The Economist

Boom and bust in Asia

Going for growth

Explaining Asia’s economic success is as easy as one, two, three

How Asia Works: Success and Failure in the World’s Most Dynamic Region. By Joe Studwell. Grove; 366 pages; $27. Profile; £14.99. Buy fromAmazon.comAmazon.co.uk

IN 1989 John Williamson, a British economist in Washington, DC, listed ten economic policies that enjoyed the backing of the IMF, the World Bank and many of their clients in Latin America. Whatever the merits of these policies, the “Washington consensus”, as he called it, proved badly named. Its prescriptions—stabilise, privatise and liberalise—have caused no end of controversy. Almost 25 years later, they get another drubbing in Joe Studwell’s provocative new book, “How Asia Works”.

Mr Studwell has no such inhibitions. Asia’s post-war miracle economies emerged, he argues, by following a recipe with just three ingredients: land reform; export-led, state-backed manufacturing; and financial repression.

The process began with the ousting of the landlords. Feudal estates were broken up and divided among small farmers, who also received cheap credit and valuable advice. Smallholder farming requires “grotesque” amounts of labour, Mr Studwell concedes. But that is a good thing, because countries as poor as Taiwan or South Korea were in the 1950s have labour—and only labour—in abundance.

Tightly planted, closely tended farms coax the best yields out of each parcel of land. This rural bounty then creates room for the next step: export-led manufacturing. The state, Mr Studwell argues, must nurse manufacturers through their infancy, helping them to learn how to stand on their own feet. This nurture should, however, be combined with discipline: the state must oblige firms to export. Foreign sales provide an external test of their progress, allowing the state to “cull losers”, even if it cannot pick winners.

The final secret of Asian success, Mr Studwell argues, was a cowed financial system. Captive savers, penned in by capital controls, were ripped off by the banks, which paid low interest rates. This allowed the banks to subsidise industrial firms through their years of education.

Mr Studwell’s recipe is not original: the formula dates back at least 140 years, he shows, to Japan under the Meiji emperor. Only the first step, smallholder farming, would be backed by this newspaper. But “How Asia Works” is a striking and enlightening book, which reflects the author’s unusual career. Having worked as an analyst (for the Economist Intelligence Unit, our sister company) and a consultant, he wrote books on China’s seduction of foreign businessmen and Asia’s crony capitalists. Then he went back to school, embarking on a doctorate at Cambridge, home to a number of unorthodox economists.

The result is a lively mix of scholarship, reporting and polemic. Its heart is a historical account of how smallholder farming, export-led manufacturing and financial repression took root in Asia’s miracle economies, such as Japan and Taiwan, but failed to bed down in the Philippines and Indonesia. This is punctuated by travelogues, describing Asia’s landscape of economic triumph and tribulation, from the kitsch houses of rice farmers in Japan’s Niigata prefecture, who have great agricultural know-how but little architectural taste, to the unfinished towers of Jakarta’s Bank Alley, their growth stunted by the Asian financial crisis.

The most impressive part of the book is the 68 pages of footnotes in which Mr Studwell dips into his trove of reading and reporting. He includes observations on Javanese chickens, the sex life of a Korean chaebol-founder, the constitutional rules that Meiji-era Japan copied from Prussia and his exchanges with Mahathir Mohamad, Malaysia’s former strongman.

In these notes, Mr Studwell wanders into the weeds of development (quite literally: Japanese rice is weeded nine times a year, he writes). But he never gets lost. The three-step doctrine he advocates is even shorter than the ten-step Washington consensus he opposes. But it will no doubt prove similarly controversial.

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The Lowy Institute

This is an ongoing Q&A thing in which I will respond to questions when I can, with whatever time I can spare… The Lowy Institute, which asked me to do this, is an Australian think tank.

Interview: Author of ‘How Asia Works’

by Sam Roggeveen  – 11 July 2013 12:34PM

Last month Marginal Revolution blogger Tyler Cowen described Joe Studwell’s How Asia Works: Success and Failure in the World’s Most Dynamic Region as ‘perhaps my favourite economics book of the year‘.

I decided to see for myself what the fuss was about, and I must say I have rarely had my economic preconceptions so thoroughly tested. This book challenges a lot of free market notions I had taken for granted, and as this interview progresses, I will try to tease out some of those ideas with Studwell. For now, here’s my opening scene-setter question and Joe Studwell’s answer.

SR: How Asia Works is a bold assault on what we might call the neo-liberal consensus about what makes economies grow. You argue that protectionism and industry policy are actually important policy tools for countries at an early stage of development, and that Asian governments have adopted this model with varying degrees of success.

This is an almost heretical thought in the Western economic debate, and I suspect a lot of readers of this site would dismiss it out of hand. So what are some of the key facets of Asia’s economic development you would point to that prove your case?

