Asia Beyond the Global Economic Crisis

Asia Beyond the Global Economic Crisis

The Transmission Mechanism of Financial Shocks

Edited by Satoshi Inomata

The characteristic feature of the recent global economic crisis is the speed and extent of the shock transmission. The development of cross-national production networks in recent years has significantly deepened the economic interdependency between countries, and a shock that occurs in one region can be swiftly and extensively transmitted to the rest of the globe. The sudden contraction of world trade and output was a negative outcome of this intertwined global economic system. Based on the method known as international input–output analyses, this book provides a detailed examination of the mechanics of shock transmission by probing the labyrinth of complex supply networks among nations.

Chapter 4: Vertical Specialization at the Time of Economic Crisis

Yoko Uchida and Satoshi Inomata

Subjects: asian studies, asian economics, economics and finance, asian economics, international economics


Yoko Uchida and Satoshi Inomata 1. INTRODUCTION One of the key factors behind global trade growth in recent decades is the development of vertical production networks (Feenstra, 1998 and Krugman, 1995). Manufacturing goods are no longer produced in a single country. Production processes are subdivided into several stages, in which respective countries specialize according to their own comparative advantages. Many countries are involved in vertical production networks of producing just a single final good to consumers. In particular, as Pitigala (2009) points out, emerging economies considerably benefited from the development of vertical production networks since the network enabled them to install an appropriate portion of the production stages according to their levels of production technology. These countries enjoyed rapid trade growth through extensive participation in global production networks. This chapter examines how the global economic crisis has changed the nature of production networks in the Asia-Pacific region, and, in so doing, aims to envisage a possible direction for a sustainable production system in the post-crisis ‘Factory Asia’ (Baldwin, 2006). 2. VERTICAL SPECIALIZATION: CONCEPT AND CALCULATION METHOD Figure 4.1 illustrates an image of vertical production chains involving four countries. Intermediate goods, final goods and factor inputs are represented by circles, rectangles and triangles, respectively. Country 1 produces intermediate inputs that are exported. Country 2 combines imported intermediate inputs, domestic intermediate inputs, and capital/ labour to produce new products. Some portion of country 2’s output is consumed in the domestic market, while the rest is exported as intermediate or final goods to...

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