Abstract
Modern economic development is accompanied by the structural transformation from an agrarian to an industrial economy. Since the 18th century, all countries that industrialized successfully have followed their comparative advantages and leveraged the latecomer advantage, including emerging market economies such as the People's Republic of China (PRC), India, and Indonesia. The current view is that Chinese dominance in manufacturing hinders poor countries from developing similar industries. We argue that rising labor cost is causing the PRC to graduate from labor-intensive to more capital-intensive and technology-intensive industries. This will result in the relocation of low-skill manufacturing jobs to other low-wage countries. This process, which we call the “leading dragon phenomenon,” offers an unprecedented opportunity to low-income countries. Such economies can seize this opportunity by attracting the rising outward foreign direct investment flowing from Brazil, the PRC, India, and Indonesia into the manufacturing sectors. All low-income countries can compete for the jobs spillover from the PRC and other emerging economies, but the winner must implement credible economic development strategies that are consistent with its comparative advantage.
Highlights
Many developing economies have tried to catch up with industrialized countries but only a handful of countries, mostly in East Asia, have succeeded
The People’s Republic of China (PRC)’s success over the past 3 decades is the result of a two-pillar strategy: (i) adopting a dual-track approach to reforms, giving transitory protection to comparative advantage defying (CAD) capital-intensive sectors, and liberalizing entry to CAF labor-intensive sectors, thereby achieving stability and dynamic transformation simultaneously; and (ii) as a latecomer, choosing an economic development strategy that tapped into the potential advantage of backwardness along the lines of the flying geese pattern
The PRC is at a stage where the western countries and Japan had been during the 1970s and where other Asian economies (Hong Kong, China; the Republic of Korea; Singapore; and Taipei,China) found themselves in during the 1980s
Summary
Many developing economies have tried to catch up with industrialized countries but only a handful of countries, mostly in East Asia, have succeeded. As the PRC upgrades its labor-intensive industries and cedes market shares, millions of labor-intensive jobs will be relocated to low-wage countries and can accelerate their industrialization. This process, which we call the “leading dragon phenomenon,” offers an unprecedented opportunity to low-income countries. If other emerging market countries such as Brazil, India, and Indonesia follow the PRC’s growth trajectory, they will create even more labor-intensive jobs in low-income countries.
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