JS: The distinction I make is between the ‘economics of learning’ and ‘the economics of efficiency’. Poor countries lack technological capacity and have low quality human capital. This is why they need to target investible funds at a learning process and such a learning process requires nurturing and protection as well as competition.

It was ever thus. Anyone who disagrees is simply historically ignorant. The history of British, American, German, and indeed Australian development is the history of government policies that nurtured globally competitive firms, whether those policies were Britain’s Navigation Acts, the average 40% tariff applied in the US in the 19th century, German export subsidies of the late 19th and early 20th centuries, or Australia’s own long history of tariff protection and industry subsidy.

Those ‘infant industry’ policies allow learning to take place and produce more competitive firms, especially when subsidy is predicated on exports, or what I call ‘export discipline’, as has very much been the case in the fastest growth stories in Japan, ROK, Taiwan and now China. The capacity to export into the global market tells governments of development countries if they are getting an acceptable return on their subsidies to domestic firms.

However, the economics of learning only get you so far. There comes a point when an economy is close to the global technological frontier and it is much harder, if not impossible, to run cost-effective industrial policy. It is then necessary to enter the world of Adam Smith or (to put things in Australian terms) Colin Clark. It is no surprise that Smith produced his ideas in the late 18th century, when Britain was close to global technological dominance but the British consumer was getting screwed every day by oligopolies and monopolies set up in the infant industry era. Britain needed to be more efficient, more focused on short-run profit, more fair to the consumer. And that was what gradually happened in the 19th century.

Colin Clark made similar points in Australia in the early 1960s and was fortunate that Labor Party politicians were receptive to his arguments about the need for deregulation so that Australia could continue to progress on its development path (I was going to say to the promised land of Kath and Kim, but I’ll leave that out).

Anyhow, the basic point is that it is a stages game, and there are different solutions for different stages of development. This, of course, is horribly problematic for modern economics because everything is supposed to fit in the same spreadsheet — there are no stages. And behind this problem is the other one that so many contemporary economists are really just (drug-less) hippies, whose every statement begins with ‘Imagine!’: ‘Imagine that there are large numbers of participants in every transaction, imagine that information is perfectly dispersed…Dude, you’d get a perfect price function. Pass the dooby!’

So I have a number of issues with the economics profession as it is presently constructed. But economics offers us powerful analytical tools and there are also some very smart, historically literate economists. In the book I quote Charles Kindleberger’s question about whether there really can be only one kind of economics. My answer, as stated above, is that, at a minimum, there is an economics of development and an economics of efficiency and what we really need to understand is where and how they meet in the middle. (But please don’t ask for the answer to this question because I don’t know and it is the subject of my next book.)

Interview: ‘How Asia Works’ part II

by Sam Roggeveen  – 12 July 2013 11:59AM

Below is the second part of my exchange with Joe Studwell, whose book, as I said in the intro to part 1, has tested some assumptions about economic development I’ve been carrying around with me for a long time.

SR: Asia is home to some of the great cautionary tales of industry policy: Malaysia’s national car brand, Proton, and Indonesia’s aircraft manufacturer IPTN come to mind. So what is it that distinguishes those failed efforts from success stories such as Hyundai?

And how do you get around the argument that, even where state-backed companies succeed in the long term, they still represent a misallocation of resources and an attempt to pick winners? Why wouldn’t these governments have been better off creating favourable tax and regulatory conditions for industry to flourish, rather than backing specific industries themselves?

JS: This is a number of different questions.

First, what makes industrial policy cost-effective? The answer to this in east Asia has been what I term ‘export discipline’, or the conditioning of subsidy (in all its myriad forms) on a significant level of exports at the firm level. In essence, export discipline solves an information problem. If you give subsidy to entrepreneurs they are amazingly good at taking the money and pretending to do what you want in terms of developing globally competitive firms that carry an economy forward, but not actually doing so.

Most obviously they tend to concentrate on services, which employ and ‘upgrade’ relatively few people, avoid adding value through manufacturing by importing components of manufactured goods or even finished manufactured goods, and they tend to limit the competition they face by sticking to the domestic market. They then take the cash flows from subsidised domestic activity and invest it on a portfolio basis in more advanced and competitive economies.

This is the story of what my last book dubbed ‘godfathers’ — the oligarchs who dominate economies from south-east Asia, to Russia, to Latin America (KS Li, Ambramovich, Carlos Slim, if you want three examples). In essence these entrepreneurs outplay the state in its efforts to foster economic development based on technological learning and broad-based improvement of human capital.

When you have export discipline, the game changes. First, export discipline is almost inevitably bound up with a focus on manufacturing because manufactures are way more freely traded in the world than services (services are only 19% of world trade and have been stuck at that level for a quarter century). So entrepreneurs manufacture because manufactures are readily exportable.

