# CHAPTER 5 FLYING WILD GEESE PATTERN ECONOMIC DEVELOPMENT AND THE CHANGING PATTERN OF INTERNATIONAL CAPITAL FLOWS IN NIES AND ASEAN COUNTRIES

INTRODUCTION : the Purpose of This Chapter

During the past 20 years NIEs and ASEAN countries have achieved rapid economic growth and have strengthened their economic interrelationships through various economic activities including international trade and foreign direct investment. During the same period the financial sector in these countries has also developed rapidly and the increasing financial interdependence amongst these countries has been recently observed. It is widely recognized that the economic development of these Asian countries has been caused by the international transfer of the “Flying Wild Geese” pattern of economic development. The purpose of this chapter is to examine how these countries’ economic development has affected the changing pattern of international capital flow in this region, by studying the role of foreign capital in the FWG pattern of economic development in these countreis.

This chapter is organized as follows: Section 1 reviews the changing pattern of balance of payments for these Asian nations, over the past 20 years, in relation to their industrialization. Section 2 examines the role of foreign capital in the process of their industrialization in connection with FWG pattern economic development. Section 3 tests the increasing financial interrelationship amongst these Asian countries by examining the changing pattern of international capital flows and the international interest rate parity amongst countries. Section 4 is the summary of the arguments in the previous sections.

### 1. THE CHANGING PATTERN OF BALANCE OF PAYMENTS IN NIES AND ASEAN COUNTRIES

1.1 Balance of Payments in the FWG Pattern of Economic Development

In the process of FWG pattern economic development $ ^{1} $ , individual industries start their development from one to another with time lags. As economic development progresses, both the industrial structure of the economy and the commodity structure of its international trade change gradually. The major industry of the economy changes from light industry using relatively simple technology, to capital intensive heavy industry using more advanced technology. Major export commodities also change from the products of light labor intensive industries, such as textile and garmets, to those of heavy capital intensive industries, like capital good. It follows then that major imports change from the products of capital intensive goods to natural resources and labor intensive goods.

A major obstacle to FWG pattern economic development is the so-called “constraint of balance of payments” $ ^{2} $ . Foreign capital, however, helps to relax the balance of payments constraint for the newly industrialized economy $ ^{3} $ . First, in the short run, it helps to smooth out the fluctuations in balance of payments which are caused by temporary external shocks. Secondly, in the long run, it helps to cover the persistent financial gap between domestic investment and domestic savings (i.e. the so-called I-S gap) which occurs frequently in the process of rapid industrialization in many developing countries. According to the so-called “debt cycle hypothesis” $ ^{4} $ , as an economy progresses in its industrialization, its balance of