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The Asian Developmental State and the Flying Geese Paradigm

Discussion paper by Kasahara, Shigehisa / Erasmus University, 2013

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This paper contemplates an outlook of the developmental state in the light of growing regionalist drive in East Asia. More specifically, it explores the possibility of developmental regionalism. Developmental regionalism, in this framework, upholds a hybrid of limited liberalism at the national level and protectionism at the regional level. It is also a hybrid of North-South and South-South cooperation for achieving agreed specialization. While the discussion is at the exploratory stage with respect to concrete policy implications, developmental regionalism could contribute to bridging the aforementioned two contending concepts.

No. 213

November 2013




Shigehisa Kasahara

No. 213
November 2013

Acknowledgements: The author is grateful to the Managing Editor and an anonymous referee, as well as Jamshid
Bahar, Michael Lim, Michael Gordy and Daniel Taklegeorgis for their helpful comments and discussions on
various versions of the paper.



The opinions expressed in this paper are those of the author and are not to be taken as the official views
of the UNCTAD secretariat or its member States. The designations and terminology employed are also
those of the author.

UNCTAD Discussion Papers are read anonymously by at least one referee, whose comments are taken
into account before publication.

Comments on this paper are invited and may be addressed to the author, c/o the Publications Assistant,
Macroeconomic and Development Policies Branch (MDPB), Division on Globalization and Development
Strategies (DGDS), United Nations Conference on Trade and Development (UNCTAD), Palais des Nations,
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Discussion Papers are available on the UNCTAD website at http://www.unctad.org.

JEL classification: B25, F15, H10, L52, N15




Abstract ....................................................................................................................................................... 1

INTRODUCTION ....................................................................................................................................... 2

I. THE DEVELOPMENTAL STATE: WHAT IS IT? .......................................................................... 3
A. Historical background ...................................................................................................................... 3
B. The Asian developmental State: contributions of Chalmers Johnson ............................................... 4
C. Variations among the Asian developmental States ........................................................................... 6

II. THE FLYING GEESE PARADIGM – A HISTORICAL EVOLUTION ........................................ 8
A. Kaname Akamtsu’s original Flying Geese paradigm ....................................................................... 8
B. Modern versions .............................................................................................................................. 10
C. Implication on regional integration ................................................................................................. 12

DEVELOPMENTAL STATE ............................................................................................................ 13
A. United States stance: aid giving for Asian reconstruction and policy tolerance ............................. 13
B. Diminishing tolerance, rising criticisms, enforcing pressures ........................................................ 14
C. Resistance to criticisms ................................................................................................................... 15

FLYING GEESE PARADIGM ......................................................................................................... 16
A. National policy measures related to industry, trade and FDI .......................................................... 16
B. Does the Flying Geese paradigm reflect the weakened state? ........................................................ 18
C. Situating the developmental state in the Flying Geese paradigm ................................................... 19
D. Developmental regionalism: situating national development measures in a regional context ....... 21

V. CONCLUSION ................................................................................................................................... 23

REFERENCES ........................................................................................................................................... 25


Shigehisa Kasahara*

International Institute of Social Studies (ISS), Erasmus University


East Asian economies have been subject to theoretical debates, especially regarding the
principal factors that have contributed to their impressive development performance. Many
economists familiar with the region’s institutional particularities believe that their catching-
up process has much to do with the role of the neo-mercantilist state, often embedded in the
concept of the developmental state. On the other hand, the recent phenomenon of regional
industrial dynamism, most clearly after the mid-1980s, has drawn attention to the concept of
the Flying Geese paradigm. The question at hand is compatibility between the neo-mercantilist
concept of the developmental state based on nationalist sentiment on the one hand, and the
neo-liberal concept of the Flying Geese (FG) paradigm based on market rationalism on the
other. In a sense, this resembles the old state vs. market debate. The paper contemplates
an outlook of the developmental state in the light of growing regionalist drive in East Asia.
More specifically, it explores the possibility of developmental regionalism. Developmental
regionalism, in our framework, upholds a hybrid of limited liberalism at the national level
and protectionism at the regional level. It is also a hybrid of North-South and South-South
cooperation for achieving agreed specialization. While our discussion is at the exploratory
stage with respect to concrete policy implications, developmental regionalism could contribute
to bridging the aforementioned two contending concepts.

*Address for correspondence: Shigehisa Kasahara, a former economic affairs officer of the United Nations Conference
on Trade and Development (UNCTAD), is presently a resident researcher at the International Institute of Social Studies
(ISS), Kortenaerkade 12, 2518 AX The Hague, The Netherlands, Email: shigehisa.kasahara@iss.nl.



The impressive development performance of East Asian economies has historically been subject to various
theoretical debates. As opposed to mainstream neoclassical observers,1 many heterodox economists
who are familiar with the region’s institutional particularities believe that their remarkable performance
has much to do with the role of their state, rather than (or in addition to) that of market forces.2 The
analysis of the Asian model of development has usually carried out in the framework of the national
economy. Metaphorically, the model can be seen as a fabric woven from various threads, such as good
macroeconomic management and stability, a competent bureaucracy, symbiotic state-business relations,
publicly controlled financing for development, industrial policy in a broad sense, etc. – which are closely
related to the state. In short, the East Asian development has been attributable considerably to the region’s
individual developmental states.

On the other hand, the recent phenomenon of regional dynamism, particularly after the mid-1980s, has
also attracted renewed intellectual attention, where the framework of the Flying Geese (FG) paradigm has
often been used to explain the region-wide catching-up process. Here, it is postulated that hierarchically
lined-up regional economies are systematically recycling comparative advantage through the “orderly”
migration of industrial activities. It is implicitly assumed that late industrializers can catch up – sooner or
later – rather than permanently remain underdeveloped, provided that they relate themselves with early
industrializers along market rationalism.3

The question at hand is how the nationalist concept of the developmental state can coexist with the
regionalist concept of FG paradigm.4 It may well be that the concept of the developmental state and
the concept of the FG paradigm are sequential in the national development process, where the former,
an important concept at the early stages of development, tends to be taken over by the latter at the later
stages. This paper argues that many elements of the developmental state still are (and should remain)
relevant in the framework of the FG paradigm. Its main objective is to explore the question as to how
East Asian states can transform their policy measures in order to make their national economies better
fit in the evolving regional context.

The remainder of this paper consists of the following parts. Section I introduces the prototype concept of
the developmental state, particularly focusing on its Asian (notably, Japanese) version. Section II presents
a summary of the historical evolution of the FG paradigm. Section III discusses how the geopolitical
context of post-World War II (post-war) international relations (most importantly the United States
position) has affected the Asian developmental states. Section IV, the heart of this paper, explores the

1 The neoclassical orthodoxy accounts for the rapid and successful development of major East Asian economies as a
result of market-driven, export-led industrialization coupled with cheap labour, realistic exchange rates and minimal state
interference (Yoshimastu, 2003: 65). It is thought that their states have allowed comparative advantage in international
trade to direct the allocation of productive resources. By creating stable, non-inflationary and open economic environments,
these states have encouraged to take advantage of low unit labour cost and engage in labour-intensive export oriented
production (Burkett and Hart, 2000: 25). For a thoughtful discussion on the applicability of the “neoliberal model” to
Asian economies, particularly those in the first-tier NIEs in this paper, see Brohman (1996).
2 Radice (2009: 1153) explains: “Given the marginalization of dependency theory and of Marxism more broadly in the
past twenty years, the DS [developmental state] became by 1990 the major ideological rallying point for those who wish
to contest the appropriateness of neo-libealism and the Washington Consensus as a framework for effective governance
and economic development in the global South.”
3 In this regard, the FG paradigm, in contrast with underdevelopment (dependency) theory, holds a more optimistic outlook
of modernization perspective. Modernization theory explains the transformation from a traditional/agricultural society
to a modern/industrial society as an inevitable evolution, even though some factors within the society may contribute to
some delay of the evolutionary process.
4 In a similar fashion, scholars have pointed out the tension between the notion of nationalism and that of globalism
(globalization) (for further discussion, see Bandelj and Sower, 2010).


role (potential and real policy implications) of the state in the FG paradigm. The conclusion sums up the
principal elements of the preceding discussions.


A. Historical background

The idea that the state should play a central role in economic development stretches back to the pre-modern
mercantilist period. In general, the reality of market failure (including imperfect market competition,
necessity of public goods, positive and negative externalities resulting from production and consumption,
etc.) has long been identified as the principal justification for state intervention.5 And more recently, i.e.
since the Keynesian revolution of the 1930s, the idea of an interventionist state for macroeconomic counter-
cyclical fine-tuning, particularly in coping with involuntary unemployment, became an accepted norm.6

In the early post-war period, the period of anti-colonialism, general enthusiasm toward development
theory designated the states as the essential agent of development in newly independent countries. As a
result, the states in most of these countries undertook the initiative of development planning, often within
a five-year planning horizon. As a matter of course, these states were involved extensively in various
aspects of the national economy, with policy and institutional initiatives, for instance, fixing prices of
goods and services, as well as regulating labour, foreign exchange, and financial markets. Partly due
to the influence of socialist thinking, many states also built up large state-owned enterprises (SOEs) in
public utilities, nationalized mining and agricultural operations.

The concept of the developmental state is based on the assumed role of the state in facilitating the structural
transition from a primitive/agrarian to a modern/manufacturing society. The developmental state is
meant to play the social engineering role (i.e. the role of restructuring the national economic system) for
promoting long-term (industrial) development. In many cases, the facilitation of growth – the prerequisite
for the structural transition – is based on the emergence of an agricultural surplus that can be transferred
to the emerging modern sector. The whole scheme of thought here reminds us of the dualist model of
Lewis (1954) where the “modern” (manufacturing) sector is indispensable as it absorbs labour from its
“primitive” (agricultural) sector. Industrial policy, the core of the developmental state’s policy actions,
is to nurture a competitive and dynamic manufacturing sector, or industrialization in short.

It has been thought that the manufacturing sector has a special role in growth due to its greater scope of
generating high levels of productivity (particularly at early stages of development) and externalities (Weiss,
2011: 2). Evans (1995: 7–8) argues that the main objective of the developmental state is to encourage a
country’s production structure to move up to higher rungs on the industrial ladder, thereby occupying better
niches higher up, in the global division of labour. The developmental state is also committed to resolving
conflicts in the on-going process of social restructuring as it tends to induce winners and losers. Conflict
management in this regard involves ensuring that the benefits, or expected benefits, of the process are
widely shared (Chang, 1996). Thus the state is expected to facilitate the process of restructuring, ideally
in such a way that would not adversely affect efficiency and productivity (UNCTAD, 2009: 33–34).

5 It is understood that market failure occurs when the market fails to allocate resources efficiently, thereby creating a
deviation from the general equilibrium that is expected in perfectly competitive markets (UNCTAD, 2009: 32). The state
whose intervention is very “routinized” in a systemic fashion may be called a regulatory state, which is concerned mainly
with setting the rules of the game rather than with shaping outcomes (UNCTAD, 2009: 29). For an authoritative survey
on the economics of development which includes a section on the state vs. market debate, see Stern (1989).
6 The developmental state has been a recurrent subject of debate during different times, in different circumstances and
in different geographical locations. Arguably, the peak period of the discussion of the Asian developmental state was the
decade from the mid-1980s to the mid-1990s. Routley (2012) provides an excellent literature survey of a wide coverage
on the subject.


