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Job: Ozawa-Evolution_of_the_world_economy
Division: 01-PART1
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Date: 14/1
Job: Ozawa-Evolution_of_the_world_economy
Division: 01-PART1
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Date: 14/1
Job: Ozawa-Evolution_of_the_world_economy
Division: 01-PART1
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Date: 14/1
Job: Ozawa-Evolution_of_the_world_economy
Division: 01-PART1
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Date: 14/1
Job: Ozawa-Evolution_of_the_world_economy
Division: 01-PART1
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Date: 14/1
Job: Ozawa-Evolution_of_the_world_economy
Division: 01-PART1
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Date: 14/1
Job: Ozawa-Evolution_of_the_world_economy
Division: 01-PART1
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Date: 14/1
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Job: Ozawa-Evolution_of_the_world_economy
Division: 01-PART1
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Job: Ozawa-Evolution_of_the_world_economy
Division: 01-PART1
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Date: 14/1
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part of the emerging host economy involved. One can easily understand
how China has capitalized on, and benefited from, FDI-driven catch-up.
In fact, the process of M inward FDI X in low-end manufacturing
(at the hands of foreign MNCs) is a more open-economy approach than
the nationalistic protective (time-consuming) process of M P X that
was once most actively pursued by Japan, as well as by the NIEs, though
to a lesser extent (Chapter 3). It is well known that early postwar Japan
was capable of absorbing advanced foreign technology (often not yet
commercialized) mostly via licensing agreements in the early postwar
period, and until recently avoided inward FDI, since Japan was already at
a fairly advanced technological level of development (Ozawa, 1974). In
contrast, Korea and Taiwan have been comparatively more receptive to
inward FDI, where local businesses and workers often served as apprentices for foreign MNCs (Amsden, 1989). The M inward FDI X
model of take-off (that is, a model of FDI-led, export-driven growth),
however, has become almost a widely accepted development strategy for
catching-up countries due to the recent trend of stepped-up market
liberalization. In short, whether viewed from a home or host country
perspective, trade and FDI-cum-knowledge transfer is thus the critical
catalyst of industrial upgrading, promoting the structural metabolism of
any successfully catching-up country; and of the entire cohort of countries involved in interactive (and derived) economic development. And
this is clearly the case with the East Asian economies (except Japan).
One can thus witness the power of global capitalism that, once accepted
and harnessed by an emerging host economy, drives the engine of
industrial take-off.
It should be further noted that the M inward FDI X sequence is
highly time-compressed and may occur instantaneously. In fact, the initial
M phase may be completely bypassed if foreign MNCs set up local
production for a new product (new to consumers in the host economy),
the output of which is then immediately sold both locally (that is,
surrogate imports) and overseas (that is, exports). It is the instant birth
of an export industry at the hands of foreign MNCs. This is in a sharp
contrast to the self-reliant and time-consuming process of M P X
for industrial take-off, which is probably no longer likely to be replicated
in any developing countries in this era of fast globalization. Practically all
the developing countries are eagerly inviting foreign MNCs investments
instead of pursuing the old-style infant-industry protection (more on this
in Chapter 3).
Thus, the new take-off model of M inward FDI X (from a
viewpoint of an emerging economy) has come into existence. What
drives this chain of events? The new sequence occurs ideally in a highly
Job: Ozawa-Evolution_of_the_world_economy
Division: 01-PART1
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Date: 14/1
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market-liberalized, open-economy environment where inward and outward FDIs are both unrestricted and where the free enterprise system
thrives. The market is allowed to play the role of coordinator in directing
economic activities and resource allocation, though the host economy
needs to formulate an appropriate strategy to host and govern foreign
MNCs, along with a long-term development plan. This contrasts sharply
with the old model of infant-industry protection designed to foster
nationally owned industries. The old model is a semi-closed, semi-openeconomy model: closed inwardly (restrictions on imports and inward
FDI) but open only outwardly (export and outward FDI promotion).
