Decoupling and flying geese

Decoupling and flying geese
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First Published: Sun, Jul 26 2009. 09 31 PM IST
Updated: Sun, Jul 26 2009. 09 31 PM IST
There are two major stories with respect to the world economy. The financial crisis and the severe recession it precipitated have dominated the headlines, pushing into the background the bigger long-run story—the rise of China, India and other emerging economies. The crisis is about the business cycle and economic fluctuations. The emergence of the “emerging” is about growth. Yet, the processes driving both are sometimes the same. The globalization of trade and finance has helped growth, and it also helped spread the crisis. Globalization would seem to be a natural culprit in causing different economies to fluctuate more in sync, increasing the magnitude of global business cycles. An empirical study by Ayhan Kose, Christopher Otrok and Eswar Prasad (KOP) suggests that this is not completely the case. Emerging market economies have become less tied to the industrialized economies—they have been decoupling.
The KOP trio use statistical methods to let the data tell their story. Comparing variations in output, investment and consumption for at least 100 countries across two time periods—less (1960-84) and more (1985-2005) globalized—they find that any underlying common or “global” factor became less important for aggregate fluctuations during the latter period, both in the 23 industrial economies and in 24 emerging market economies. However, for both subgroups of the whole set of countries, the importance of group-specific factors increased substantially with globalization. In sum, there was convergence within the two groups but decoupling across them.
KOP find part of the explanation for these results in the larger common shocks, especially two oil price shocks, in the earlier period. They also note that for the emerging economies, intra-group trade became relatively more important than trade with industrial countries, while the group’s economic structures have become increasingly similar. But what exactly has that process been, and where will it lead?
Another recent paper, “Are the Geese Still Flying?” by Inderjit N. Kaur, indirectly sheds economic light on the statistical patterns of convergence and decoupling unearthed by KOP. The flying geese metaphor was originally applied to catch-up industrialization by Japan, with curves of imports and exports of specific goods having inverted-V shapes, like the formation of flying geese, as comparative advantages for those goods developed and shifted. The cycles in this model of development were product cycles, as a country moved from production of less to more sophisticated goods. Later, the metaphor came to be applied to the idea of other East Asian countries following the “lead goose”, Japan.
Kaur reviews evidence which suggests China’s promotion to the status of emerging market economy has not substantively altered the regional hierarchy of value added. The flying geese pattern of shifting comparative advantage still holds, with more advanced economies moving up in sophistication and passing the baton to other emerging economies. What has changed is the degree of vertical specialization in global production networks, with supply chain management now allowing different production stages to be spread across more locations. The way in which economic activity is measured means that if several economies in a region are linked (as has increasingly been happening) through participation in particular product supply chains, these economies will move more in sync. In fact, the exception in the KOP results is with fluctuations in investment, where the global factor was more important in the more globalized period, in contrast to the diminished importance for output and consumption. This is consistent with a story of investment that is global in its sources but regionally concentrated in its destinations, as has been the case in many of the new supply chains and production networks.
In a nutshell, Kaur’s economic analysis provides the explanation for a key feature of the KOP statistical findings. It also links the dynamics of growth to the correlations of short-run economic fluctuations. The economic processes driving growth, captured in the flying geese metaphor, help create the observed pattern of decoupling and convergence. This means that the KOP results with respect to the impacts of globalization are not just a function of specific episodes such as oil price shocks or coordinated monetary tightening. Instead, they reflect the economic process of growth as it ripples through linked economies and regions.
The final piece of the story is the fate of the rest of the KOP sample—59 countries that are not classified as industrialized or emerging. Instead, they languish as ODCs—other developing countries, not buffeted by the winds of globalization, but also unable to sail forward. Their hope may lie in the growth of China and India. These two countries, as they grow, may help to pull more ODCs into the growth process. At the height of the financial crisis, some observers began to fret about the excesses and limits of capitalism. The real issue is realizing its full potential. To paraphrase Kaur, “The geese (must) continue to fly!”
Nirvikar Singh is professor of economics at the University of California, Santa Cruz. Your comments are welcome at eyeonindia@livemint.com
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First Published: Sun, Jul 26 2009. 09 31 PM IST