The developmental state is also understood to be identified with its actual achievement of economic
growth, since its legitimacy stems from the significant improvement in standards of living for a broad
cross section of society. This association between a state’s actions and their outcomes means that it
would be difficult to identify a developmental state prior to its attainment of successful development.
Since no state openly opposes development as such, what we have are developmental states with a wide
range of achievement (from a very successful one to a totally unsuccessful one). At any rate, the extent
to which policymakers can enjoy broad public support, particularly regarding the right to rule and ensure
political order, heavily depends on their ability to contribute broadly to the significant improvements in
standards of living. In short, the developmental state is a lot more than a state that implements defensive
protectionist measures.

B. The Asian developmental State: contributions of Chalmers Johnson

The discussion of the Asian developmental State, as we usually understand it, has a more recent origin,
associated with the types of economic policies followed by East Asian States in the second half of the
20th century. More specifically, it is often related to Johnson’s seminal analysis (1982) of Japan’s industrial
policy.7 His central contention was that much of Japan’s remarkable industrial development – during the
1925–1975 period – was achieved thanks to the role of its state’s leadership in the process.8

Johnson (1982) explains that the industrial policy undertaken by the Japanese developmental State
consists of two basic components: industrial rationalization policy and industrial structure policy.
Industrial rationalization policy, which focuses on the micro aspect of the national economy, includes
detailed measures for the operation of specific industrial sectors or individual firms, with the intention to
improve their operational efficiency. He notes that industrial rationalization policy has appeared in every
industrialized country. On the other hand, industrial structure policy (often known as selective or strategic
industrial policy) – which is more controversial – concerns the identification of the strategic sectors to
be developed as well as the selection of the non-strategic sectors to be converted to other lines of work.

Johnson (1982) explains that Japan’s industrial structure policy was based on such standards as income
elasticity of demand, comparative costs of production, labour absorptive power, environmental concerns,
investment effects on related sectors, and export prospects (Johnson, 1982: 27–28). In concrete terms,
industrial structure policy concerns the proportion of agriculture, mining, manufacturing, and services in
the country’s total production; and within manufacturing it concerns the percentages of light and heavy
as well as of labour-intensive and knowledge-intensive sectors. The related policy measures reflect the
state’s attempts to change these proportions in ways that are deemed advantageous to the country.

In Japan and the Republic of Korea in particular, incentives and resources to guide private sector activities
were result-oriented, i.e. contingent upon performance. The adopted performance standards were usually
linked to production and trade (export) objectives that could be monitored at the firm level. State support,
which often involved contests among firms, was time-limited. To ensure the effective use of state support,
firms were made subject, though gradually, to the discipline of competition through international markets
(UNCTAD, 2009: 34).

7 Scholars, including Johnson himself, argue that the Asian developmental state is a descendent of Fredrich List, the
main representative of the German Historical School, who insisted that Germany needed to take a state-led approach to
development in order to catch up with Great Britain (Johnson, 1982: 17).
8 The State’s leadership in Japan’s catching-up campaign, however, was already seen in the 1870s and 1880s – the early
years within the Meiji Period (1868–1912). Furthermore, while Johnson’s research focuses on the second and third
quarters of the twentieth century is half-century period, Japan’s industrial policy obviously did not die off after the period.


The evolution of the developmental State in East Asia has not followed a single path; however, for the
institutional characteristics, the prototype Asian developmental State has the following two institutional
attributes, namely, competent bureaucracy and embedded autonomy:

Competent bureaucracy: At the centre of the successful developmental State of Japan – as well as those
in Taiwan Province of China (Wade, 1990), the Republic of Korea (Amsden, 1989) and Singapore (Huff,
1999) – was a competent bureaucracy of a pilot agency dedicated to devising and implementing a planned
process of economic development, like Japan’s Ministry of International Trade and Industry (MITI).9
The pilot agency staffed by the country’s best human resources, is charged with the task of directing
the course of the country’s development. Such pilot agencies generally enjoy a high degree of prestige
and legitimacy that allows them not only to continue recruiting outstanding personnel, but also to utilize
policy tools that tend to give them additional authority. As a result, the aforementioned economies have
developed the greatest state capacity not only to formulate development policies but also to implement
them effectively.

Embedded autonomy: A competent bureaucracy should be able to maintain effective relationship,
especially regarding the direction and funding of industrial investment, with the domestic business
sector. In an influential comparative study of industrialization in Asia and Latin America, Evans (1995)
coined the term “embedded autonomy” to describe the ideal relationship between the developmental
state and the indigenous business sector. According to him, the successful developmental state needs to
be sufficiently embedded in society so that it can achieve its development objectives by acting through
“social infrastructure”, but not so close to business that it risks ‘capture’ by particular interests.10

In the initial stages of the developmental project where the private sector cannot take the effective
leadership, the aspiring developmental state – if it has the requisite capacity and vision – is likely to
stimulate the development (catching-up) process. The Asian developmental State has also been extensively
involved in public investment in education with policies to ensure the equitable distribution of opportunities
and wealth (Martinussen, 1997: 239). It should be added that while being capable of maintaining stability,
the state has tended to restrain, often in an authoritarian fashion, “growth-compromising” demand
from interest groups (such as labour and civil society movements). A developmental state is not always
synonymous with authoritarianism, but many Asian states have been authoritarian to a degree (again at
the earlier stages of development), perhaps due to the historically-based attitude of Asian paternalism.
Authoritarian states have often been accepted, given that they proved capable of achieving both steady
high rates of economic growth and structural change in the production system (Low, 2000: 413).11

The organizational relations have evolved through distinct historical background within each society as
well as its surrounding external context (for further discussion, see section III).

9 The central bureaucracy responsible for industrial policy in the pre-war period was the Ministry of Commerce and
Industry (1825–1945), which was later replaced by the Ministry of Munitions (1943–1945). In the early post-war period,
the Ministry of Commerce and Industry was reestablished, and lasted until 1949 when it was reorganized as MITI. In
2000, MITI was transformed into the Ministry of Economy, Trade and Industry (METI).
10 A variety of institutional forms have enabled effective information flows between the state and business leaders in East
Asia. They include, for instance, blue-ribbon policy consultation bodies, state-sponsored industrial associations, export
cartels and inter-personal connections based on lineage, hometown, or “old-boy” network (Chu, 1989: 659). But Japan’s
numerous “deliberation councils”, designed at the sectoral levels, may be an archetype institutional form in East Asia.
11 It should be noted, however, that authoritarianism covers a wide range of regimes from dictatorships to traditional
patrimonial systems. Even fascist and communist states are sometimes referred to as authoritarian. Yet, there is a critical
difference between regimes where a cohesive and purposive Weberian bureaucracy exists on the one hand, and regimes
where bureaucrats are only personal servants of patrimonial rulers on the other. And both of these regimes may be equally
repressive but only the former possesses developmental structures (Vu, 2010: 247).


C. Variations among the Asian developmental States

Among the first-tier NIEs (newly industrialized economies) – the Republic of Korea, Taiwan Province of
China, Singapore and Hong Kong (China Special Administrative Region) – in East Asia, the Republic of
Korea’s interventionist policies in the 1960s and 1970s relied heavily on close consultations between the
state (with a notable role played by state-controlled financial sector) and business leaders, and very large
diversified corporate conglomerates (Chaebols). This closely resembled the Japanese situation with keiretsu
business groups. 12 In contrast, the state-business relationship in Taiwan Province of China, particularly
in its formative years, was more distant and fragmented, largely due to strained relations between the
transplanted political structures (bureaucracy and military) from the mainland and the indigenous business
elites. As a result, large state-owned enterprises (SOEs) in some key sectors coexisted with smaller firms
elsewhere, and with room for the evolution of a good deal of strategic planning in between (Kozul-Wright
and Rayment, 2007: 240).

Since its 1959 independence (with the exception of a turbulent 18-month union with Malaysia which
ended in 1965), Singapore has maintained one party that dominates electoral politics. Unlike Japan and
the Republic of Korea, its successful developmental state has always emphasized economic openness,
especially foreign direct investment (FDI), at first chiefly through manufacturing for export and
subsequently also as a major exporter of services.13 Huff (1999) argues that large and growing foreign
transnational corporations (TNCs) have helped the Singapore State to exclude the local Chinese business
community, previously the main entrepreneurial class, which was predominantly Chinese-educated
and oriented towards China (Huff, 1999: 221). Singapore’s Economic Development Board (EDB) has
grown into an principal agency to deal directly with private investors in line with the city State’s overall
development strategy (for Singapore’s principal policy measures, see section IV).

The second-tier NIEs in Southeast Asia (Indonesia, Malaysia and Thailand) have been faced with
typically complex class structures, and they have tended to rely on the continuing importance of resource
production. Their natural resource wealth has given rise to agro-based leading sectors in their economies.
In comparison with Japan and the Republic of Korea, they have initiated their development with a far
more modest role for the state. It is pointed out that the second-tier NIEs have generally adopted a much
less demanding policy regime (i.e. less interventionist industrial policy), and concentrated on more
conservative macroeconomic management (Kozul-Wright and Rayment, 2007). In comparison with Japan
and the Republic of Korea, they have also pursued more liberal trade and FDI policies.14

Export-processing zones (EPZs) have been created in many parts of East Asia, particularly in the second-
tier NIEs, where foreign firms have been granted various preferential treatments. (In the case of Singapore
among the first-tier NIEs, its entirety has been a state-directed export-oriented economy.) The situation led
to the rise of numerous export-oriented enclaves. Nevertheless, competition as well as interactions with
local firms was deliberately avoided until the mid-1980s (Kimura, 2006).15 A classic preference treatment
was the (partial) exception from corporate income tax. Another policy measure often implemented was

12 The State of the Republic of Korea went further down the road than that of Japan, pursuing some of the most selective
industrial policies, using an extremely powerful pilot agency (the Economic Planning Board, or EPB) and total ownership
of the banking sector. Both of these elements were missing in Japan (Chang, 2010: 83).
13 During 1980–1989, Singapore received a bigger absolute level of FDI than any other developing country, and during
1985–1995, it drew more FDI per capita than any country, developed or developing, and twice as much as the country
ranking second (Huff, 1999: 229–230).

14 While being much more open to the strategy of utilizing FDI, they remained rather cautious towards foreign firms and
tried to place them under tight control until the mid-1980s (Kimura, 2006: 337).
15 With the Chinese EPZs emerging as effective locations for FDI in the 1990s, the second-tier NIEs rapidly liberalized
their FDI regulations. As a result, competition over hosting FDI has become fierce (Kimura, 2006: 338).


to reduce or exempt tariffs on imported capital equipment and components. For instance, tax breaks were
given to firms that exported a sizeable portion of their exports.

