Is Economic Growth Endogenous?U.S. Supply Chain Theory

J.D. Han

1. Is Economic Growth

• Exogenous,

• Endogenous,

• or both?

Perspective

Combining all the Growth Theories that we have covered, we can say that the East Asian Miracles, including Japan, the HPAEs, and China, tell us that a Rapid Economic Growth may be both Endogenous and Exogenous at the same time.

It can be compared to

• Chick and Mother Chicken break egg shell together for hatching

• 啐啄同機「如果小雞要孵出蛋殼，母雞和小雞必須裡應外合地齊喙蛋殼」之意的「啐啄同機」

• Chick: Asian Countries (Japan in the 1950-60s; Korea and Taiwan in the 1960-70s; HPAEs in the 1970-80s; China in the 1990s)

• Chicken: U.S.

2. The Ultimate Exogenous Factor

• U.S.’s Influence/Control of the International Economics

• This has been the ‘American Century’ ( by Harold Evans).

• Economic growth of a country needs some economic cooperation with the U.S.

Exogenous Factor of Economic Growth: Partnership with U.S.

Has different stages of • Trade Partnership

• Investment Partnership

in the Structured Supply Chain of the U.S.

The long-term sustained economic growth of

the U.S. economy means that i)the U.S. has been a source of fundamental

technological innovations; and

ii) The U.S. has growing ‘Buying Power’ or strong consumption demand from the world.

Note that

1)A Rapid Economic Growth has been shifting from one country or area to another over time

(Japan 1960-1975; HPAEs 1975-1997; China 1997-Present)

• Growth rates are strongly correlated with Exports, and Trade Surplus, particularly, with the U.S.

In addition, the U.S. has unlimited means to buy goods from other countries:

- U.S. is a source of infinite international wealth due to its currency being the Key Currency which it can print out without limits- East Asian countries have become the trade partner produce and supply Outputs to U.S. over time in exchange for the key currency- Assigned roles in the partnership for each specific

economy changed over time: Korea of the 1970s took over Japan’s roles in the 1950-60s, and gave it to China of the 1990s.

International Division of Labor

• U.S. exports services of R & D, Finance,

Education, Fashion, Culture, and Military

• East Asia becomes ‘Factory of the World’

• The Factory needs ‘inputs’ from elsewhere

What is the U.S. Economic ‘Design’ in the East Asia?

- The U.S. Supply Chain in the East Asia

The U.S. needs a source of Massive Supply of Manufacture Goods at the Lowest Possible Prices.

The best partner for this need is the East Asia:Not a single country, but a few countries bound

together.

A complete circle of the U.S. Supply Chain in the East Asia and the Division of Labor

• Linking the U.S. as the source of Purchasing Power, Liquidity, and Fundamental Technology

• Japan as the supplier of practical/industrial Technologies

• Korea and Taiwan as the supplier of processed materials

• China as the producer of Final outputs and exporter of them.

• China as the supplier of Capital to the U.S. • U.S. as the manager of Capital and Investment.

(2) International Finance

Goods flow from the partner countries to U.S., and capital (U.S. dollars) flows the other way around.- It would be best for the U.S. if the capital flows back to the

U.S.

- East Asia has high savings ratio, but relatively low investment ratio. - A large portion of savings flow out of East Asia into U.S. securities market.

(2) Endogenous Factors:Why were HPAEs and China chosen?

• Product /International Trade Side - “Best Quality” at “Lowest Cost” - Disciplined workers; High Quality Workers - successfully integrating Human Capital and

Physical Capital - social stability(orderly society)• Macro /International Finance Side - High Savings - Low Domestic Investment - Relatively large Investment in U.S.

Why is the East Asia chosen as the partner for the U.S. Supply Chain?

• Neo-Confucian work ethics provides discipline for assembly line workers for massive production required for the U.S. Market

• Social capital based on Neo-Confucianism provides domestic political/economic stability of the supply chain.

• The Neo-Confucianism provides a common Cultural Binding for the East Asian countries and Practicality as well: Because of these, international political conflicts do not interfere with trade and economic relations.

