Dynamic Measures of Competitiveness: Are the Geese Still Flying in Formation?

• Measuring export competitiveness
• Shifting patterns of Asian competitiveness
• Conclusion
• References

Pacific Basin Notes. This series appears on an occasional basis. It is prepared under the auspices of the Center for Pacific Basin Monetary and Economic Studies within the FRBSF’s Economic Research Department.

Now and then, economists actually manage to come up with colorful phrases to describe economic phenomena. This Economic Letter focuses on the phenomenon known as “the flying geese formation.” It refers to the following pattern of exports from East Asia: Japan tends to produce and export new goods before other Asian countries; as these goods become standardized and profit margins shrink, production shifts from Japan to the “four tigers” (Hong Kong, Korea, Singapore, and Taiwan), to take advantage of their lower labor costs, while Japanese production shifts to newer goods; production and exports of the goods then continue to shift, for similar reasons, from the four tigers to Malaysia and Thailand, on to Indonesia, and finally, China. This pattern of exports across countries — the “flying geese formation” (which includes the “four tigers,” but then, nobody said economists never mix metaphors) — is an empirical phenomenon often asserted in the literature (for example, Petri 1992).

This Economic Letter tests whether the “geese” still are flying “in formation.” It uses new dynamic measures of competitiveness, in which a country is defined to be “competitive” if it consistently exports goods earlier than others do. My estimates indicate that the Asian economies, to a first approximation, have exported goods in a pattern which accords well with the “flying geese” pattern. I also show that Asian countries are quite “competitive,” in the sense that they tend to export goods quickly compared to the rest of the world. Asian competitiveness in this sense also has increased since the early 1970s. In fact, I find only one piece of evidence inconsistent with the pattern. China seems to be much more competitive than is consistent with the “flying geese” pattern, and much more “competitive” than commonly considered.

Measuring export competitiveness

To gauge “competitiveness” I use the measure developed in Feenstra and Rose (1997); further details are available in that paper. Intuitively, our measure relies on the fact that a country can be gauged to be “competitive” compared to other countries if it consistently exports goods earlier than others do. Feenstra and I use this idea to rank the countries of the world by examining a large number of finely disaggregated goods. We exploit a comprehensive data set of American imports, which is disaggregated by source country and commodity at the 5-digit Standard International Trade Classification (SITC) level. This data set is available between 1972 and 1994. Our data span 160 countries and other geographical jurisdictions (which we refer to as “countries” for simplicity), and 1,434 commodities (“goods”). Examples of such commodities include “Human Hair” (SITC code 29191), “Varnish Solvents” (59897), “Cotton Yarn 14-40 KM/KG” (65132), “High Carbon Steel Coils” (67272), and “Piston Aircraft Engines” (71311).

For each good and each country, we use only one datum, the first year of export to the United States. We then rank countries by the speed with which they export goods. Countries that consistently export a randomly chosen good sooner than others will be ranked high and considered to be “competitive.” Since we have many commodities, we can rank countries using cross-country variation in the year of first export. Since our measure of competitiveness uses only the first year of export, it suffers from potential problems. Our measure ignores whether the trade is: artificial (it might be prompted by trade barriers), unimportant (in that trade volume might be very low), or unprofitable (in that the exports may not constitute value-added for the country). On the other hand, our measure is based only on disaggregated trade data for a comprehensive set of countries and commodities, and is consistent with a number of standard dynamic theories of international trade. There is certainly no presumption that the measure will work either well or poorly in practice; we let the data decide.

Our estimated country rankings turn out to be intuitive and sensible. Table 1 tabulates the “top twenty” and “bottom ten” countries in our rankings. Canada, Japan, the U.K., and Germany rank at the very top of our competitiveness orderings; Djibouti, Chad, the Falkland Islands, and Equatorial Guinea appear at the bottom. Reassuringly, these country rankings are also robust to minor perturbations in our statistical methodology. Further, our rankings, estimated solely with disaggregated bilateral trade data, turn out to be closely linked with macroeconomic phenomena. “Competitive” countries are systematically both richer (in terms of real GDP and productivity) and grow faster than others, even taking into account a variety of control factors (see Feenstra and Rose 1997 for further details).