In the second-tier NIEs, the State-business relationship in those countries is not straightforward, as it is
heavily influenced by inter-ethnic distributive pressures and the resulting need to manage challenging
political and economic issues at the same time (Woo-Cumings, 1999: 19). While their bureaucracies are
not well insulated from these pressures, this does not disqualify them altogether as developmental states.
After all, these states have not succumbed entirely to business or personal interests, and retained some
mechanism to encourage a developmental orientation (Hayashi, 2010: 52). Malaysia’s attempt at strategic
industrial policy did have some success in certain sectors, especially following the adoption of the Industrial
Master Plan in the mid-1980s, which strengthened incentives for technological deepening and domestic
sourcing of inputs in strategic firms, and sought to strengthen linkages between foreign and domestic firms
(Akyüz, Chang and Kozul-Wright, 1998: 20). Thailand, while being less inclined to undertake large scale
projects, has rather successfully utilized tariff protection and other measures to promote some selected
sectors. While its effectiveness has been hotly debated, Indonesia has retained an important wing of the
bureaucracy devoted to developing advanced industrial sectors, such as aviation, automobiles, steel and
shipbuilding. Thus, policy interventions in the second-tier NIEs have encouraged the development of an
indigenous manufacturing sector. Referring to the second-tier NIES, Jomo (2001: 481) observes:

There is little doubt that the structural transformation and industrialization of these economies has gone
well beyond what would have been achieved by relying exclusively on market forces and private sector

In China, the role of the State in industrialization has been historically larger than in Japan and the first-
tier NIEs. In the years following the communist revolution in 1949, all industrial firms were brought
under public ownership.16 Initially, economic policy followed the example of the Soviet Union. National
Five-Year Plans were introduced, with the physical production goals for all industrial sectors being
predetermined and laid down. As in many economies in East Asian, China succeeded in high level of
savings, but unlike them all investment in China was done via the public sector. The choice of heavy
industrials sectors and the role of the state were linked:

Heavy industries require investment with long gestation period, imported capital goods and large lump-
sum investments. In a predominantly agricultural economy, capital is scarce, market interest rates are
high, foreign exchange is scarce and the economic surplus is small. In order to make large-scale industrial
enterprises possible, one needs distort macro-economic policies (cheap energy prices, low interest rates,
low wages, overvalued exchange rates), which require government intervention (Szirmai, 2004: 465).

In December 1978, China announced a policy shift which involved some economic liberalization. It
started with a liberalization of the agricultural sector (including the abolition of the commune system)
which led to an explosive growth in agricultural production. More far-reaching were the creation of special
economic zones (SEZs) and the identification of some areas that have been granted special priority for
FDI.17 When the SEZs were established in 1979 there were strong controls by the State, but since the
mid-1980s some policies of market reforms have been progressively introduced, which included more
autonomy for firms, and a greater openness to foreign trade (Kiely, 1998: 112).18 Since the early 1990s,

16 Large-scale land reforms were implemented. The land of large landowners was nationalized without compensation and
redistributed among the peasants. After that the agricultural sector was collectivized step by step, starting with voluntary
cooperatives in the early 1950s and ending with the establishment of immense communes.
17 In the early 1980s, levels of FDI were relatively low, and concentrated in the service sector and in oil exploration.
From the mid-1980s, there was a marked shift toward manufacturing investment, most of which originated from Hong
Kong (China SAR) and located in the neighbouring Guandong province.
18 Firms in the SEZs operated under different rules than those that applied in the rest of the country; they had access to
better infrastructure and could import imports duty-free. Rodrik (2011: 152) states: “The SEZs generated incentives for
export-oriented investments without pulling the rugs from the under state enterprises.”


China has been one of the most dominant FDI recipient countries in the world. Most of this investment
remains concentrated in labour-intensive activity, some observers point to the partial shift away from
the zones and into the inner-land.

As stated earlier, the second-tier NIEs (and Singapore among the first-tier NIEs as well as recently China)
have relied more on foreign investment than their Northeast Asian counterparts. Nevertheless, it should
be noted that policy activism on the part of their States – through investment incentives, subsidies and
the like – has provided the critical catalyst with which to accelerate the developmental process.

The main conclusion of the preceding discussion is that the developmental state may adopt a variety of
specific policy measures. In this regard, one of the clearest divergences in the policy stance adopted by
the various developmental states may be seen in their attitude toward FDI.


A. Kaname Akamtsu’s original Flying Geese paradigm

During the 1930s, a Japanese economist, Kaname Akamatsu, initially sketched out a long span of history
involving the evolutionary interrelationships of a developing Asian country (Japan) with the advanced
West. His interest was to examine how developing countries in general may catch up with the advanced
ones through their mutual interactions. This interest in interactive relationships stands in clear contrast to
the dependency school’s position with regard to its focus on bi-polar centre-periphery relationships. The
term, flying geese, which Akamatsu used for the first time in 1935, came from the graphic presentation
of three timeseries curves for a particular product group (or more broadly a particular industrial sector)
with the time dimension on the horizontal axis. The curve that appears first represents the import of a
product group, the second represents its domestic production, and the third presents its export. They –
in an import-production-export (M-P-E) sequence – all rise and fall forming an inverted V or U shape.

In these presentations, the vertical axis indicates the value of import, production and export of the product
group in question. Implicitly, therefore, the vertical distance at a specific time between the production
curve and the export curve shows the portion of the local production that is domestically consumed.
Akamatsu asserted that this M-P-E sequence usually occurs for each product group (or each industrial
sector), although the exact shape of each curve and the cascading timing of the sequence depend on the
nature of the product group in question as well as the socio-economic conditions of the country at a
particular moment of time.

The geese in this one-country-one-product model represent these time-series curves, each of them
depicting the historical contour of import, production and export, respectively. These three curves
together characterize the level of competitiveness of the relevant sector in the country. In other words,
the M-P-E sequence for each particular product group indicates the change of competitiveness of the
national economy in producing the product group. Competitiveness in production as such does not exist
during the period when the domestic market for the product group is supplied totally by imports (i.e. no
local production). In due course, competitiveness is expected to rise with the commencement of local
production.20 As the competitiveness rises further, not only are imports being increasingly replaced by

19 For detailed studies on the historical evolution of the FG paradigm as well as its interpretations, see Kojima (2000),
Kasahara (2004) and Schröppel and Nakajima (2002).
20 Akamatsu’s explanation of industrial development does not rely on changes in relative competitiveness due to different
endowments, as modern theorists would predict. It is rather the result of “demand linkages” and “complementarities”
of different products. Schröppel and Nakajima (2002: 217) explain: “[I]t is not relative absence of competitiveness in
a particular segment of the market, but the presence of complementary products and industries that leads to economic


locally supplied products but some excess products eventually also exported (i.e. a vent for surplus).21
Initially, products are simple, crude and cheap, but gradually the level of quality is elevated. This sort
of procedure is repeated, and eventually leads to a process of national economic development with the
import of consumer goods being gradually taking over the import of machinery.22

Akamatsu warrants that there are many kinds and qualities of consumer goods and capital goods, and the
M-P-E sequence occurs not only in connection with capital goods following consumer goods, but also in
the progression from crude and simple goods to complex and refined goods (Akamatsu, 1961: 208, and
1962: 16–17). Akamatsu also notes that the product improvement tends to associate with the changes in
overseas markets, from a low-income area to a high-income area (Akamatsu, 1962: 17). Thus, Akamatsu’s
FG paradigm includes 1) the M-P-E trade pattern for consumer and capital goods; 2) the sectoral shifts of
production and export from consumer to capital goods, and 3) the inter-national alignment from advanced
to backward countries in accordance with their stages of development. As seen above, these four stylized
stages already presented rudimentary forms of the multiple sequence of patterns of modern FG paradigm
(to be discussed below).

By putting the M-P-E sequence of a late-industrializing country’s economy in the context of its trade
relations with an advanced country, Akamatsu presented a historical pattern of “dialectical dynamism”,
i.e. a period of homogenization (in a contemporary jargon, the trend of convergence in comparative
costs that impedes trade) repeatedly alternates with a period of heterogenization (the trend of widening

21 The commencement of the export phase of local products, which requires overseas marketing efforts, may necessitate
local firms (producers) to establish some sort of association with internationally established firms or trading companies.
This is the area that modern researchers have extensively explored.
22 Akamatsu presents a stylized four-stage model of evolving trade patterns of a typical developing country along its
development process (catching-up), where the existing manufactured products are clustered into two broad categories:
“consumer goods” and “capital goods”.
The First Stage (with exports consisted of primary goods, and imports of consumer goods): This is the stage at which a
developing country enters the international economy, where the domestic demand dictates the import of consumer goods
that cannot be produced at home. The balance-of-payments pressures oblige the country to engage primary goods exports
typically to distant developed countries with dissimilar economic structure, rather than to neighbouring (developing)
countries with similar economic structures (Akamatsu, 1961: 206).
The Second Stage (with exports made of dominantly primary goods with some consumer goods, and imports increasingly
less of consumer goods and more of capital goods and raw materials): At this stage, with its imports being higher profits
as compared with domestic industry, the country’s domestic situation begins to induce starts local capital to the import-
substituting production with the domestic market as an outlet. But capital goods such as machinery must be imported from
developed countries for the emerging consumer industries. As a result, the country’s imports from developed countries
gradually shift from consumer goods to capital goods (Akamatsu, 1961: 206–207). For establishing such domestic
industries, there must be an abundant supply of raw materials, which may be obtained domestically or from abroad. In
the latter case, not only capital goods but also raw materials must be imported from abroad (Akamatsu, 1962: 14–15).
The Third Stage (with exports made of dominantly consumer goods with some capital goods, and imports of capital
goods and raw materials): At this stage, the growth of its consumer goods production makes it possible for the country
to begin to export some of outputs, typically light industry products to its neighbouring countries, while it imports raw
materials and food staffs from them. The import-substituting production of consumer goods which was initiated by
the imports of capital goods develops into export sectors, and the domestic production of capital goods also is slowing
beginning slowly (Akamatsu, 1961: 206–207).
The Fourth Stage (with exports whose position being further shifting from consumer goods to capital goods, and imports
of consumer and capital goods as well as raw materials): At this stage, the export of consumer goods begins to decline and
be replaced by that of capital goods. Meanwhile, imported capital goods are steadily replaced by domestically produced
counterparts, and the latter eventually develop into export sectors (Akamatsu 1961: 207, and 1962: 15). However, the
domestic production of machinery as well as its exports (typically to other developing countries) may raise tensions with
the advanced countries with respect to capital goods exports (Akamatsu, 1962: 15).
What is important in this four-stage model is the generalized evolutionary process of trade patterns along industrial
development. After all, in reality, these stages overlap (or coexist with) each other.


divergence in comparative costs that promotes trade).23 These periods occur as the catching-up countries’
economic structures are upgraded (homogenizing), and as the advanced countries themselves in turn
strive to introduce innovations in order to stay ahead (heterogenizing). This dynamism – complementary
co-acceleration (Akamatsu, 1961: 18) – allows the collective advancement of all trading parties along
industrial development. In the early 1940s, Akamatsu developed the concept of relocation process of
industrial activities from advanced to developing countries during latters’ catching-up process (Schröppel
and Nakajima, 2002: 216)

One aspect of Akamatsu’s version, which is crucially important to our discussion, is the influence of the
German Historical School which emphasized the role of state in the national integration and development
through protectionist measures. Akamatsu himself admits that his M-P-E sequence framework was similar
to an earlier version formulated by Friedrich List (Akamatsu, 1961: 207). However, Akamatsu was more
optimistic about the possibilities of transforming innovations, skills and technologies from advanced to
developing countries than List. Whereas List advocated a comprehensive system of protection of new
industries from imports, though not the complete prohibition of them, Akamatsu, who regards imports as
generally beneficial, argues that imports lead to increases domestic consumption and transfer of product-
related knowledge. Both, in turn, lead top domestic production (Schröppel and Nakajima, 2002: 211).