Then comes the information bit. The capacity to export tells the state whether firms it subsidises and otherwise supports are globally competitive. Domestic financial institutions benefit from the same information feedback. Of course you can sell at a loss for a while, but not long if you have to export, say, 30% of your output, because it will bankrupt your firm. As a result, the capacity of the entrepreneur to deceive the state is undermined. He or she faces the horrible reality that in order to feed their insatiable desire for wealth and recognition (those ‘animal spirits’) they have to knuckle down, actually make stuff, and sell it in the viciously competitive world market.

Hyundai is a good example because founder Chung Ju Yung was himself a godfather, bribing his way to construction contracts under Syngman Rhee in the 1950s. Then came Park Chung Hee’s coup in May 1961. Park brought in so much export discipline that firms had to file their export returns to the government on a monthly basis. Suddenly Chung became a big fan of manufacturing for export and had to get rich that way.

In Southeast Asia, industrialisation programs like Proton and IPTN did not face export discipline. As a result the state’s return on industrial policy was very poor. Was it zero, however? I think not. There has been some industrial learning in Malaysia and, to a lesser extent, in Indonesia. So I doubt they would have been better off without Mahathir or Habibie, the main people who drove those programs. However, the performance was lousy by the standards of Japan, ROK, Taiwan and China and I talk in a lot more detail in the book about exactly why. After the Asian financial crisis, when the IMF went in to Indonesia and dismantled/emasculated its industrialisation strategy, it made things worse. If you look at IPTN, on which the Indonesians spent billions training engineers, designers and so on, many of the key people went off in the late 90s and 2000s to work in places like the US or Germany. Indonesia’s learning-oriented subsidy ended up going to the world’s richest nations (that’s why we have black humour).

On the inevitability of misallocation of resources in industrial policy, the answer is ‘yes’. There is a lot of waste in industrial policy. But the waste is at an acceptable level when you are far behind the technological frontier because you can see where you need to go. Steel, chemicals, plastics, construction materials, etc — you have to learn to make this stuff just like everybody before you. You have to fill your society with tacit, value-adding knowledge. Critically, manufacturing is the way to learn because people learn on the job, in factories, generating the capital to pay for their education. It is affordable in the way that more schooling for everybody would not be because school is just a sunk cost until you leave and get a job. (Indians — don’t get me started — only think about learning through investment in formal education and have no real manufacturing strategy, which is why they are relatively so much poorer than the Chinese.)

On ‘picking winners’, this is a term of abuse coined by neo-liberal economists in Europe in the 1970s (I have never managed to identify first use of the term) when they were beginning to criticise the industrial policies that made a country like Italy grow 5-6% for a quarter century after World War II. It is a term of abuse because, as far as I can see, successful industrial policy has never been about picking winners. It is about culling losers, which is very different. Culling losers means cutting off state support to subsidised firms that are failing to make the grade, judged by profit & loss and export performance. There is a period of culling losers going on in China right now, so you can watch live!

On ‘favourable tax and regulatory environments’, development requires these, but the objective remains that of learning, as I have said, not efficiency expressed in terms of short-run returns. That comes later. I think that perhaps the answer you want to this question is the following statement: if you can show me a country, other than anomalous offshore financial centres/trading entrepots, which has developed to the first rank through policies of free trade from the get-go, then tell me which country it is. (Certainly not yours or mine…)

Reading through the first part of this answer, I realise that I simplified and exaggerated considerably to make a point. Perhaps too much so. But people need to read the book!

Can we talk about the rugby now?

 

Below is the third part of my exchange with Joe Studwell, author of How Asia Works. Here’s part 1and part 2.

SR: In your previous answer you took a swipe at the IMF for its behaviour towards Indonesia during the currency crisis, so I wonder if you could say some more about the role of international institutions.

I notice that Michael Pettis, in his Amazon review of your book, says the merits of industry policy are so obvious as to be not worth debating. The fact it is debated ‘suggests to me how unreal academic economics has become and how divorced from historical understanding.’

But it’s not just academic economics, clearly. It’s also the policy advisers in the IMF and World Bank (and perhaps even the NGOs?) who push a pure free market line. How do you account for the fact that these institutions seemingly continue to ignore the evidence of successful industry policy? And how have Asian governments dealt with advice from the IMF, World Bank and others? Do they just ignore it?

JS: The story of the international institutions is a complex one, so I’d like to try to reflect that complexity. I would also like to say that I am not an expert in the history of these institutions and mostly know them from the work I have seen them doing in east Asia.

The first point is to consider the origins of the IMF, the institution that is best known for going in to countries after financial crises occur and agreeing (forcing?) and overseeing reform ‘programs’. The IMF was created at the end of the Second World War and gained its early crisis experience in the 1970s in already quite mature western European countries after the Bretton Woods fixed exchange rate regime broke down. The IMF played an important role cajoling countries that had employed what I earlier called the ‘economics of development’ or ‘economics of learning’ in order to get back on their feet after the Second World War towards what I called the ‘economics of efficiency’.

