Academic journal article Asian Development Review

Leading Dragon Phenomenon: New Opportunities for Catch-Up in Low-Income Countries

Academic journal article Asian Development Review

Leading Dragon Phenomenon: New Opportunities for Catch-Up in Low-Income Countries

Article excerpt

Modern economic development is accompanied by the structural transformation from an agrarian to an industrial economy. Since the 18th century, all countries that industrialized successfully have followed their comparative advantages and leveraged the latecomer advantage, including emerging market economies such as the People's Republic of China (PRC), India, and Indonesia. The current view is that Chinese dominance in manufacturing hinders poor countries from developing similar industries. We argue that rising labor cost is causing the PRC to graduate from labor-intensive to more capital-intensive and technology-intensive industries. This will result in the relocation of low-skill manufacturing jobs to other low-wage countries. This process, which we call the "leading dragon phenomenon," offers an unprecedented opportunity to low-income countries. Such economies can seize this opportunity by attracting the rising outward foreign direct investment flowing from Brazil, the PRC, India, and Indonesia into the manufacturing sectors. All low-income countries can compete for the jobs spillover from the PRC and other emerging economies, but the winner must implement credible economic development strategies that are consistent with its comparative advantage.

Keywords: structural transformation, Asia, Africa, People's Republic of China, flying geese

JEL codes: B10, O10, O14, O25

I. Introduction

Many developing economies have tried to catch up with industrialized countries but only a handful of countries, mostly in East Asia, have succeeded. Entering into the 2 1 st century, Brazil, the People's Republic of China (PRC), India, Indonesia, and a number of other large developing countries achieved dynamic growth and emerged as the drivers of global growth in a new multipolar world.

Lin (2010) and Lin and Monga (2011) show that a developing country can achieve dynamic growth and catch up by exploiting the latecomer advantage and developing industries that are aligned with its comparative advantage. In this paper, we build on this theme and use historical and comparative perspectives to show that because of similarity in the comparative advantage of low-income countries, the dynamic emerging economies, when they upgrade their industrial sectors, will create a huge space for low-income countries. In contrast to the conventional thinking that the PRCs dominance in manufacturing export dooms poor countries to economic backwardness, we argue that its growth spiral may in fact be a boon. As the PRC upgrades its labor-intensive industries and cedes market shares, millions of labor-intensive jobs will be relocated to low-wage countries and can accelerate their industrialization. This process, which we call the "leading dragon phenomenon," offers an unprecedented opportunity to low-income countries. To the skeptics, we point to current trends in South-South foreign direct investment (FDI) flows as drivers of industrialization in low-income countries. If other emerging market counties such as Brazil, India, and Indonesia follow the PRCs growth trajectory, they will create even more labor-intensive jobs in low-income countries.

Section II motivates the analysis by reviewing the evidence on structural Iransformation and its role in industrialization in the world. Section III examines the experiences of the Industrial Revolution, the post- World War (WW) II period, and the more recent East Asian successes in catching up. Section IV first discusses the failures to catch-up in various countries that followed protectionist strategies. It then analyzes the PRCs meteoric rise in the context of its "comparative advantage following" strategy. Section V investigates the impact of the PRCs rising labor costs on its employment structure and the industrial upgrading and job relocation currently being facilitated through outward foreign direct investment (OFDI). Section VI concludes.

II. Structural Transformation and Catch-up

A. …

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