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Monday, Nov. 26, 2001

'Flying geese' must face onset of global 'megacompetition'

The "flying geese" theory of development has long served as the basis of policy formulation and analysis of post-World War II economic relations between industrialized nations and developing countries. The fundamental idea is that both sides benefit from a vertical division of labor across national borders.

When a country's economic development reaches a certain level and people's income rises, such production costs as labor and land get pushed up, rendering the manufacture and provision of low-value-added goods and services unprofitable.

As a result, economic activities in those areas will be transferred to less-developed countries where production costs are cheaper. Frictions between countries often arise during this process.

In the countries to which the economic activities are transferred, new industries spring up, boosting employment and income. In countries on the other end of the deal, however, the affected industries suffer, the industry groups and labor unions raise opposition, and various political forces pressure the government.

Once these frictions are overcome, however, the countries involved will have established a mutually complementary division of labor that benefits both sides. This is the basic idea of the theory.

The postwar history of Japanese-U.S. economic relations shows the development of such division of labor. Despite a series of trade disputes over the transistor radio, home electric appliances, steel, cars, semiconductors, and other products, the division of labor pushed up living standards in both countries. It would be safe to say that Japan's economic relations with the rest of Asia basically followed a similar pattern.

However, the end of the Cold War paved the way for large numbers of low-cost manufacturing elements that had earlier been kept hidden behind the iron and bamboo curtains to join the capitalist world.

The easing or abolition of the COCOM and CHINCOM regulations also facilitated technological transfers. The integration of technologies imported from industrialized nations and the low-cost production elements have changed economic relations between countries from a vertical division of labor to a more horizontal and competitive relationship.

The recent phenomenon, called megacompetition, is a process by which all the world's economies, both developed and developing, are being reorganized into a vertical structure based on market principles.

The World Trade Organization approved the entry of China at the Nov. 10 ministerial meeting held in Doha. China's participation in WTO is the first step in an attempt to incorporate a huge country with a vast volume of low-cost labor and land into the world economic system under a set of rules. Nobody -- not Japan, other industrialized countries or the rest of Asia -- can afford to remain indifferent.

Many Asian economies, just as they are trying to catch up with the industrialized world, are simultaneously facing this challenge from China, and the situation is likely to continue.

It will take time before the income of China's 1.2-billion-strong labor force can rise to the levels of ASEAN members' populations. And this is one factor behind ASEAN's bid to pursue a free-trade agreement with China. Expectations are high for the future of the Chinese market because of its huge population, but it must be noted that $1.2 billion will be needed to raise the country's per capita income by $1.

This phenomenon is not merely the problem of the developing countries. All the industrialized nations must adapt to this new environment.

To survive the global competition, Japan must carry out the structural reforms promised by the Koizumi Cabinet. China's WTO entry should give Japanese politicians, bureaucrats and private-sector businesses a chance to reconfirm the need to reform the nation's industrial structure.

Teruhiko Mano is an adviser to Tokyo Research International Ltd.

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The Japan Times

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