In other words, the institution moved countries along from one kind of economics to the next (at least in my conceptualisation). For the most part this involved deregulation, the imposition of freer markets and the gradual removal of currency controls (the latter not in the UK, for instance, until the advent of Margaret Thatcher as prime minister in 1979).

In the 1980s the IMF then took its medicine to Latin America with the onset of the Latin American debt crisis. As far as I can see (again, I am not an expert), Latin America had messed up its development policy in two main ways. First, land reforms were absent or ineffective (because of lousy execution). This left a very skewed income distribution in place, failed to give landless farmers any capital (in the form of land) with which to play the capitalist game, and did not maximise yields.

During the post-war industrialisation drives in countries like Brazil, agricultural exports either flatlined or fell, or imports increased, exacerbating the balance of payments stresses that occur in the early stages of industrialisation when countries always run trade deficits (because of the need to import producers’ goods — typically, machines to make stuff with). The second policy cock-up was the shortfall of ‘export discipline’ to ensure adequate returns on subsidy and protection to manufacturers.

The wrong agriculture policy and the failure to export enough manufactures created balance of payments pressures and a capital shortfall that were filled with foreign loans. When dollar interest rates rose under the Reagan Administration, the loans could not be serviced, and governments resorted to printing money (just like in the Philippines under Marcos, which was east Asia’s Latin American state).

In this respect, the deflationary macro policies the IMF brought in were necessary and stabilised the situation. However, the IMF also dismantled industrial policy and has never, as far as I can see, understood anything about agriculture. The upshot was that the IMF undermined Latin America’s ability to develop quickly and sustainably. But then one can say that the Latin Americans had already done that for themselves by borrowing lots of money and investing it unwisely.

I make the point in How Asia Works that, scaled for GDP, the Koreans borrowed more money overseas than any Latin American country, but it didn’t matter because they had export discipline which meant they were creating lots of globally competitive manufacturing firms. Latin America seems to have produced one: Embraer.

Anyhow, we can say the IMF did well in western Europe, and then did well-ish (at best) in Latin America. Next it came to east Asia after the Asian financial crisis. Here, for me, it really made a terrible mess of southeast Asia by imposing Anglo-Saxon financial systems in Thailand and Indonesia after the crisis, having already done the same thing in the Philippines following the fall of Marcos in 1986. Industrial policy has been almost completely undermined and the banking systems now focus loans on consumers (making very tidy profits, just like in post-crisis Latin America). But the banks do not support sensible developmental policies that make national economies more value-adding. It should be no surprise that southeast Asia has had east Asia’s best performing stock markets since the Asian crisis while, in terms of the real economy, a country like the Philippines is on the brink of a return to the Third World. The only positive thing the IMF has done in southeast Asia is to make the place work for hedge fund managers. In fact I often think the IMF should become a hedge fund.

In defence of the IMF, I would point out two things. In southeast Asia, Malaysia did much of what the other major economies did, but without an IMF intervention; it just copied them anyway. With that kind of lack of political leadership, a country is in a lot of trouble anyway. And second, the IMF intervention in South Korea, which got caught up in the crisis, was much better timed, at least in my view.

South Korea was already a US$10,000 GDP per capita country when the crisis hit and the IMF forced sales of equity in the financial system to foreigners, required major changes to company law, and oversaw other adjustments in favour of consumers and minority shareholders. Contrary to Ha Joon Chang (whom I admire enormously), I think these interventions were well-timed. Of course the good timing was totally by chance because the IMF does not believe in timing, if you get what I mean! South Korea, in short, was ready for the economics of efficiency.

So that’s the IMF. The World Bank, by contrast, was set up specifically to support economic development at the micro level, and should be judged on this basis. Its real name is the International Bank for Reconstruction and Development.

My own observation over the years has been that the World Bank has some fantastic people, but that the institution is only as good as the use governments make of it. This means knowing what you want and getting World Bank specialists to work within some kind of brief that is defined by the developing state. If you just ask the World Bank (or the IMF) what to do, the ideologues in these institutions will their list of currently fashionable options, almost all of which have been between useless and disastrous for the past 40 or more years.

Classic examples include ‘privatise your banks’, ‘develop your stock markets’, and ‘concentrate financial intervention on micro-finance’. Note that each one is a financial liberalisation policy, reflecting exactly what has been fashionable (often rightly so) in rich countries and is deemed to be good for poor ones too. We may be about to get a new fashion menu based more around ‘institutions’. Again my expectation is that in timing terms the advice will be out of kilter. The institutional stuff becomes critical after the basic structural stuff that I talk about in How Asia Works. However now we are getting on to the subject of my next book again…

Successful developing countries have ignored the fashion menu(s) and instead have asked the World Bank’s technical people to support a proper development strategy. This is what China did in the 1980s when it had the World Bank, for instance, bring over Korean government people to explain what they had done and produce a bunch of comparative historical development studies. The process is described from different perspectives in Ezra Vogel’s biography of Deng Xiaoping, and in Harold Jacobson and Michael Oksenberg’s China’s Participation in the IMF, the World Bank, and the GATT, and, in Chinese, in Wu Jinglian et al (eds), Chinese Economists 50 Forum Looking at Thirty Years: Retrospective and Analysis (中国经济50人看三十年:回顾与分析).