B. Modern versions

The publication of Vernon’s (1966) product cycle (PC) theory stimulated modern Japanese theorists
to modernize the FG paradigm, although for a while it remained as a matter mostly of academic
curiosity (Korhonen, 1994). Furthermore, Kojima’s efforts (2000) to promote the FG paradigm led to a
“westernization” (by framing it in a neoclassical fashion) of Japanese ideas on economic development
as expressed in the FG paradigm (Schröppel and Nakajima, 2002: 217). Kojima explains national
development and its accompanying changes in trade pattern in the factor proportions (Heckscher-Ohlin)
theorem.24 One central concept of his argument is the dynamic capital accumulation (via high savings
ratio) as incorporated in national factor endowments (Memis, 2009: 43). With the imports of capital
(and intermediate) goods, the capital-labour ratio tends to rise, and the economy will shift its productive
activities towards the more capital-intensive good (Memis, 2009: 43). In other words, the change in the
structure of comparative advantage among Asian countries tends to induce changes in the production
and trade patterns (Kojima, 2000).

Vernon’s PC theory presented a perspective on a major individual firm with respect to how it makes
decisions on the location of its production facilities, by distinguishing products by the degree of their
maturation and standardization. The PC theory looks at the location of the production of a particular
product during its life cycle. Vernon’s argument, in a nutshell, was that when new products develop into
mature products and later reach the stage of standardized ones, the production locations (undertaken by
the original exporting firms) changes from the United States (the most advanced country) first to other
industrialized countries, and later to developing countries. Here outward FDI (thus overseas production)
is understood to replace export.

23 Akamatsu’s “dynamic” framework is built on Hegelian dialectics such that any given national economy, being in
perpetual motion, tends to move forward, i.e. to higher stages of industrial development (Korhonen, 1994).
24 Bernard and Ravenhill (1995: 173–174) explain: “Liberal economists (primarily Japanese, but not exclusively so) have
attempted to synthesize aspects of Akamatsu’s and Vernon’s arguments into a model of East Asian regional development.
They have incorporated Akamatsu’s discussion of industrial diffusion across nations with Vernon’s model direct foreign
investment and foreign sourcing of products by innovating firms. The two have in turn been linked to neoclassical notions
of comparative advantage to describe a ‘rational’ pattern of industrial diffusion from Japan to the East Asian newly
industrializing countries…, to ASEAN and most recently to China.”


As mentioned above, modern FG theorists – mostly Akamatsu’s students and particularly Kiyoshi Kajima
– developed the original paradigm further by incorporating the PC concept. Kojima presented the FG
paradigm in the post-war context in the 1970s, in a wider debate on the role of transnational corporations
(TNCs), by integrating the phenomena of Japanese FDI into the paradigm. Kojima added one aspect of
Vernon’s perspective, i.e. “reverse import” into Akamatsu’s framework. Reverse import for a product
occurs when its declining domestic production and export are combined with the rising offshore production
and (eventual) import from follower countries.

Modern theorists, including Kojima, depict the harmonious mechanism of collective advancement by
means of consecutive catchingup efforts. (As mentioned earlier, Akamatsu’s dialectic model is not as
harmonious as the modern versions.) With the postulation of a pattern of continuously altering product-
cyclebased trade, the modern FG paradigm focuses on the regionally contextualized transformation of
national economies (thus, macroeconomic in nature) rather than on the strategic behaviour of large firms
of the PC theory (thus, microeconomic in nature). The FG paradigm presents large firms (via FDI) as
“benevolent” transmitters of industrial knowledge – mostly industry-specific rather than firm-specific –
from one national economy to another.

According to modern theorists, the key to the national development and systematic regional integration is
the simultaneous occurrence of three types of orderly sequence – thus “multiple sequences” – of economic
activities within and among national economies:

1. The product-cycle sequence of a particular product (or a product group): This sequence explains
that the national economy follows the trade framework of the product life cycle, consisting of four
stages: import, production, export, and finally again import (i.e., reverse import). This is presented in
a “single-country-single-product” framework.

2. The inter-industry sequence of domestic development: This sequence depicts the gradual development
of industries in a manner compatible with a national economy’s changing factors and technological
capacities (collectively, endowments), meaning that the country shifts the production (thus export)
activities from lower value-added, more labour-intensive and less capital-intensive industries to
higher value-added, less labour-intensive, and more capital-intensive industries. (Akamtasu touched
upon this, but modern theorists are much more elaborating.) This sequence is presented in a “single-
country-multiple-product (industry)” framework.25

3. The inter-economy sequence of regional development: This sequence indicates that the orderly
transfer of industrial activities occurs among national economies along regional hierarchy as follower
economies come to obtain the endowments most suitable to the transfers of activities. (As mentioned
earlier, Akamatsu’s “dialectic” inter-economy sequence is much more conflict-prone than modern
versions.) This sequence is presented in a “multiple-country-single-product (industry)” framework.

For the sake of historical accuracy, Akamatsu already introduced, though in a much less stylized fashion,
these sets of sequences in the 1930s and 1940s. The more recent discourse, as discussed below, tends to
concentrate on the last one, the inter-economy sequence (Schröppel and Nakajima, 2002: 211).

25 According to Ozawa (2008, 2009), there are five distinctive stages in the inter-industry sequence, as a “flight map” for
follower geese to be guided in their drive to catch up on growth. Stage 1 is the endowments-driven (resource-intensive or
labour-intensive light industries) stage, such as textiles, raw industrial materials and agricultural products. Stage 2 is the
physical scale-driven (capital-intensive, natural resource processing) stage, with mostly non-differentiated products, such
as steel and basic chemicals. Stage 3 is the consumer-oriented stage, such as clothing and higher level manufacturing, such
as automobile. Stage 4 deals with R&D-based sectors, such as microchips and computers. Stage 5 is Internet-based, such
as information services. Under this framework, the most developed stage is currently information technology. Each of
these stages goes through the M-P-E sequence, although the mechanism of transition from one stage to the next presents
considerable challenges. Ozawa also names these five stages after corresponding economists and entrepreneurs: Stage 1
with Heckscher-Ohlin, Stage 2 with Adam Smith, Stage 3 with Henry Ford, Stage 4 with Joseph Schumpeter, and Stage 5
with Marshall McLuhan (Ozawa, 2008, 2009).


C. Implication on regional integration

The modern versions of the FG paradigm contain a framework of regional development and integration,
by adding the dimension of FDI – more specifically, investment from Japan to its neighbours – to the
paradigm (Terry, 1996: 188). While Vernon’s publication implies a theoretical base for regional integration,
it is Japanese theorists that linked various overseas activities of Japanese TNCs (through sub-contracting,
licensing arrangement, joint ventures, FDI, etc.) with the theme of regional integration (particularly in
East Asia). Kojima (1978) argues that flows of both real and financial assets from Japan combined and
sent to follower economies as a package, will augment the benefit of inter-economy linkages. Focusing
on FDI, Kojima (2000) asserts that it creates substantial spillover effects:

Foreign affiliates generate, through backward and forward linkages, support industries and employment.
They contribute to developing local entrepreneurship and managerial and technical skills. They improve
the quality and morale of labour through training and education. Ultimately, FDI induces ‘reform’
in production methods, employment systems, business management, and even laws and political
organizations (Kojima, 2000: 383).

Such FDI, which began to grow in the 1970s but dramatically accelerated after the mid-1980s, has
facilitated Japan’s industrial restructuring, scaling down those industrial sectors losing competitiveness,
thereby releasing resources for other sectors gaining “competitiveness”.26

It is pointed out that FDI from Japan ostensibly aids in replicating (regionalizing) the Japanese development
pattern in East Asia (Arase, 1994; Hatch and Yamamura, 1996; Hatch, 2010).27 In this Japan-centric
scheme, the role of the Japanese State was to assist the implementation of the FG paradigm as a vehicle
of regional integration (ibid.).

Let us note that the imperative perceived in Japan for promoting regional integration has been externally
imposed. We witnessed the intensifying protectionist sentiment in the United States and Western Europe
in the late 1970s and the early 1980s. It was this external factor that prompted Japan to systematically
cap its export surges by means of voluntary export restraints (VERs) 28 as well as FDI in these markets.
Furthermore, labour-cost differentials between Japan and a large part of the rest of the East Asian region
were widened more in the mid-1980s with the rapid appreciation of the Japanese yen. These factors
contributed to the mass exit of Japanese firms from their home. By the end of 1989, Japan accumulated
a total of $254.4 billion in FDI outflows. In absolute terms, the United States received the largest amount
of Japanese FDI – $104.4 billion (or 41 per cent of the total) – and the EC as a whole received $40 billion
(15.7 per cent) (for these data cited and further discussion, see Cai, 2008: 188–219). However, the East
Asian economies received the lion’s share of Japanese FDI to non-OECD member countries. While the
Japanese outward FDI lost momentum after 1990, the shift of investment to East Asia became even more
evident, particularly to China. The proportion of Japanese FDI in East Asian total FDI grew from 10 per

26 United States FDI dominated the East Asian region in the 1950s and 1960s; however, starting in the late 1960s, Japanese
firms were taking an increasingly larger share of regional FDI. Particularly, stimulated by massive trade surplus and the
rapid appreciation of the yen (after the 1985 Plaza Accord), Japanese FDI had a big boost.
27 However, the exact replication of the Japanese development policies in dealing with FDI may turn out to be “self-
contradictory”. If the East Asian economies faithfully imitated Japan, they would have to put restriction on FDI and
make their economies relatively closed. On the other hand, if they emulated the closed system, Japanese firms, which
have organized this region as their production sites and markets, would be constrained in their activities. As long as
the expansion of Japanese economy is concomitant with the regional development, it is impossible for the East Asian
economies to model after Japan (Yun, 2005: 46).
28 VERs – for specific sectors, such as steel, machine tools, televisions, automobiles and alter chips – were undertaken
not by Japanese firms alone; many exporters in the Republic of Korea and Taiwan Province of China were also pressured
to implement them.


cent in 1991 to 50 per cent in 1997 (Park, 2009: 158). It is important to note that a high proportion of
Japanese FDI has been in manufacturing sectors in East Asia.

The exit of manufacturing activities from Japan in the post-bubble decade of the 1990s was partly due to
the slower growth in domestic demand. Similarly, first-tier NIEs began to follow Japan’s policy footsteps
with respect to transferring some of their manufacturing firms (and its domestic sub-contractors) to the
second-tier NIEs in the late 1980s.

In sum, Japan’s industrial restructuring has provided special incentives to the first-tier NIEs to move into
some of Japan’s export-oriented industries. Meanwhile, the Japanese State was ready to focus, amplify
and sometimes orchestrate the efforts of its business sector (Terry 1996). As mentioned above, the similar
restructuring has been taking place in the first-tier NIEs. Thus, the regional industrial restructuring
process – which is closely associated with contemporary regional integration – is a “top-down” rather
than a “bottom-up” process.