Shifting patterns of Asian competitiveness

Our methodology allows us to rank commodities, relying on exactly the same sort of intuition we used to estimate the country rankings. The idea is to exploit the variation across goods in the average year that they are first exported to the United States, and use this to rank commodities. We rely on the notion that goods exported more recently are more “sophisticated” than older goods. Given an estimate of the “sophistication” of a good, we can then estimate the “competitiveness” of say Canada in 1972, by averaging the rankings of individual goods of actual Canadian exports in 1972, and comparing this to the average for other countries in 1972. In this way we can construct competitiveness measures which vary year by year, as a country’s export basket changes over time. Countries that systematically shift their export basket towards newer, more “sophisticated” goods will then rise in our rankings and gain competitiveness over time.

Figure 1 plots the rankings from 1972 through 1994 of nine East Asian countries, which together constitute the “geese flying in formation”. As in Table 1, a lower number indicates a more competitive country; a country moving toward a ranking of 1 (the highest rank) is gaining competitiveness. Thus, the Japanese data portrayed in the top left graphic indicate that Japan had a consistently high ranking – estimated level of competitiveness — throughout the period.

The four tigers are ranked as roughly comparable by the end of the period, and quite competitive compared to the rest of the world. However, the data portray Hong Kong and Taiwan as consistently highly ranked throughout the period, while in contrast, Korea and Singapore enjoyed rising levels of competitiveness. Malaysia and Thailand start from initially lower rankings than the tigers, but experienced improving competitiveness through the period. Indonesia started further back still, but also has shifted its export base rapidly and consequently has experienced rising competitiveness.

Taken as a whole, the country rankings are quite supportive of the “geese flying in formation” pattern. East Asian countries are ranked vis-à-vis each other and the rest of the world in a very sensible and intuitive way. The measures further indicate that the countries are gaining competitiveness over time in a plausible fashion.

There is one striking and important exception: China. It is no surprise that China’s competitiveness has risen over time, as portrayed in the figure. The issue is that the level of China’s competitiveness is much higher than commonly considered. The estimate of Chinese competitiveness is very high throughout the period, relative to both other Asian countries and the rest of the world. This high ranking is inconsistent with common sense, given that: (a) the data sample begins before the Cultural Revolution of 1976, and (b) China is still a relatively poor country. Unfortunately, the mysteriously competitive ranking of China is difficult to explain. It does not appear to stem from data anomalies linked to the special relationship of China and Hong Kong. It also does not seem to depend on the size of China’s exports, since China’s rankings weighted by import values are broadly comparable to the unweighted averages portrayed in Figure 1. Then again, perhaps China’s ranking is not anomalous at all. As a large country, China might have had the capacity to maintain a (small) competitive export-based sector throughout the sample period.

Conclusion

The East Asian “geese” do seem to be “flying in formation.” Japan’s exports are consistently more competitive than those of the four tigers; and the four tigers export goods faster than Malaysia, Thailand and, Indonesia. Asian competitiveness is both high relative to the rest of the world and growing. All this seems intuitive and reasonable. The data generate only one apparent anomaly. China’s competitiveness is consistently much higher than one might expect. Given the importance of China and Chinese trade frictions in the world economy, this subject warrants further investigation.

Andrew K. Rose
Visiting Scholar
University of California, Berkeley

References

Feenstra, Robert C., and Andrew K. Rose. 1997. “Putting Things in Order: Patterns of Trade Dynamics and Growth.” NBER Working Paper #5975.

Petri, Peter. 1992. “One Bloc, Two Blocs or None?” In The U.S.-Japan Economic Relationship in East and Southeast Asia, eds. Okuzumi, Calder, and Gong. Significant Issues Series XIV-1. Washington: Center for Strategic and International Studies.