Other developing countries would do well to study the manner in which China, the ROK and Japan have handled the IMF and the World Bank and gotten value from them. It is basically about avoiding the ideologues and making use of the technical people. You don’t want people like the World Bank guy in Jakarta who, shortly before the fall of Suharto, held a press conference lauding a successful telecoms ‘privatisation’ that had actually just been handed to one of Suharto’s daughters. You do want the ones like Edwin Lim, the Filipino Chinese who led the early World Bank mission in China.

Your last question is the one about why the bad advice continues to flow. I think it mainly comes down to ignorance, although just the other day someone was saying that they once asked a USTR guy in a bar to name one instance in which policies of free trade from the get-go had led to a positive developmental outcome, and the person just got up and left.

So maybe there is some pre-meditated desire to screw poor countries. Friedrich List claimed that one British prime minister used to keep a copy of The Wealth of Nations in his pocket and quote it to French leaders at every meeting in a cynical attempt to have them accept their (then very backward) division of labour in grain and wine production and leave manufacturing and services up to Britain.

Asian Review of Books

An Interview with Joe Studwell, author of How Asia Works

by Caitlin Dwyer

How Asia Works; Success and Failure in the World’s Most Dynamic Region

Joe Studwell

Profile Books Ltd, March 2013

 

3 July 2013 — Joe Studwell has written about Asia and economics for a variety of publications. Founding editor of China Economic Quarterly, he is also the author of three books: The China Dream, Asian Godfathers, and his most recent, How Asia Works.

How Asia Works seeks to debunk the classical rationale for why some Asian countries have flourished economically and others not. Three factors—agriculture, manufacturing, and finance—need supportive government policy to encourage development, Studwell posits. Using examples from Malaysia, Korea, Japan, China, and the Philippines, Studwell shows that the economics of developing nations are necessarily different from developed, free-market countries. Studwell calls his model “the economics of learning”, noting that until nations have achieved a certain technological self-sufficiency, they cannot possibly succeed with a neo-classical economic model. An extract from the book is available here.

Asian Review of Books spoke with Studwell about the economics of learning and how Asia offers a new model for development.

 

ARB: How much research was involved in writing this? You’ve got very extensive footnotes—can you talk about where these ideas came from and how you developed them?

JS: I lived for ten years in China, and in that time I spent some time working in Southeast Asia as well. I arrived in China not speaking any Chinese. Most of the people who spend a long time in China become China people, but gradually I evolved into a person who was more interested in the comparative development of the major economies in East Asia. I focused on the major economies because it allows you to take the basket-case countries out of the equation and focus down.

In 2007-8, I did a Masters in Economics [Development Economics] and I started reading more into the economic literature, which is pretty strong on Japan, Korea, and Taiwan in particular. In the era of the Cold War, the U.S. put a lot of resources behind stabilizing and supporting those economies. They were written about in the way that China’s being written about now. There’s actually a much stronger literature on Japan, Korea, and Taiwan in terms of what happened than there is on any other country in the region, including China. There hasn’t really been a developmental classic about China yet. But if you take your knowledge of Southeast Asia and your access there, put that together with what has already been done about China, and bring the whole thing together, maybe that’s a useful project.

I also gave some thought to what the shortcomings are of the neo-classical view of economics that has dominated the world in an overwhelming way since the 1970s and 1980s.

ARB: It was clear in the book that you consider your theory is a deviation from the standard economic model. What can economists and development experts learn from this book? What is the standard economic view not seeing when it looks at Asia?

JS: The main message is about there being two kinds of economics. That really is a response to a question that was posed by Charles Kindleberger, who’s a very good economist, very historically literate. He posed the question: is it really possible that there is only one kind of economics?

The answer that I give in this book is that there are at least two. It has to do with objectives. Developmental objectives are about learning. It’s a learning process. Alexander Hamilton, the American treasury secretary back in the late 18th century, came up with the term “infant industry”. This theme of learning and likening it to the experience of going to school is one that people have often reached for as a way to explain what happens. Poor countries have the people, but they lack know-how and technology. When you start to think of learning as the objective, of course, that’s very different to when you’re thinking about short-term profit as the objective, or even efficiency.

What do we really mean by these terms? Well, efficiency could be short-term profitability. That isn’t necessarily the efficiency you’re looking for during a development period. The efficiency you’re looking for is how can we learn, or, in another respect, how can you go around the deficiencies of your human capital? Because people take such a long time to change. The economics of learning and development is largely about finding ways to go around human capital constraints.

You do that in agriculture if you use householdfarming, and turn it into gardening—because you’re just throwing the labor at the problem without a major restructuring. More than that, you’re employing all your human resources and getting something out of all your people. You do that in manufacturing by helping low-skilled people to build their knowledge base.