A. United States stance: aid giving for Asian reconstruction and policy tolerance

The successful emergence of East Asian economies cannot be fully understood without considering the
context of the Cold War, i.e. the existence of external and internal threats as well as diplomatic, financial
and in some cases military aid from the United States (Beeson, 2007; Cumings, 1984; Stubbs, 2009). Here
one of the most critical threats must be one from Asian communism.29 In the early post-WWII period,
concern of the United States with geopolitics prompted the strategy to forge a hub-and-spoke network of
bilateral security treaties with Asian “front-line” States. This dependence on the United States protection,
however, constrained the security policies of the region’s States. Furthermore, the region’s economies
soon came to depend heavily on the United States market, shipping on average 20 to 30 per cent of their
exports to it (Tsunakawa, 2005: 105).

Japan, the most important Asian ally of the United States, was a beneficiary of massive, stimulatory
procurements resulting from the Korean War – totalling US$3.4 billion, or one-fourth of all United States
merchandise imports at that time (Cumings, 1984). Johnson (1982) went as far as to describe massive
United States demand for goods and services from Japan resulting from the Korean War as a virtual
equivalent of the Marshall Plan for Europe. A similar effect was also seen in the case of the Viet Nam War
on the Republic of Korea and Taiwan Province of China. Over the period of 1946–1978, the Republic
of Korea received total of nearly $6 billion in t economic grants and loans. During the 1950s alone, the
United States aid accounted for five-sixths of the Republic of Korea’s imports. The United States military
deliveries to these economies in 1955–1978, i.e. excluding the Korean War, totaled $9.05 billion (ibid.).

The Cold War also provided a “relatively” permissible environment in which the Asian developmental
States continued to protect and nurture their strategically important manufacturing sectors, while the United
States maintained a tolerant attitude toward the neo-mercantilist position of its Asian allies (Harvie and
Lee, 2002: 10). Referring specifically to Japan, Beeson (2009: 15) explains: “[The country] was able to
take advantage of a rapidly expanding international economy and relatively unfettered access to important
markets in Europe and North America, without having to open up its own markets and, crucially, while
maintaining control of the domestic financial system.” The United States policy to keep its market open

29 Particularly for the Republic of Korea and Taiwan Province of China, the perception of extremely intensive and long-
term threats emanating from the People’s Republic of Korea and China, respectively, played the key role in creating
their developmental states. For further discussion on the threat perceptions as an important factor that underpinned their
developmental states, see Zhu (2002).


to Asian Allies, particularly to Japan, was to compensate for costs resulting from its insistence to them
on not trading freely with China (Pempel, 2005: 8).

The United States’s hub-and-spokes alliances through a series of bilateral security agreements with its
Asian allies allowed (if not encouraged) Japan to take the leadership in directing intra-regional economic
relations, through the provision of substantial amounts of aid to its neighbours. Japanese official aid, which
began in the 1950s as war reparations30 to several Southeast Asian counties in the 1950, has always been
one piece of a broader programme of economic cooperation that included both public aid and private
investments (Arase, 1994). In sum, while the Cold War indirectly helped the developmental States to
operate in East Asia, it facilitated the emergence of economic regionalism in a particular fashion against
this background.

B. Diminishing tolerance, rising criticisms, enforcing pressures

During the 1970s and the early 1980s, the capacity of States in many developing countries was seriously
restrained by rising energy prices and recession of the world economy (Bandelj and Sower, 2010: 178).
In the 1980s, the international community increasingly adopted the policy stance of neo-liberalism
toward economic development. This became particularly prominent in Latin America and Africa after
the outbreak of the Debt Crisis in 1982. The previous optimism about the benevolence and competence
of the state came under a serious challenge. The emerging perception was that the state itself had become
a part of the problem of underdevelopment rather than the solution. Nevertheless, the crisis did not
critically affect East Asian countries which, with the overall good performance, could retain their own
state-centred pattern of development.31

In the 1970s and the early 1980s, the United States administrations had favoured an issue-by-issue
approach in negotiating economic disputes with Asian economies (particularly Japan), but such an approach
reportedly limited the areas of negotiations. This United States diplomatic approach gradually induced
negative publicity in domestic politics. Eventually, changing economic and security circumstances in the
mid-1980s prompted the United States to re-evaluate its relationships with Asian economies (Beeson,
2009). Consequently, the United States policy towards Japan shifted in the 1990s to measures designed to
open the Japanese market, by pressuring it to make structural changes in the domestic political economy
(Hook et al 2001).32

As aid money from the West (and the East) became scarce with the ebbing of the Cold War in the second
half of the 1980s, the availability of funds to “buy” political ability began to dry up (Fritz and Menocal,
2007: 540–541). However, Japan’s aid commitment towards its Asian neighbours remained firm. From the

30 These reparations typically involved export credits, tied loans, plant exports, and long-term investment projects that relied
on Japanese money. As a result, they opened markets for Japanese firms as well as providing tremendous opportunities
for personal profits by business and political leaders (Pempel, 1998: 57).
31 During the 1980s, some innovative approaches emerged as the United States firms strove to achieve greater access to
overseas markets. Among these markets, the concern was particularly notable with respect to those in East Asia. For instance,
problems of access to the Japanese market were the motivations for the Omnibus Foreign Trade and Competitiveness Act
of 1988, which included a provision calling on the President to identify unfair trading partners and to specify products
for negotiation with these partners. In 1989, Japan was named as an unfair trading partner and three areas, namely, forest
products, telecommunications satellites, and supercomputers, were selected for negotiations. This action exemplified the
continuing mood of dissatisfaction over access to Japanese markets at the end of the decade.
32 They included the MOSS (market oriented, sector specific) talks agree to in 1985, the Structural Impediments Initiative
(SII) (1989–1990), the Framework Talks on Bilateral Trade (1993–1995), as well as explicit efforts at “managed trade
as a second-best alternative,” embodied in the bilateral Semiconductor Trade Agreement (1986 to 1991) (for a detailed
discussion, see Hook et al., 2001: 105–117).


end of the 1980s until the start of the new millennium, Japan, as the world’s largest aid donor, continued
to reserve its aid money largely for Asia neighbours. Hatch (2010) documents:

Most of this aid was delivered in the form of yen loans for dams, bridges, electricity transmission lines,
telephone lines, and other infrastructure projects that are needed to support industrialization. Indeed, it
was routinely criticized by other wealthy donor countries for focusing on such development projects
rather than humanitarian programs (Hatch, 2010: 80).

In the first decade of the post-Cold War period in the 1990s, the United States, together with its Western
allies, propagated further (i.e. to globalize) neo-liberal reforms. The disintegration of the socialist regimes
was a decisive factor pushing public sentiment towards the neo-liberal orientation. Japan, being defensive
within the donor community, attempted to reverse the increasingly prevalent world sentiment of discounting
the role of the state, by financing the World Bank to undertake a major study (World Bank, 1993) on East
Asian economic development (for further discussion see Terry, 1996; Wade, 1996).33

It was the financial crisis (1997–1998) that finally dealt a serious blow to the image of East Asia. Its formerly
praised state-business relationships were now disparaged as forms of outmoded “crony capitalism”, and
synonymous with corruption and inefficiency (Beeson, 2007). But this critical view was not gain the
universal consent.34 One reason for that was that it could not explain how some Asian economies, such
as Taiwan Province of China, managed to escape the crisis.

Some observers argued that it might have been the gradual exit of the developmental States in some of
the East Asian region – i.e. rapid liberalization of their financial sector – that had invited the crisis. Chang
(1998), for example, points out that the cause of the crisis in the Republic of Korea was not due to the
existence of the developmental state, but due to its disappearance in the late 1980s onward. At any rate,
the neo-liberal policy prescriptions came to be viewed as a direct threat to the developmental States in
East Asia.

C. Resistance to criticisms

When Thailand and Indonesia appealed for emergency funding in 1997, the International Monetary Fund
(IMF) assumed that the East Asian crisis (caused mainly by capital account deficits due to “hot money”
flows35) was similar to the Latin American crisis in the 1980s (caused by current account deficits due to
public debts and high inflation). As a result, the IMF instructed these countries to reduce public spending
and open their markets further, to impose higher interest rates, and to force their banks failing to meet
the capital adequacy ratio to shut down. The idea was to cut demand and liquidity and encourage foreign
investors to deploy their capital to kick-start again the economies in trouble.

33 At a more fundamental level, many Japanese economists have long argued that development promotion with extensive
protectionist measures have been universally observed at early stages of development for all advanced counties. They
argue that neo-liberal ideas are a distortion of the historical reality (for further discussion see Lee, 2008).
34 Before and after the crisis, Taiwan Province of China, like the Republic of Korea, abandoned key policy tools in the
developmental state armory, including planning, widespread public ownership and the selective state direction of private
investment. Rapid financial liberalization exposed the entire region of East Asia to speculative risks. Radice (2009: 1167)
explains: “[Taiwan Province of China] was protected by its particular role in the very different Greater China miracle.”
35 In the 1990, many of the Easy Asian economies became increasingly open to inflows of highly mobile portfolio capital
and short-term lending in a way that was not the case in the earlier period. This was due to the external pressure to follow
the neo-liberal orthodoxy and open their capital account, allowing much greater (and unregulated) movements of capital.
By the mid-1990s, inflows of private capital grew much faster than public loans (up to 75 per cent of inflow, of which
half was highly mobile portfolio capital. Another noteworthy feature that emerged in the 1990s was that much of the debt
increased was short term (Beeson 2007: 206–209).


The effects of the crisis on the region’s economies turned out to be neither exceedingly detrimental nor
long-lasting (with the exception of Indonesia). Many observers now do not subscribe to the idea that the
relatively rapid recovery of the region from the crisis was due to either its austerity prescriptions with
extensive reform suggestions by the IMF, or the reduced role of their developmental states. Instead, the
dominant public opinion in the region was that the excessive intrusive role of the IMF converted the
initial currency crisis into a deep economic recession and a social tragedy (Chang, 2008).

Many of the region’s leaders shifted blame for the crisis to outside influence, thereby, in a way, justifying
their economic policies. According to Higgot (1998), many regional economies that had to endure the
austerity policy measures prescribed by the IMF were engaged in a “politics of resentment” toward the
organization. One important side-effect of the crisis, Higgot further argues, was a psychological bond
among regional leaders on the ground that they were common victims of a major disaster, and that East
Asia should become a “single market”. Referring to Malaysia’s experience during the crisis, Beeson
(2007) argues:

[I]t exacerbated tension between East Asia and the USA, giving renewed life to Mahathir’s aborted
proposal for an East Asian Economic Caucus (which would ultimately re-emerge as ASEAN+3) and
sparking interest in the possibility of developing regional monetary mechanisms with which to ward
off future crises (Beeson, 2007: 210).

It could be argued that the strict adhesion to neo-liberal prescriptions, including the element of reducing
the role of the state, has considerably lost its potency (Gore, 2000). This is partly because of the poor
performance – in terms of growth and distribution as well as stability – of many developing countries in
Africa and Latin America in particular as well as economies in transition (former socialist countries) that
have adopted extensive neo-liberal policy measures. As mentioned above, the rapid East Asian recovery
after the crisis certainly did not revive trustworthiness of the neo-liberal prescriptions; instead, it instigated
widespread mistrust of them in the region.