3. Issues of the U.S. Supply Chain in the East Asia

• U.S. Supply Chain Parallel to the Flying Geese Model claimed by Japan

Pyramid Structure of East Asian Miracle

“Flying Goose Model ( 雁行 )” suggests

U.S. Supply Chain with Japan +Korea and other HPAEs +ChinaIn a Pyramid Structure.

The Model

• The phase "flying geese pattern of development" was coined originally by Kaname Akamatsu in 1930s

• Saburo Okita (1914-1993), well-known Japanese

economist and a foreign minister in the 1980s, presented the idea formally at the 4th Asia Pacific Economic

Cooperation Council Conference, Seoul in 1985.• It says that Japan is the leader of Asian countries

in terms of economic growth.

Implications

The flying geese (FG) model intends to explain the catching-up process of industrialization by latecomer economies. It has some special dynamics such

• Intra-industry aspect: product development within a particular developing country, with a single industry growing over three time-series curves, i.e., import (M), production (P), and export (E).

• Inter-industry aspect: sequential appearance and development of industries in a particular developing country, with industries being diversified and upgraded from consumer goods to capital goods and/or from simple to more sophisticated products.

• International aspect: subsequent relocation process of industries from advanced to developing countries during the latter's catching-up process.

 

Problems of the Flying Geese Model

• The Flying Geese model needs the regional leader(Japan) , and the followers(other EA countries)

-> Japan as the Middleman Economy between U.S. and the EA.

• The followers get less; The bottom countries get the least.

• This is a chain of Exploitation.

A chunk of China’s Trade Surplus get transferred

to Korea, Taiwan, and Japan.

Supply Chain = Export Chain

• Japan provides Technologies, Core Materials for Korea and other HPEAs.

• Korea and HPEAs provides processed Materials for China• China produces Final Outputs and exports to U.S.-> In the end, China’s Trade Surplus is substaintially absorbed as China’s Trade Deficits with Korea and Japan.

• The bottom country looks for another new comer to the flying geese.

• There is a relentless pursuit for lower labor costs and more profits.

-> China looks to Yunnan, Xingjiang, Vietnam, Nigeria, etc.

• Is the Neo-Confucian Work Ethic transferrable to other countries?

• Would China reorganize the economy/industry in the Japanese and Korean or Neo-Confucian way so that it becomes the leader in the East Asian?

4. Next Level of Economic Partnership

• Next level of Economic Partnership is to extend the U.S. Supply Chain to a partner country through the Free Trade

Agreement

World Trade Policy of U.S.

• A “qualified” Free Trade

- U.S. blocks WTO’s Global or General Free Trade

- U.S. wants Bilateral Free Trade and forms Block of Free Trade with specific country or block of countries

- U.S. competes with other potential Blocks

FTA with U.S. = U.S. Supply Chain

• U.S. FTA is comprehensive by including Investment (by U.S. in the partner country)

• FTA facilitates Intra-industry Trade of the U.S. Multinational Firms (GM U.S. and G.M. China, just as was the case of GM U.S. and G.M. Canada)

• U.S. Free Trade Agreement will capture the Flying Geese within its Net

• U.S. FTA in East Asian cover U.S. Canada Japan Korea

• It competes with the China Block of FTA

* Korea as the King Maker in the East Asia

• Asian countries want Viable Block of Economy independent of U.S.

• China, and Japan compete for hegemony

• U.S. wants to keep its hegemony

• Korea is the King-maker by its size and location, and is trying to cash on its “Balancing Role in the North East Asia” ( 东北亚均蘅者 理论 ).

• For now, U.S. Free Trade Agreement offer is made to Korea, blocking potential Trade Block led by China.

- China calls U.S.-Korea FTA “Pang Da Kuan” for Korea

5. Challenges

Would the East Asia as a whole build a Self-reliant and Sustainable economy? -> Can East Asia continue to fast grow without

U.S.?

7. Conclusion

• Economic growth is both endogenous and exogenous.

• Economic growth is of International Economics.

• Partnership with the U.S. determines Growth Rates

• The partnership is a Structured Supply Chain of the U.S.