ARB: India is noticeably missing from this book, except for a mention that they have delved into IT and service-based industry rather than following the agriculture/manufacturing/finance model. Can you talk about why you didn’t include India here and how it differs?

JS: The media suggests sometimes that India has a different model and it’s based around services. I’m not sure that’s fair. I think it’s just that they don’t have a proper strategy. This is just the place they’ve ended up.

They have a very elitist education system left to them by the British. They have the Indian Institutes of Technology, and they graduate very sophisticated engineers, who work in IT and speak English. They work in software businesses, but in software, the capacity to absorb your human capital isn’t great. You can’t even write a single line of code until you’ve learned software code, whereas if you’re absorbing people into a manufacturing economy, you can put people in a factory and they can start to add a tiny bit of value from day one, because they’re working with and through machines.

This helps to explain why every developed country, with the exception of anomalous offshore financial centers (like Hong Kong and Singapore), everybody’s gone through this manufacturing experience. You can look at agricultural super-specialists like Australia and New Zealand, but even they have some manufacturing related to the agricultural sector.

ARB: Myanmar is kind of a blank slate at the moment. What’s going to happen there? Can they follow the model you’ve laid out?

JS: I don’t know what will happen in Myanmar, other than to say that the countries that develop are the ones that take control of their own destiny. If the government there says to the World Bank and the IMF, What’s on your shopping list?, they are going to end up with micro-finance and all kinds of at best superfluous and at worst damaging policy distractions. But if they do what successful states have done, which is to look at the world and see what other people have done, figure it out for themselves, and adjust it to their national condition, they’ll be fine.

The DPRK [Democratic People’s Republic of Korea] is easier to talk about. They have collectivized agriculture, so in the last decade or so they use a points system to differentiate people who work harder. They’ve brought the points-reward down to a very low level, a sub-group level, so they’re pretty close to rewarding the family as a unit. They could move very swiftly to household agriculture. If they were able to put the agronomic support in place around that, to make sure that farmers get the upside of growing more, then I could see, bizarrely, North Korea becoming the last fast-growing success story. It sounds extraordinary, but I can see that it’s possible they could turn on a dime.

ARB: In the book Japan emerges as a major success story developmentally, but one that failed to make an adjustment at some point and has stagnated as a result. Can you talk about that pivot point, where economies need to make a shift?

JS: This is most poorly understood part of the debate, including by me. Things are so misrepresented that one struggles just to communicate the idea of the economics of learning or development as distinct from the economics of efficiency that come later. Between these two things there is a relationship. The nature of that relationship is to do with the transition and the building of institutions, and it’s a very difficult thing to understand.

Take a legal system as an example. There’s a whole stream of literature that says property rights and a legal system are critical to economic development. Well, look at China. Does China have a functioning legal system? No. Has China developed? Yes, it has. But can China continue indefinitely to develop without a functioning legal system? I think not. Look at Italy!

The counter-example is South Korea. They got caught up in the Asian financial crisis largely through bond market interaction. Then the IMF went in, changed company law, changed the financial system, a bunch of stuff. Today, Korea appears to have the upside of developmental economics. It has its Samsung and Hyundai, very successful companies. Household indebtedness is still quite high, but maybe Korea gives us a window onto the relationship between these two kinds of economics and how one transitions from one to the other.

ARB: Also in China, manufacturing is big business, but industry expansion is causing serious environmental issues with economic and also social costs. At some point are these costs going to outweigh the benefits? How does the environment play into your model?

JS: In Japan and South Korea, they created one hell of a lot of pollution and then they cleaned it up. Why did they clean it up? Public pressure. By the late 60s in Japan people were getting very upset, and in Korea by the 80s. So government moved to clean that up.

In China we can see the beginnings of that as well. Such a high proportion of incidents of civil unrest are attributable in one way or another to poisonous rivers and air. In any situation you have to find the positive. China’s in a position to do that, because the world has been working on cleaner energy technologies and the size of the Chinese market means that they can push forward the development of those technologies—essentially, using the scale of the domestic market. They are incentivised to do it because they don’t have a lot of mineral resources—they have a lot of coal, but they can see down the road… [Environmental protection] won’t happen as fast as many people would like, but I suspect we are at the apex of dirtiness at this point.

 

Caitin Dwyer is a freelance writer. Her work has appeared in print and online throughout Asia and North America. Caitlin spent three years working and studying in China and has her Master of Journalism degree from the University of Hong Kong. She now lives in Oregon.

Irish Times

Elites behaving badly and other theories: why only some Asian states are ‘Tigers’

A new book offers some plausible explanations on the patchy rate of economic success across Asia

Clifford Coonan

Monday 1 July 2013

 

There’s a 500kg gorilla in the corner of the room when discussing Asia’s remarkable rise over the past few decades: why has the success has been so uneven?