A. National policy measures related to industry, trade and FDI

As discussed earlier, many East Asian States have been known for their selective industrial policy –
equivalent to what Johnson (1982) calls industrial structure policy – toward their strategically targeted
sectors. They have often used their domestic financial sector (publicly controlled) for providing firms
within these sectors with subsidies of different kinds, combined with various trade- and investment-related
preferential treatments. Instead of being static, however, the emphasis on policy measures undertaken
has been shifted over time within each national economy as well as across different national economies
(UNCTAD, 2009). Yet one fundamental point remains unchanged: the States – with the exception of Hong
Kong (China SAR) – have been heavily engaged, as the principal agent, in the conflict-prone process
of industrial development involving different social actors. This is because, most fundamentally, not all
factors of production (i.e. tangible and intangible productive assets) are readily transferable between
sectors (Chang, 1996). In general, East Asian States have successfully undertaken the social engineering
role of guiding the process of socio-economic restructuring.

Selective industry policy measures once widely used in East Asia were based on a broad industry targeting
through administrative regulations and guidance for strategic/priority sectors and firms. These measures
were to restrict foreign competitors’ access to the domestic market in general or its specific sectors in
particular. As noted above, the measures for protecting, and thereby nurturing, the targeted sectors and
firms included, among others, financial subsides of various kinds – credit subsidies, production subsidies,
tax subsidies, export subsidies, and so forth – together with preferential market licensing, adjustment


assistance and manpower training (UNCTAD, 2009: 151).36 Let us note again that their infant industry
protection was accompanied by stringent conditions, such as those of achieving specified export targets
with a rigid time limit.37 Over time, East Asian States have retained some of these measures, but modified
(liberalized) or discontinued others.

Trade-related measures38 include import tariff and non-tariff measures (particularly in earlier days)
and export promotion.39 Tariff measures (import duties) have been structured in such a way (with their
drawbacks) as to reduce the pressures from external competition on the one hand, and to facilitate imports
of capital goods (machinery) and essential inputs on the other. Typical non-tariff measures on imports,
which many Asian States have implemented, include import bans, import quotas, import licensing, and
safeguard measures. In a broader definition, non-tariff measures also include public procurement measures
(preference of domestic products over imports), foreign exchange regulations and controls, and exchange
rate policy. It is anticipated that these import-related measures would enable domestic producers to charge
higher prices for their import-substituting products and thus to pay higher wages, thereby inducing labour
to move the targeted sectors (Kreinin, 1971: 260). Export promotion measures include overseas marketing
via export promotion agencies, export finance/insurance guarantee, export quality management, and
export processing zones (EPZs) (UNCTAD, 2009: 151). An important export promotion measure is the
maintenance of competitive exchange rates (with occasional currency devaluation). In general, these
measures (mostly on imports) have been considerably softened throughout the region.

As for investment-related measures, East Asian States have placed various sectoral restrictions and
guidance on domestic and foreign investment, again with some financial assistance to the targeted sectors/
firms. Particularly notable are those measures related to inward FDI. It is well known that Japan, the
Republic of Korea and Taiwan Province of China used to tightly regulate inward FD with strict performance
requirements, such as those on technology transfer, local content, and joint venture arrangements and
export orientation. As discussed earlier, Cold War geopolitics of the 1950s, 1960s and 1970s presented a
tolerant external environment to these economies. In contrast, the second-tier NIEs have been somewhat
less protectionist in trade, and more reliant on inward FDI – particularly in the late 1980s and onward
with the extensive use of EPZs – as a way of integrating into trade networks regionally and globally.40
(Let us point out that to some extent, the beginning of rapid growth of the second-tier NIES coincided
with the rise of neo-liberalism in the 1980s.)

36 Singapore is an exception to this rule, as it has always embraced foreign TNCs, with various incentives, as its overall
development strategy. Similarly, China could be regarded as another exception, given the fact that its growth in export
of manufactured goods has been substantially due to foreign TNCs as well.
37 It is interesting to note that Singapore has been free from the concern of ensuring firms in receipt of State subsidies to
use them in productive. Huff (1999: 225) argues: “Because multinationals came to Singapore almost entirely to export,
international pressures to remain competitive answered the need for the market-conforming behaviour enforced by
governments in other developmental states … , where subsidized firms were set export targets, but typically lacking in
subsidization by soft states. Along with education and training, policies that tied investment incentives to higher technology
activities helped to avoid a further potential problem that multinationals would come to Singapore, take whatever subsidies
were on offer and then depart, leaving the republic a still decidedly low-wage center.”
38 Obviously, trade-related measures are not solely for promoting industrialization. Two other principal objectives are: the
correction of external imbalance, and the generation of public revenue. The correction of external imbalance (persistent
payment deficits) is undertaken by import contraction, export expansion or both. Revenue tariffs (normally duties on
imports but also on exports) are quite significant for many developing countries where the domestic authorities have a
limited administrative capacity of taxation.
39 Historically, mercantilist policy occasionally restrained export for security and developmental purposes. For instance,
the British State prohibited exports of machinery in order to prevent others (European countries and its own colonies) from
catch up with it in industrial development. This prohibition remained in force until the 1830s (Shafaeddin, 2005: 164).
40 Some observers, particularly those from the dependency perspective, are critical of such integration strategies, arguing
that the extensive external dependence on management, technology (capital goods), parts and components have made their
development illusory. These critical views, which were dominant in the 1960s and 1970s, have considerably subsided
in the recent past.


Generally speaking, the Asian developmental States have sought a process of strategic integration with
the world economy, in which the timing, speed and sequencing of opening in relations to different types
of international flows was decided on the basis of how they support the national interest in promoting
economic growth and structural change (UNCTAD, 2009: 31).

Whereas the policy measures discussed above appear to be most relevant during the early catching-
up period, we would argue that the state should remain relevant even later on. As the “advantage of
backwardness”41 is gradually eroded in the course of development, the competitive pressure could rise on
the catching-up economy. The situation may become especially critical when the state’s policy measures
have eventually helped its economy reach the leading edge of production and knowledge. In East Asia,
this question is very pertinent to Japan and the first-tier NIEs. Once the advantage of backwardness is
fully taken advantage of, the state faces the problem of revising ways for keeping-up, moving ahead, or
simply staying ahead of others. Weiss (2000: 27) argues:

[K]eeping up with the change in the modern industrial economy entails many more important tasks
than looking for the next big invention. These tasks include assisting an orderly retreat or restructuring
for industries in decline, regaining ground lost to competitors in strategic industries …, maintaining a
long-term investment programme for upgrading in mature industries, promoting new infant industries
in high technology, as well as tracking areas with new products and technological potential.

Weiss (2000) further argues that the new task of “keeping-up” may entail a different array of policy
instruments, but not necessarily the abandonment of a “transformative project”. Using the term
“transformative state”, she argues that the interventionist state needs to remain active with various
restructuring measures in the post-catching-up period (Weiss, 2000: 29). In this regard, the emigration
of firms (i.e. the outward movement of industrial activities) partly implies the internationalization
(regionalization) of the state’s development (or restructuring) initiatives, thus not always indicating a
weakening of the role of the state (see a further discussion see below).42

B. Does the Flying Geese paradigm reflect the weakened state?

Neo-liberals stress that the rise of cross-border economic transactions has resulted from the state’s
progressive disengagement from market interventions. The developmental state is a transitory (archaic)
institution because a range of viable/permissible policy measures have diminished over time. After all,
investment decisions are essentially made by firms, and trade is similarly pursued by exporting/importing
firms, not by states (Memis, 2009: 34). In this sense, the FG paradigm, as a framework of regional
integration, may imply the weakening role of the state.

The FG paradigm postulates that industrial upgrading of all inter-linked economies in East Asia reflects is
a process through rational market transactions, where the existing inter-country hierarchy can potentially
provide all aspiring states (more importantly, their firms) with a ladder of development starting with the
most labour-intensive segments of industrial activities. This is in clear contrast to the dependency argument
of underdevelopment resulting from the “centre-periphery” relations. The upgrading of manufacturing
activities in the lead economies has opened up opportunities for less developed ones to enter the regional
division of labour by picking up less complex activities. Here, it is understood that large firms (rather

41 In Gerschenkron’s (1962) argument, late-industrializing economies have the opportunities to take over technological
know-how from advanced ones, without having to bear the R&D costs of new technologies. They can choose from a
tremendous arsenal of new production techniques, which were not available previously. Thus if they are able to absorb
new technologies, late-industrializing economies can experience faster economic growth than the early developers. This
is the advantage of backwardness.
42 On the other hand, some observers argue that outward FDI from Japan may be a response, in part, of its firms wishing
to escape the obligations and costs associated with the social and institutional organizations of the Japanese economy
(Henderson, 1998: 374).


than states) have provided foreign firms with a powerful tool through the transfer of technology and
skills. Ozawa (2009) calls it a mechanism of “recycling comparative advantage”. According to the FG
paradigm as a framework of regional division of labour, the developmental task of the state is being taken
over by that of the market (i.e. firms). One implication of this reasoning is that state actions that defy the
“rational” market in the region are likely to frustrate the collective catching-up process; therefore, the
state must be the follower of the market, rather than the other way round. Indeed, it may be argued that
the FG paradigm and neo-liberalism share a common “critical” view toward the state.

However, in our view, the reality is more nuanced, mainly because East Asian states have proactively
affected regional movements of their fi rms (FDI and trade).43 As mentioned earlier, the states of Japan and
the first-tier NIEs have promoted outward FDI partly for reducing political tensions with their Western
major trade partners (importers). They have also done so with a view to upgrading their industrial sectors
(and abroad).44 Japan, and more recently some of the first-tier NIEs, have provided their aid money to
East Asian neighbours (and beyond) to develop their local infrastructure, thereby making aid-recipients
more accommodating toward newly arriving industrial activities from abroad (for Japan’s case, see Arase,
1994). More recently, China, the emerging powerhouse in East Asia, has also distributed massive aid
money to its neighbouring economies (as well as to others).

As for host economies of FDI (the second-tier NIEs and China), their States have solicited, in a strategic
fashion, investment from abroad with various incentives and conditions. Admittedly, for these economies,
industrial immigration (arrival of foreign firms) could complicate the politics of State involvement,
particularly when local firms establish alliances (such as joint ventures) with foreign firms. The situation
may not follow the classic process of developing/upgrading the genuinely local industrial sectors, as joint
ventures no longer comprise a purely domestic constituency for protection and nurturing. The interests
of firms involved (domestic and foreign) are much less neatly bound up with the enhancement of local
productive capacities. Yet, again, joint venture requirements have been a practical policy choice for
promoting higher levels of local sourcing (UNCTAD, 2001: 167).

C. Situating the developmental state in the Flying Geese paradigm

The logic of the FG paradigm (as understood in its typical modern versions) emphasizes the importance
of the orderly (market-rational) sequence – nationally and regionally – in industrial development. It is
thought to be not rational for any country with an abundant unskilled labour – as the potential basis
of its comparative advantage – to try to take up the task of building the capital-intensive high-tech or
knowledge-intensive R&D-driven sectors. Instead, it should start out with the lower tiers among such
sectors that are commensurate with the local conditions of labour abundance and technological scarcity
(broadly “endowments”). The development prescription of the FG paradigm would be: the catching-up
economy should act realistically in identifying the sectoral targets for promotion, rather than attempt
to jump unrealistically rungs of the industrial ladder (for further discussion see Lin, 2011). It should be
easier for a catching-up economy to pick up those industrial sectors that are losing competitiveness in
slightly more advanced economies that are relatively similar in economic environment.

