while retining ll the other ssumptions of the model. In tht cse, lthough the derivtions become more complicted, the bsic home mrket result is unchnged. Ech country will be net exporter in the industry for whose goods it hs reltively lrger demnd. The difference is tht wges will generlly be different. Prticulrly, smll countries with bsolutely smller mrkets for both kinds of goods will likely hve to compenste fro this disdvntge with lower wges. The chpter summrised in bove mkes no pretence of generlity. The models presented rely on extremely restrictive ssumptions bout cost nd utility. The pper provides some useful insights into those spects of interntionl trde which simply cnnot be treted in usul models. Read More