Of Flying Geese and Sitting Ducks: Brazil Stares, East Asia Takes Off…

A vital question Latin America, and Brazil in particular, should be asking these days, is why economic development has been so impressive in East Asian countries. That was one of the central themes at the recent annual meeting of the Inter-American Development Bank in Okinawa, Japan.

The data presented is proof positive that Brazilian president Luiz Inácio Lula da Silva is correct when he says there's a new trade pattern in the world today, or, as he puts it, a new "commercial geography". The trouble is that this new pattern is being constructed more and more between East Asia and the developed world, not in the "South-South" realm that is so in vogue lately in Brazil.

Unfortunately, the harsh reality for the developing world is that, while Africa is losing importance, Latin America is spinning its wheels and East Asia is taking off. A simple check of GDP numbers for Asian nations will show growth between 6 and 10 percent per year over the last two decades, while GDP growth in Latin America for the same period varies from minus one to 5 percent annually.

To be sure, there have been important advances in Latin America during those years, such as democracy taking root, inflation being brought under control, institutional reforms, growing foreign investment and the recent surge in exports. But the fact remains that on all those fronts, Asia has left Latin America in the dust. The facts and figures speak for themselves.

The first major difference between the two regions emerged in the 1950s, when Latin America adopted the import-substitution model of industrialization, while Asia chose an aggressive strategy of export promotion. The similarity between the two models was strong government intervention running both processes, in effect picking "winning sectors" to be benefited by steep subsidies and border protections. The main difference is that in Latin America the focus was on the internal market, while Asia made exports the priority.

As of the 1980s, what has been described as the "flying geese formation" surfaced in East Asia, which is the pursuit of regional synergies through massive cross-investments, particularly the transfer of technologies from Japan through minority shares in companies based in less-developed neighboring countries.

In this way, the spearhead is the region's "super goose", Japan, followed closely by the newly industrializing economies, or NIEs - South Korea, Taiwan, Hong Kong and Singapore. The next layer includes more dynamic ASEAN nations such as Thailand, Malaysia and Indonesia, with the Philippines and Indochina at the back of the line. This basic order began to change recently with the arrival on the scene of two enormous "wild geese": China, which now strives to surpass Japan, and India, which has been flying low but showing a great deal of determination.

It should be noted that this somewhat celestial design fell into place following an interesting labor division in manufacturing, with wealthier nations shifting activities that demanded cheap labor to partners or subsidiaries set up in the less advanced "geese". The whole idea was to attain systemic competitiveness globally, not locally – a process that normally begins in the textile industry, continues through chemicals, steel and the auto industry, and advances with electronics and information technology.

The end result is a sequence of life cycles of industries, in which labor-intensive sectors are constantly relocated to less developed countries while wealthier, more developed countries show increases in per capita income and wages. Recent literature feeds an interesting debate on whether China's role in the region represents a break with this pattern of production and trade.

While all of that was happening in Asia, Latin America was constantly tangled up with galloping inflation rates, sluggish economic growth, high debts, squandering administrations, immature institutions and unstable rules. In 1993, ECLAC researcher Michael Mortimer published an article suggestively titled "Flying geese or sitting ducks? Transnationals and industry in developing countries". In it, he suggested that Latin American firms were behaving like the proverbial duck, simply watching the flight of the Asian geese.

Data collected by Brown University Professor Barbara Stallings shows that accelerated industrialization led both regions to a situation where industry accounted for about 40 percent of GDP by the early 1980s. Two decades later, agriculture and industry represent only a third of Latin America's, and two-thirds of Eastern Asia's GDP. In spite of its huge population, East Asia currently channels 42 percent of everything it produces to external markets, while only 17 percent of what Latin America produces is exported. Asian industry becomes global, while Latin America's remains local.

The relationship between investments and GDP is cause for even more concern. While in Asia that percentage jumps from 20 to 30 or 35 percent of GDP between 1960 and 2000, it remains parked at 20 percent of GDP in Latin America. Asian investments are guaranteed by greater domestic savings, and less dependence on foreign savings.

On top of all this, East Asia has generally done a better job than Latin America when it comes to reducing social inequalities. This is a result of heavy investments in basic education, and the development of more solid institutions, lower transaction costs and better enforcement of contracts and property rights.

While Latin America insists on formal and incomplete regional integration schemes centered on trade, the integration of East Asia takes place through investments by private companies and technology transfers geared to systemic competitiveness on a global level. The explosion of regional trade in Asia is a consequence of investments between and within companies. Integration is achieved through the globalization of companies, not through imperfect agreements between governments that, in the end, generate little trade or investment.

The idea of bilateral agreements is a recent phenomena in Asia, but it packs enormous potential when it comes to organizing the flight of the geese – that is, if the Asians remain witty enough to avoid losing their focus because of old power struggles, such as the Japan-China conflict that re-surfaced in recent weeks.

In all, Eastern Asia is gradually stabilizing at cruising altitude, without turbulence, in a flight sustained by the stability of its macroeconomic fundamentals, the persistence of private sector strategies focused on global competitiveness, the building of strong institutions, and massive investments in education.

What about Latin America? Will it continue to sit and watch the flight of the Asian geese?