JapanSouth Korea and Taiwan in the northeast have become fabulously wealthy while the Southeast Asian states, such as Thailand, the Philippines and Indonesia have advanced, but at a far less impressive pace.

You hear some odd theories – the climate is too warm near the equator for these economies to thrive – which I’m sure is news to Hong Kong’s tycoons and their colleagues across the border in Guangdong.

Then there are cultural arguments put forward, that the Chinese or the Japanese are intrinsically hardworking. (I know plenty of lazy Chinese people, for the record, just like there are many lazy Germans.)

In How Asia WorksJoe Studwell goes a long way to cut through the cliches about Asian growth and explain why things have happened at a varied pace. If this is indeed to be the Asian Century, this engaging, thought-provoking book is required reading for anyone serious about understanding the structural dynamics of the continent.

Studwell says the blame is largely due to a lack of political leadership and a tendency by ruling elites to behave, well, badly. And for countries to do well, they have to be prepared to introduce land reform.
Success and failure
“No one had put this together before, a book covering the nine major economies, explaining the differences between the ones that succeeded and the ones that failed, and how in the end it came down to policies devised and implemented by human beings rather than anything else,” says Studwell in an interview.

He describes as “folly” the ways of the iconic leaders in the region in the past few decades, such as Mao in China, Sukarno in Indonesia and Mahathir in Malaysia, constantly railing against western hegemony and sticking “your rhetorical finger in the eye of its leader, the United States”.

“Far better to take a page out of [Korean leader] Park Chung-hee or contemporary China’s book: make public pronouncements about the importance of free markets, and then go quietly about your dirigiste business,” he writes.

One of the striking elements working in the region is the way in which countries like the Philippines, with its resources, its educated, often English-speaking workforce and its central geographical position have done much worse than countries such as Korea, which was devastated by war in living memory and has little in the way of natural resources to lift it, but has gone on to become one of the world’s richest economies.

“In east Asia the countries with the best endowments have pretty much done the worst. That’s why it’s such a fantastic laboratory for understanding economic development. People who had it all have thrown it all away, and the people who had less have gotten themselves organised and have done well,” said Studwell, who has written about the early days of the China boom in The China Dream and looked at tycoons in the region in Asian Godfathers.

“The main thing that prevents you from seeing that clearly in east Asia is the racial overlay. The rubbish you hear – largely generated by indigenous people in the region – about Chinese culture or Japanese culture, or Korean hard work versus . . . [people] down near the equator. It’s all just rubbish but it’s amazing how many people believe that stuff,” says Studwell.

“It’s been my observation at an entrepreneurial level as well. I’d never rate entrepreneurs that I met in China over the years higher than, say, entrepreneurs in places like Malaysia. They are not producing better businessmen,” he says.
Politics
Chinese business communities thrive in many areas of Southeast Asia, but this is down to political structures in the region.

“You find societies that settled into a feudal equilibrium. If you command political power, you command all power, and you can allow other people to come in and play the economic role. This is no different to the way feudal monarchs in western Europein the medieval and early modern period made use of Jewish financiers and it’s no different to the way Southeast Asian rulers made use of Persian and Arab traders before the Chinese were there,” he said.

He does not see much chance that the situation in Southeast Asia will change anytime soon.

There is no Konrad Adenauer equivalent to bring the countries in the region together as he did with the European Union core states in the 1950s.

“They found their equilibrium and it was one where the elites live pretty well. There just isn’t the political leadership. I don’t see a single politician down there who is going to change the trajectory of the region. Southeast Asia is the Latin America of east Asia, basically, and that is their political choice . . . they are relative economic failures though they have made significant economic advances since the end of the colonial period.”

Many of the Southeast Asian economies are former British colonies and Studwell talks of how the British empire was successful at marshalling structures in the region, and the long-term impact has been disastrous on many countries.

“The British empire in particular because it was so efficiently and subtly run, working with small numbers of people and working through local elites, it was extremely good at reinforcing and shoring up these kind of economic operating systems. This is why the colonial influence was so utterly perfidious.

“The British don’t come in and put a knife in your back, they finish you off with a warm embrace. They were fantastic at running systems on that basis which in developmental terms have proven to be enormously damaging.

“Malaysia doesn’t get independence until 1957 when the Cambridge University-educated leader of the country agrees to allow the British plantation and mining interests to remain in place and it was only the race riots in the 1960s which changed that,” he says.

“The same thing in the Philippines – independence in 1946 but the Americans locked them into various trade agreements which kept the ruling elites in a comfortable position.

“No country has ever acted generously having become rich, with the exception of theUnited States for a brief period after the second World War, in very particular circumstances.”
History of selfishness
He cites the remark by 19th century German economist Friedrich List about kicking away the ladder once you get to the top.

“That’s very much what Britain did. China fits much more into the British model. I don’t see them having a positive developmental impact in places like Africa, or inNorth Korea. The Chinese go in and trade for their own benefits. All that ‘pragmatic’ really means is that countries that climb the ladder of development have a very long history of being revoltingly selfish,” says Studwell.

