The Dragon and the Flying Geese:
The Effects of the Emergence of China on Patterns of
Growth and Development in Asia

by

Patrick Avato

Paper for Asian Economic Dynamics
Summer 2006

Outline

1. Introduction

2. The Complementarities of Asian Economic Dynamics

3. China′s Awakening

4. The Effect of China on Asian Trade and FDI

5. China and the Future of Asian Economic Dynamics

1. Introduction

For the past 30 years, Asian economies have been the world′s envy as they have surpassed practically every other region in terms exports and economic growth. The remarkable development of various Asian countries has drawn millions of people out of poverty and created some of the wealthiest and most competitive economies in the world. Much of this success has been attributed to a distinctly Asian development model that combines high work ethics with an exceptional emphasis on savings and high rates of investment in both infrastructure and human capital. Moreover, it is clear that the Asian Miracle was also facilitated by the extraordinary complementarily of resources, stages of development and policies of Asian countries. This complementarily made possible a pattern of development known as the Flying Geese model, in which capital, technologies and know-how trickled down, first from Japan to the Tiger economies (Taiwan, Korea, Singapore and Hong Kong) and then to the Aspirant Tigers of Southeast Asia (Thailand, Malaysia, Indonesia and the Philippines), fostering economic development throughout the region.

During the 1990s, however, this picture changed abruptly. First, fuelled by excessive liquidity combined with a policy of financial repression, a real estate and equity bubble developed in Japan, the bursting of which dragged Japan into a decade long economic crisis. Consequently, Japanese FDI flows to the region, which had played an instrumental role in the Flying Geese Pattern, were reduced significantly. Second, China emerged as a major player in the world economy as her strategy of opening up to FDI and redirecting economic activity towards exports began to pay off. While the drastic reduction of Japanese FDI definitely hit Asian economies hard, it has been the rise of China that has created the biggest worries in South and Southeast Asian countries. The addition of hundreds of millions of Chinese workers to the world supply of labor clearly has increased competitive pressures, especially in the labor intensive industries in which many Asian economies have specialized. This nurtured fears and a sense of helplessness in light of a seemingly all encompassing absolute advantage of China in so many industries and, similarly, fears that Chinese attractiveness to FDI would be to the detriment of ASEAN countries.

In the following paper, I analyze how the spectacular rise of China has affected the patterns of Asian economic dynamics since the early 1990s. In particular, I focus on the question weather the win-win situation of economic complementarily of the past has given way to a zero sum competitive game in which the Asian economies fiercely compete for the same FDI inflows and the same export markets. Part 1 of this paper will give an overview of how the complementarities of Asian economics have contributed to the remarkable growth in the region, emphasizing the Flying Geese pattern of Asian Development and the importance of production networks. Part 2 introduces China as an Asian player and describes along general lines how her policy of opening up and integrating into the global economy contributed to her exceptional rise. Part 3 constitutes the core of this paper and analyses in depth how trade and FDI flows have evolved in Asia since the early 1990s. In particular, the effect of rising Chinese exports and FDI inflows on selected Asian economies will be discussed. Part 4 builds upon this analysis and describes how the rise of China is likely to affect Asian dynamics in the future and to what effect the complementarities of the past will continue to remain relevant.

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