Indeed, China is spearheading in the global race of catch-up economic
growth by adopting the new full-circle model so pragmatically and
effectively, though the visible hand of government is always clearly
seen or lurking in the background. Because of rapid wage increases in
Chinas export-driven coastal manufacturing regions, both foreign MNCs
and Chinese enterprises themselves have recently begun to shift laborintensive production outward (notably to their neighboring countries), as
well as inward to Chinas vast interior regions where wages are still
lower. Industrial development, along with the benefits of economic
prosperity, is thus spreading to Chinas hinterlands, flying-geese style
(Chapter 6).
In sum, the full-circle sequence of industrial development (M M*)
means that economic prosperity cannot be confined and retained in a
particular location once developed. It will eventually spread to underdeveloped locations. In other words, the initial phase of building up a
domestic industry, whether autonomously under protection (the old
model) or with the help of foreign MNCs (the new model) will sooner or
later lead to the weakening or even the loss of that industry as a result
(the price increase due to rising wages and appreciating home currency)
of the very success of such a catch-up strategy and to eventual industrial
shedding. This mechanism may be named the price-industry-flow
theory la David Hume (Ozawa, 1996a). Even Japans rather nationalistic initial attempt to confine industrial activities at home ended up with
the necessity to transplant those same activities abroad (to such an extent
as to even stoke fears of industrial hollowing-out at home). Ironically,
however, this is an ineluctable denouement, the paradox of inward
dependence (nationalism) as outward dependence (globalism).
Job: Ozawa-Evolution_of_the_world_economy
Division: 01-PART1
/Pg. Position: 11 /
Date: 14/1
14
1.6 SUMMING UP
Kaname Akamatsu gave us a very broad outline of a process of economic
development. For him, what drives the main engine of catch-up
industrialization was the basic pattern of the MPX sequence under
infant-industry protection, the sequence originally conceptualized by
Friedrich List. Since Akamatsus theory was built on the 18701939
experiences of Japans industrial development, it has become outdated in
the face of rapid globalization that has occurred ever since the end of
WWII. In particular, the rise of MNCs has brought about a drastic sea
change in the global economy. Their international production has
replaced international trade as the fundamental catalyst and agent of
change in industrial structure across the world in general, and as the
facilitator of industrialization in emerging economies in particular (Chapters 3 and 5).
Job: Ozawa-Evolution_of_the_world_economy
Division: 01-PART1
/Pg. Position: 12 /
Date: 14/1
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MNCs cross-border operations mean that Akamatsus MPX mechanism needs a further expanded analysis and reformulation of the vital
causal sequence of industrial activities beyond the X stage. Consequently,
the M P X sequence has been extended to the full-circle of M P
X outward FDI M* by bringing in the role of MNCs as a
cross-border disseminator of industrial knowledge. On the part of emerging host economies, this expanded part of the progression is inward
FDI P X (three activities accomplished simultaneously by foreign
MNCs all at once), thereby sparking an FDI-led, export-driven take-off.
There are a number of other developments in our fast-evolving global
economy that were not clearly discernible in Akamatsus day and that,
therefore, need to be brought into the analytical framework of our
reformulated FG theory of economic development. These include the
dimensions of mass consumption and massive financial flows in the
present-day world. Above all, now that the US is in relative decline
(especially vis--vis a rising China), a potential change of hegemons, and
its implications for the viability of FG-style growth in particular, needs to
be analyzed (Chapter 7). In fact, different versions of Akamatsus
analytical framework have been introduced by many scholars over time
ever since, along with criticisms of the FG theory (for a survey, see
Kasahara, 2004; Schrppel and Nakajima, 2002, though both are
unfortunately outdated due to the passage of time).
Indeed, Akamatsus original model looks only at the supply side of an
economy. It concerns how individual industries are developed as a result
of the MPX process. It does not take account of demand-side (consumption) factors. Nor does it address the critical issue of industrial development finance. Yet, we know that the process of economic development,
especially catch-up development, heavily hinges on how demand, not
only at home but more importantly overseas, is created and captured as a
critical joint input in national production. Similarly, the availability of
industrial development finance at home and from abroad is a key
determinant of industrialization (and deindustrialization). This book
touches on the demand-side issues, introducing the ladder of consumption in Chapter 3. And some major aspects of the financial dimension of
FG-style growth are explored elsewhere (Ozawa, 2009, 2011).
Job: Ozawa-Evolution_of_the_world_economy
Division: 01-PART1
/Pg. Position: 13 /
Date: 14/1