This does not mean, however, that the state should stand idle, waiting for the “natural” maturation of
its economy. Many agree that development will not happen purely through market forces and will need
state interventions. Let us recall that Akamatsu, the originator of the FG paradigm, did recognize the role

43 A totally different explanation is also possible. A case in point is Japan in particular. From this perspective, the
internationalization (including regionalization) of Japanese (Asian) firms is partly due to their desire to escape the social
and institutional organization of their home economy (economies) (Henderson, 1997: 374).
44 Industrial migration strategies may take several forms. The specific destination could be these importers (particularly
the United States or Europe), or third countries (typically East Asian neighbours).


of the state in facilitating the transition from import to domestic production (and export) in his M-P-E
sequence model, although he did not adequately elaborate on concrete measures that the state ought to
take (Akamatsu, 1962: 23).45 One major area of the current debate on the role of the state on industrial
promotion is related to comparative advantage (domestic factor endowments). There are those who
argue that state interventions should conform to a country’s comparative advantage. UNCTAD (2009),
for instance, argues that the state’s efforts should be such that the opportunities of current relative cost
advantages are exploited to the full but at the same time to promote investment and learning in economic
activities where comparative advantage can be expected to lie in the immediate future as its economy
develops and other late industrializing competitors catch up (UNCTAD, 2009: 31). But there are others
who argue that state initiatives should defy its present comparative advantage in order to upgrade its
industry (see, for instance, the debate in Lin and Chang (2009)).

While the state has lost some of its traditional regulatory power in the global age, it is premature to dismiss
its role in economic management altogether.46 At the fundamental level, it must maintain an enabling
environment for development, i.e. macroeconomic stability with effective counter-cyclical fiscal policy.
The state should improve the conditions of the domestic factor markets, perhaps most importantly, the
levels of public health and of skills and knowledge of its labour force, and provide effective infrastructure,
including power, transport and communications. Needless to say, public security (political stability and
order) is indispensable. But the question still remains as to whether some (if not all) of these traditional
policy measures discussed earlier can (and should) remain relevant to regional dynamism envisaged by
the FG paradigm. We would argue that the state’s developmental initiatives could be effective in the
regional context.

Contemporary regional trade in East Asia has been dramatically expanded as a result of the development of
fragmentation of production (cross-border production sharing), particularly for such products as electronic
appliances and automobiles. The entire production of some products involves fragmented production
blocs located in different national economies. Thanks to the technological development in transport and
communications, they are well linked through intra-industry and/or intra-firm trade. Characteristics of
multi-step production processes allow firms in catching-up countries to partition their production activities
into “slices”. It is no longer necessary for them to master entire production chains and to organize them
by themselves. Instead, they can now focus on mastering just one facet of production. This is likely to
entail large savings in learning costs and can allow small and medium-sized firms (as local suppliers) to
coexist with large foreign firms (UNCTAD, 2002: 74).

But the question still remains as to which facet of production firms should be engaged in. Should it be
decided totally by the market? It is known that foreign affiliates tend to source the most sophisticated
and complex parts and components either internally or more dominantly from preferred (often foreign-
owned) suppliers within or outside host country, depending on the capabilities of local firms (UNCTAD,
2002: 75). Therefore, the efforts on the part of regional states to promote the productive capacities of
their local firms, thereby enhancing production linkages with foreign affiliates must remain important
(UNCTAD, 2001; Memis and Montes, 2008).

45 Unlike many modern FG paradigm theorists, Akamatsu (1961, 1962) did not subscribe to the idea that the ranking
order among Asian economies within regional hierarchy is rather fixed.
46 Regarding state interventions, Biersteker (1990) thoughtfully provides a typology of 4 forms, according which they
may be designed to: (1) “influence” (i.e. to promote and/or constrain) private firms’ behaviour, (2) “moderate” conflicts
among social stakeholders (particularly between capital and labour), (3) “redistribute” social and private products, and
(4) “produce” goods and services. He argues that the influence of neo-liberal prescriptions have most clearly effected a
reduction in the state interventions in the area of “production”. Neo-liberals have pushed the policy prescriptions generally
directed against the more extensive forms of state interventions associated with “state capitalism” and Keynesianism
(Biersteker 1990: 488).


The intensifying catching-up process within the hierarchical order among regional economies has induced
enormous pressures on all of them (most of all, Japan and the first-tier NIEs, but also the second-tier NIEs
as well) from below. Given that each rung of the industrial ladder is not occupied by a single economy
and that each economy occupies more than a single rung, with China being a case in point for the latter.
The process has tended to raise the degree of similarity (convergence) among East Asian economies in
the manufacturing structure and production activities, which in turn has raised problematic issues, such as
overproduction and dumping practices, all of which have contributed to the region-wide trend of terms-
of-trade deterioration.47 One additional negative consequence is the rise of protectionist measures in the
importing countries (outside the region) towards Asian economies as a group. In our view, the framework
of strategically cooperative regionalism can somewhat ease the situation, as will be discussed below.

The FG paradigm was explicitly the theoretical foundation when the Japanese State proposed the new
Asian Industrial Development Plan in 1987. The plan aimed at promoting industrial development through
state programmes such as comprehensive master plans and the guidelines for sector-specific development.
Unlike the previous aid programmes directed toward economic infrastructure and humanitarian objectives,
the new plan sought to link aid money to fostering export sectors by offering Japan’s expertise and
know-how in industrial development (Arase, 1994: 129–134; Hatch and Yamamura, 1996: 138–139).
Yoshimatsu (2003: 69) argues that Japan continued or strengthened the developmental state approach
that sustained steady industrial restructuring, in conjunction with the industrial upgrading of East Asia
as a whole. While the plan no longer appears in Japan’s overall foreign policy toward East Asia, some of
the perceived merits in the plan may have remained among the region’s decision-makers.

The following section is an extension of the above discussions on finding a place for the developmental
state in the FG paradigm. It will specifically look into the possibility of “development regionalism” as
the concept that may provide an intellectual solution.

D. Developmental regionalism: situating national development measures in a regional context

The concept of developmental regionalism48 frames national development measures – with appropriate
modifications – in a regional context. Policy measures under discussion here include, first of all, those
that promote “passive” or “shallow” integration. Regional preferential treatments, such as the removal of
barriers to trade and FDI, and freer flows of labour, are likely to facilitate regional production networks and
supply chains, since they tend to reduce transaction costs and perceived risk (UNCTAD, 2012: 4).49 This
alone underscores the need for regional states to transform traditional domestic development measures
into something more appropriate in the regional context. Here, however, let us note that developmental
regionalism retains the mercantilist sentiment of protectionism not very much at a national level but more
at a regional level. We would also argue that developmental regionalism should go beyond “passive”
or “shallow” integration measures. It can aim at “proactive” or “deeper” integration, by means of
coordination and harmonization of various policy measures, including state interventions to promote
industrial development (Memis 2009). It takes “agreed specialization” or “negotiated specialization”

47 Memis (2009) argues that given its unique size and nature, one should not expect China to follow exactly the same
transformation experiences in Japan and the first- and second-tier NIEs. She expects that shifts in Chinese exports towards
more sophisticated products will take a much longer time as compared to earlier experiences of others due to the large
labour pool in the interior of the country and restrictions on labour migration between domestic regions.
48 The term developmental regionalism has not been used extensively. One of the earliest uses was in Nasadurai (2003).
49 In fact, many East Asian countries, particularly some members of the Association of South East Asian Nations (ASEAN),
have implemented “de facto” regional preferential arrangements in trade, by setting the “applied” tariffs for regional
imports below the legally announced “bound” tariff rates (Hale, 2011). The regional bias in applied tariffs is driven by
regional production networks that must move components and parts across national borders. As discussed later in the
text, ASEAN members have attempted to reduce the differences in their own regulatory systems with respect to trade
and FDI so as to attain various development gains.


among regional states as an effective method for increasing the complementarity among regional economies
and the capacity of their region as a whole.50

Given that East Asia is a region of a mixture of vertical (North-South) and horizontal (South-South)
integration, developmental regionalism should also follow a dual process of integration. When countries
at different stages of development undertake a regional cooperation project (vertical integration), the FG
paradigm readily presents a theoretical ground for mutual benefits for all. Here, good diplomatic relations
(commercial diplomacy) among counties at different stages of development would be a prerequisite for
enhancing market-led growth of the region as a whole. We witness the rapid growth of North-South
bilateral agreements on trade and investment within the region, but they are yet to be harmonized. Indeed,
regional diplomacy could be complex, as East Asian economies are increasingly operating at similar
stages of development (convergence in manufacturing activities), tending to raise the potential of inter-
state conflict resulting from rising competition. But the trend only underlines the greater importance of
inter-state consultations for reducing political tensions.

Developmental regionalism is probably most pertinent to the more finance-scarce catching-up economies
of the region. South-South integration may be a theoretical spin-off of the developmental state, where,
as pointed out earlier, the latter’s mercantilist sentiment is transformed into a regional context. Practical
measures based on development regionalism include resource pooling – such as joint expenditure on human
resource development (e.g. education, training and migration) and R&D as well inter-state infrastructure
development (e.g. power and transport facilities, as well as trade facilitation) – and the extended regional
diffusion of technology. Cooperation based on developmental regionalism would also reduce the costs of
exploiting natural resources across national boundaries. South-South developmental regionalism would
likely strengthen the collective bargaining power of the states (and firms) in host countries vis-à-vis such
powerful foreign firms with their regional industrial plan that may complicate the developmental potential
of these countries (UNCTAD, 2002). Indeed, such cooperation would also improve the chance for these
states involved to follow their own preferred growth path consistent with their priorities (Kozul-Wright
and Rayment, 2007: 312). This could be especially important, as North-South developmental regionalism
could be dictated in a “top-down” rather a “bottom-up” fashion.

As stated above, we believe that specialization based on negotiated agreements – in North-South and
South-South developmental regionalism – could be a harmonious solution to many contemporary problems
in East Asia. What is required is a shift in the states’ self-image from as a competitor to as a collaborator.
Yet, the regional states must remain collectively competitive vis-à-vis outsiders. The pursuit of such
collective efforts could be politicized and time-consuming, but it could contribute to the nourishing of
emerging domestic (and regional) firms eventually into internationally competitive ones. In addition, such
regional integration could ease the process for foreign firms to realign their organizational structures and
value-added activities to reflect a regional rather than a strictly national market (Dickson, 2011: 203).

Developmental regionalism, whether in the North-South or South-South framework, would require the
availability of accurate information on levels of productivity and wages among the regional economies.
This implies the need for stable exchange-rate relations among local currencies to present “reliable” price
signal. Developmental regionalism as manifested in mutual financial support, which is within the policy
domain of states, would probably reduce another risk associated with increasing regional interdependence,

50 Kojima (2000) suggests “agreed specialization” as a way to create opportunities for all economies in East Asia. While
admitting “agreed specialization” as a valid solution in theory, Memis (2009: 30) is skeptical about its validity in practice:
“When considered within the context of state business and today’s complicated production network nexus, one can easily
see that it is unlikely to mobilize common interests on the agreed specialization at the national level.”


namely, serious contagion from external shocks as seen in the Asian financial crisis.51 One important
lesson from the crisis was potential vulnerability of regional economies, by highlighting that the then
existing institutions – national and regional – for financial management was inadequate. All of these
issues have raised the recognition of creating stable financial (foreign exchange and capital) markets.52
Again, developmental regionalism could be a helpful hint.

