Scholars use flying geese model to analyze world economy
GVC participation of all countries across the world Photo: WORLD BANK
Chinese President Xi Jinping recently chaired a symposium with entrepreneurs and suggested that we need to expand our global view, guiding companies to achieve better development through higher-level opening up.
Entering the millennium, many emerging economies and developing countries have grown rapidly. In the context of a polarized world, how to develop amid uncertainties and how to cultivate new advantages to take part in international cooperation and competition are important issues. From the perspective of industrial development, forming dynamic comparative advantages to participate in the reconstruction of global value chains (GVCs) is the direction we must take.
The global economic system
In the mid 20th century, the Latin American School of development economics proposed the core and periphery theory, an important footstone of structuralism and the main theoretical basis for Latin American policy.
As a representative of the Latin American School, Paul Prebisch (1901–1986), an Argentinean economist, said that the world economy can be divided into two parts, that is, the core part, led by those industrialized countries, and the periphery part, led by countries responsible for the professional production of agricultural and primary products. The world economy is based on this binary structure. Within this system, the core countries were connected with the periphery countries through business and trade, while the latter countries have become more and more reliant on the advanced core countries. After World War II, Latin American countries recognized that this international system prevented them from obtaining benefits from technological progress, trying to choose to industrialize and to push forward the evolution of the world economic system.
As emerging and regional economies grew in the mid-to-late 20th century, Immanuel Wallerstein (1930–2019), an American sociologist and economic historian, put forward the world-systems theory. He noted that there is a “semi-periphery” part existing between the core and the periphery, and he used this ternary framework to analyze the modern world economic system. Some developed capitalist countries experiencing a downturn and emerging industrialized countries made up the semi-periphery part, which makes the economic system more complex.
In the new century, Michael Spence, a Nobel Prize winner for economics, said that the world has been developing at an astonishing speed as the unicentric power system led by the United States is coming to an end while multiple power centers are arising to exist simultaneously.
The “flying geese” pattern
Akamatsu Kaname (1896–1974), a Japanese economist, investigated the inner connection between economic development and the upgrading of industrial structure in the rise and decline of the textile industry, proposing the “flying geese” pattern. Based on the FG model, Kiyoshi Kojima, Akamatsu’s student, put forward a theory of international division of labor and used the model to analyze foreign direct investment (FDI). The FG model has provided a theoretical foundation for upgrading and optimizing the Japanese industrial structure, and it has shown how latecomer economies utilize the imported products and technologies of advanced countries to establish local industries to satisfy domestic demand and produce goods to export to the world. Then, they cultivate competitive advantages and become leading geese.
The FG model was used by Joseph E. Stiglitz, a winner of the Nobel Prize for economics, to explain the catching-up process of industrialization in East Asian countries in Rethinking the East Asian Miracle. For example, the transmission of technologies and industries caused by Japan’s FDI has brought market opportunities for South Korea, Singapore and Taiwan, China. After that, those regions and countries mainly produced mid-tier goods while Japan produced the most complicated top goods. At present, the above follower geese have focused on heavy industries and high-tech products, while the light industries have been transplanted to Thailand, the Philippines and Indonesia.
Japanese economists analyzed the transmission of all subsidiary departments of the manufacturing industry in Asian countries in detail. They divided subsidiary departments into labor-intensive, capital-intensive and technology-intensive parts and explained their periodic features. That is, regions and countries in Asia have successfully passed their comparative advantages to the latecomers, while the latecomers afterwards will transmit their advantages to their follower geese. In this way, more regions and countries will flourish.
In the context of economic globalization, the FG model has been extended and an industrial pattern featuring multi-polarized flying geese has gradually formed in the world economy. In the current economic pattern, the United States is the leading power in chip and financial industries. The European Union is leading the medical and chemical industries. Japan is the leading goose of household appliances and vehicles, while China takes the leading position in high-speed rail and e-commerce. The trend of multipolarity becomes more and more obvious.
The pattern of multi-polarized flying geese has resulted from how emerging economies have fully made use of their comprehensive advantages, including comparative advantages and the scale advantages of factors and markets in very-large-scale countries.
Economic friction between the leading geese in different industries will come along with the multi-polarized pattern. In the process of changing economic powers among emerging economies and advanced countries, new industries have been established and positions will change in the value chain, which will trigger conflicts of interests and trade disagreements.
Reconstruction of GVCs
Emerging industrialized countries achieving fast economic growth relies on their entering into the international division of labor system while taking advantage of comparative advantage and then gradually moving up the ladder through product, industry and value chains. As China has actively participated in the international division of labor since the reform and opening up, the country now occupies an essential place in the global industrial chains. With the rapidly expanding industrial aggregate, 19% of the global manufacturing export depends on China, which is an obvious advantage of scale. China possesses complete supporting facilities. At the same time, the industrial structure has been gradually improved. Products have become more technological and complex and the pattern of the division of industries attaches equal importance to service trade and product trade.
Depending on individual comprehensive advantages, China has become a global manufacturing center, stabilizing its essential role in the world industrial and supply chains. As the basis of value chains, industrial chains need a long time to combine factors and take form. We could utilize our large-scale industries and strong supporting abilities, by virtue of our pivot position with high engagement into forward and backward industrial departments, to improve industrial and product upgrading. These help us move from the lower to the middle and high-end industrial value chains and grow into a leading goose in our competitive industries.
From the macroscopic perspective, as GVCs involve issues of value-added allocation and trade benefits, the national income level will be increased with the rising position of a country in the chains. China’s continuous participation in the global economy and value chains has facilitated rapid economic development and brought an obvious increase in trade benefits. However, China is still located in a lower position; being bogged down in this dilemma for a long time means that it will be difficult for the country to cross over into middle-level income. According to the World Development Report 2020 published by the World Bank last November, from 1990 to 2015, China shifted from a primary manufacturer to a provider of advanced manufacturing and service industries, while the national income also changed accordingly. That means we must break through our fixed lower-end position and manage to be the leading goose in more GVCs; then it will be possible for us to join the ranks of high-income countries.
Innovation-driven development is a necessary road for emerging economies to achieve the upgrading of industrial chains and value chains. Since 2000, with the enhanced forward linkage of China’s modern service industry, China’s exported products depend more on the research and development factor. At present, China is dedicated to building an innovative country and stimulating economic development with innovative practices. As such, we need to accelerate growth in two areas.
The first area is leading technology industries, such as high-speed rail and communication. Relying on advanced industrial technologies and strong supporting abilities as well as utilizing China's large-scale market and industries, we could effectively gather innovative resources from across the world and develop cutting-edge key technologies and firmly occupy the top of the value chains.
The second area is the new round of new technological revolution, where we can seize the opportunity to develop the digital economy from the same starting line as developed countries. By virtue of the scale of the domestic consumer market, we need to rapidly develop the big data, internet of things and e-commerce industries and create an ideal ecosystem for the digital economy, cultivating more leading geese in the global industrial and value chains.
Ouyang Yao is the director of the Center of Large Country Economy Research at Hunan Normal University.
This article was edited and translated from Guangming Daily
edited by MA YUHONG