In addition, developmental regionalism can lead to the resolution of distorted (unhealthy) investment
patterns, including military build-up, emanating from political conflicts. Reduced security tension
would allow each member of the region to use its resources for more productive purposes. Recent
territorial disputes only highlight the importance of regional consultations for their peaceful resolution.
Developmental regionalism can reinforce regional initiatives to maintain social stability by adding
social security issues and elements of distribution in its cooperative agendas. By doing so, it could, in
the long run, provide the regional economies with certainty and credibility about their future policies
and economic environment.


While some observers continue to argue that East Asian developmental States can still play an important
role in directing the course of development, others hold that the institutionalized relationships that were
formerly effective have become outdated, and even turned into obstacles to the reforms that are required.
It is not totally clear whether the developmental state can remain reasonably functional – i.e. being free
of capture by particularistic economic, ethnic or political interests, or capable of guiding the development
process. Historical changes in geopolitics have also reduced tolerance of the West (particularly the
United States) toward State interventionism in East Asia. The propagation of neo-liberal ideas has also
dictated firms, perhaps at the cost of states, to assume greater responsibility for creating the rules and
regulations. Nevertheless, we argued that states should not abandon their developmental role, because
unilateral liberalization could not only subject the vulnerable domestic economy to overwhelming external
competition, but also induce premature deindustrialization (Shafaeddin, 2005). Furthermore, given the fact
that each state now has to respond effectively to the challenges emanating from increasingly integrated
international economic relations, this requires the capacity of the regional states to handle external shocks
singularly and/or collectively.

The modern FG paradigm closely follows the logic of market, postulating that the location of production
for tradable products must change in accordance with the development of factor endowments of national
economies. The initiatives of the region-wide collective catching-up come from those countries located
at the higher positions in regional hierarchy that are shading industrial activities. This mechanism, in our
view, is a disguised framework of trickle-down effect. A critical question is whether such a mechanism of
rational market together with a limited role of the state would promote long-term development in all of
the economies involved. The complex reality of East Asia (with diverse characteristics among regional
countries) does not neatly present itself for an orderly catching-up process.

We pointed out that East Asia contains new networks of power and coordination with a mixture of vertical
and horizontal integration. The regional policy of the states to pool their political power may be helpful

51 The most concrete regional initiative was the Chiang Mai Initiative agreed in 2000, which expanded the existing ASEAN
swap arrangements to include all ASEAN members and set up a network of bilateral currency swaps and repurchase
arrangements among ASEAN and three major economies in the region, namely Japan, China and the Republic of Korea.
The aim of the initiative is to provide additional short-term hard currency for members facing possible liquidity shortfalls.
The initiative has also undertaken better monitoring of financial flows, regional surveillance, and training of personnel.
The initiative has gone through various reforms to scale up its operation.
52 Many East Asian economies have strongly supported the idea of increasing the availability of emergency financing
during crises and to establish new procedures for timely and orderly debt workouts.


in coping with the pressure from the outside. Thus regional states may have to take a deliberate approach
with a properly sequenced set of policies. The FG paradigm would require the successful coordination
among region’s states where the identification and timing of the industrial migration should be mutually
understood. Here, traditional mercantilist sentiment of nationalism could be a serious obstacle to regional
integration. It is shown that developmental regionalism is a hybrid of two kinds. It upholds a hybrid
policy of limited liberalism at the national level and protectionism at the regional level. It is also a hybrid
framework of North-South and South-South cooperation for achieving “agreed specialization”. While
it is still at the exploratory stage, we would argue that the concept of developmental regionalism seems
to contain a promising potential in terms of filling the gap between the developmental state and the FG



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No. Date Author(s) Title

212 November 2013 Vladimir Filimonov,
David Bicchetti,
Nicolas Maystre and
Didier Sornette

Quantification of the high level of endogeneity and of
structural regime shifts in commodity markets

211 October 2013 André Nassif,
Carmem Feijó and
Eliane Araújo

Structural change and economic development: Is Brazil
catching up or falling behind?

210 December 2012 Giovanni Andrea Cornia
and Bruno Martorano

Development policies and income inequality in selected
developing regions, 1980–2010

209 November 2012 Alessandro Missale and
Emanuele Bacchiocchi

Multilateral indexed loans and debt sustainability

208 October 2012 David Bicchetti and
Nicolas Maystre

The synchronized and long-lasting structural change on
commodity markets: Evidence from high frequency data

207 July 2012 Amelia U. Santos-

Trade, income distribution and poverty in developing
countries: A survey

206 December 2011 André Nassif,
Carmem Feijó
and Eliane Araújo

The long-term “optimal” real exchange rate and
the currency overvaluation trend in open emerging
economies: The case of Brazil

205 December 2011 Ulrich Hoffmann Some reflections on climate change, green growth
illusions and development space

204 October 2011 Peter Bofinger The scope for foreign exchange market interventions
203 September 2011 Javier Lindenboim,

Damián Kennedy and
Juan M. Graña

Share of labour compensation and aggregate demand
discussions towards a growth strategy

202 June 2011 Pilar Fajarnes An overview of major sources of data and analyses
relating to physical fundamentals in international
commodity markets

201 February 2011 Ulrich Hoffmann Assuring food security in developing countries under the
challenges of climate change: Key trade and development
issues of a fundamental transformation of agriculture

200 September 2010 Jörg Mayer Global rebalancing: Effects on trade flows and employment
199 June 2010 Ugo Panizza,

Federico Sturzenegger
and Jeromin Zettelmeyer

International government debt

198 April 2010 Lee C. Buchheit and
G. Mitu Gulati

Responsible sovereign lending and borrowing

197 March 2010 Christopher L. Gilbert Speculative influences on commodity futures prices

196 November 2009 Michael Herrmann Food security and agricultural development in times of
high commodity prices

195 October 2009 Jörg Mayer The growing interdependence between financial and
commodity markets

194 June 2009 Andrew Cornford Statistics for international trade in banking services:
Requirements, availability and prospects

193 January 2009 Sebastian Dullien Central banking, financial institutions and credit creation
in developing countries

UNCTAD Discussion PaPers


No. Date Author(s) Title

192 November 2008 Enrique Cosio-Pascal The emerging of a multilateral forum for debt
restructuring: The Paris Club

191 October 2008 Jörg Mayer Policy space: What, for what, and where?
190 October 2008 Martin Knoll Budget support: A reformed approach or old wine in new

189 September 2008 Martina Metzger Regional cooperation and integration in sub-Saharan Africa
188 March 2008 Ugo Panizza Domestic and external public debt in developing

187 February 2008 Michael Geiger Instruments of monetary policy in China and their

effectiveness: 1994–2006

186 January 2008 Marwan Elkhoury Credit rating agencies and their potential impact on
developing countries

185 July 2007 Robert Howse The concept of odious debt in public international law
184 May 2007 André Nassif National innovation system and macroeconomic policies:

Brazil and India in comparative perspective
183 April 2007 Irfan ul Haque Rethinking industrial policy
182 October 2006 Robert Rowthorn The renaissance of China and India: implications for the

advanced economies
181 October 2005 Michael Sakbani A re-examination of the architecture of the international

economic system in a global setting: Issues and proposals
180 October 2005 Jörg Mayer and

Pilar Fajarnes
Tripling Africa’s Primary Exports: What? How? Where?

179 April 2005 S.M. Shafaeddin Trade liberalization and economic reform in developing
countries: structural change or de-industrialization?

178 April 2005 Andrew Cornford Basel II: The revised framework of June 2004
177 April 2005 Benu Schneider Do global standards and codes prevent financial crises?

Some proposals on modifying the standards-based approach
176 December 2004 Jörg Mayer Not totally naked: textiles and clothing trade in a quota

free environment
175 August 2004 S.M. Shafaeddin Who is the master? Who is the servant? Market or

174 August 2004 Jörg Mayer Industrialization in developing countries: some evidence

from a new economic geography perspective
173 June 2004 Irfan ul Haque Globalization, neoliberalism and labour
172 June 2004 Andrew J. Cornford The WTO negotiations on financial services: current

issues and future directions
171 May 2004 Andrew J. Cornford Variable geometry for the WTO: concepts and precedents
170 May 2004 Robert Rowthorn and

Ken Coutts
De-industrialization and the balance of payments in
advanced economies

169 April 2004 Shigehisa Kasahara The flying geese paradigm: a critical study of its
application to East Asian regional development

168 February 2004 Alberto Gabriele Policy alternatives in reforming power utilities in
developing countries: a critical survey

167 January 2004 Richard Kozul-Wright
and Paul Rayment

Globalization reloaded: an UNCTAD Perspective

166 February 2003 Jörg Mayer The fallacy of composition: a review of the literature
165 November 2002 Yuefen Li China’s accession to WTO: exaggerated fears?


No. Date Author(s) Title

164 November 2002 Lucas Assuncao and
ZhongXiang Zhang

Domestic climate change policies and the WTO

163 November 2002 A.S. Bhalla and S. Qiu China’s WTO accession. Its impact on Chinese

162 July 2002 Peter Nolan and
Jin Zhang

The challenge of globalization for large Chinese firms

161 June 2002 Zheng Zhihai and
Zhao Yumin

China’s terms of trade in manufactures, 1993–2000

160 June 2002 S.M. Shafaeddin The impact of China’s accession to WTO on exports of
developing countries

159 May 2002 Jörg Mayer,
Arunas Butkevicius and
Ali Kadri

Dynamic products in world exports

158 April 2002 Yılmaz Akyüz and
Korkut Boratav

The making of the Turkish financial crisis

157 September 2001 Heiner Flassbeck The exchange rate: Economic policy tool or market price?
156 August 2001 Andrew J. Cornford The Basel Committee’s proposals for revised capital

standards: Mark 2 and the state of play
155 August 2001 Alberto Gabriele Science and technology policies, industrial reform and

technical progress in China: Can socialist property rights
be compatible with technological catching up?

154 June 2001 Jörg Mayer Technology diffusion, human capital and economic
growth in developing countries

153 December 2000 Mehdi Shafaeddin Free trade or fair trade? Fallacies surrounding the theories
of trade liberalization and protection and contradictions in
international trade rules

152 December 2000 Dilip K. Das Asian crisis: Distilling critical lessons
151 October 2000 Bernard Shull Financial modernization legislation in the United States –

Background and implications
150 August 2000 Jörg Mayer Globalization, technology transfer and skill accumulation

in low-income countries
149 July 2000 Mehdi Shafaeddin What did Frederick List actually say? Some clarifications

on the infant industry argument
148 April 2000 Yılmaz Akyüz The debate on the international financial architecture:

Reforming the reformers
147 April 2000 Martin Khor Globalization and the South: Some critical issues
146 February 2000 Manuel R. Agosin and

Ricardo Mayer
Foreign investment in developing countries: Does it
crowd in domestic investment?

145 January 2000 B. Andersen,
Z. Kozul-Wright and
R. Kozul-Wright

Copyrights, competition and development: The case of
the music industry

Copies of UNCTAD Discussion Papers may be obtained from the Publications Assistant, Macroeconomic and
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Nations Conference on Trade and Development (UNCTAD), Palais des Nations, CH-1211 Geneva 10, Switzerland;
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UNCTAD Discussion Papers are accessible on the website at http://unctad.org.