So much is a question of approach. It’s not about prudence or stability, at least not necessarily.

“Macroeconomic stability was not a clear determinant of developmental success in northeast Asia, and nor was it in Southeast Asia, where there was also notable variation – for instance, between less ‘prudent’ Indonesia and more prudent Thailand, both of which ended up on the industrialisation rubbish heap,” he writes.

“Equally, there is the example of Ferdinand Marcos, who borrowed and printed lots of money like Park Chung-hee and Chun Doo-hwan in Korea, but blew his cash like a drunk in a casino.

“I think China will be the last fast growth story that we will see. You can’t have that kind of very fast development without land reform and I don’t think that kind of land reform is going to occur in Southeast Asia because the politicians can’t get it together.”

For those looking for a punt on a future growth story, Studwell recommends North Korea.

“The place most likely to have a 10 per cent growth story is North Korea. The reason would be is that Korean agriculture is collectivised but they have been moving tentatively towards household farming essentially and it wouldn’t require much of a push for North Korea to significantly increase its output and push to industrialisation and go for the east Asian miracle. It has the political infrastructure. It will of course require a political shift.”
How Asia Works: Success and Failure in the World’s Most Dynamic Region by Joe Studwell, Profile Books, £14.99

Wall Street Journal

Here is the Wall Street Journal we know and love. Most obvious observation is that the reviewer has not read the back end of the book. Otherwise he wouldn’t have set me up as an ‘attacker’ of neo-classical economics in the way he does.

His best effort at a substantive riposte is in this par:

<Mr. Studwell also underestimates the capital formation undone by land reforms. He dutifully reports that, for instance, under Japanese rule before 1945 Taiwan had enjoyed significant investment in yield-boosting technologies in the countryside. But he seems strangely uncurious about why earlier land regimes around the region had experienced deteriorating levels of investment in agriculture, a line of inquiry that might have suggested less drastic alternatives to the policies the tigers ended up following. Onerous agricultural taxes and murky protections of property rights were often to blame for stunted rural capital accumulation.>

But there is nothing really there. Just a bit of fantasy about low taxes and property rights being the solution to any given problem. (A bit like the less thoughtful Republican view of the current US malaise.)

I guess Rupert Murdoch will be happy enough. And I’m not much fussed.

 

Don’t Think Of A Tiger

by Joseph Sternberg

 

Readers of a certain age will remember when Japan was going to eat the world’s lunch. These days, we gird ourselves for a “Chinese century,” while awarding an honorable mention to those scrappy South Koreans every time we buy a Samsung phone or a Hyundai. The successes of these so-called tiger economies, which also include Taiwan, fascinate economists and policy makers.

Joe Studwell attempts a concise explanation of the Asian miracle in “How Asia Works,” and his book comes across as a how-to of sorts: Make Your Own Economic Miracle in Just Three Steps. First, reform agricultural land ownership to encourage small-plot, high-yield farming. Next, implement industrial policies to nurture infant industries and impose discipline on exporters to up their competitive games by requiring companies to export to foreign markets where they will face more intense competition. Finally, deploy the financial system in support of items one and two, steering capital to exporters.

Japan charted the course that others followed. As far back as the 1860s, the government pensioned off the class of powerful landlords known as daimyo in order to redistribute their land to smallholders who had previously been tenant farmers. South Korea followed suit in the late 1940s and ’50s, as did Taiwan (with an assist from the Americans). At least those reforms were relatively peaceful, and some attempt was made to compensate displaced landlords. China achieved the same result but with greater violence during the first years of communist rule. This actually boosted productivity dramatically in the early 1950s, until Mao Zedong succumbed to the siren song of collectivization less than a decade later.

Then came manufacturing. Mr. Studwell notes that the goal across the tiger economies was to protect national champions at home while forcing them to be competitive abroad. Exports provided a source of capital and exposed companies to cutting-edge technologies in developed markets instead of allowing them to retreat into uncompetitive, high-profit domestic markets. In Japan and Korea a system of incentives rewarded companies for export success in competitive global markets, for instance by making capital available only to those companies that boosted market share abroad. Yet in other countries, such as Malaysia, protectionism simply allowed companies to profit at home without ever making much of a push abroad.

image

How Asia Works

By Joe Studwell
(Grove, 366 pages, $27)

This is where Mr. Studwell’s third prong comes in, since the financial system was often the preferred tool for implementing such rewards. Companies who notched export successes would enjoy preferential access to capital; others wouldn’t. By suppressing interest rates paid to savers to enable lower lending rates for manufacturers (a technique known as financial repression), Asian governments could redirect capital toward industry and, in the process, reward certain kinds of industry. Chinese banks do the same today.

Mr. Studwell, whose earlier works include “Asian Godfathers,” on the continent’s new tycoons, here delivers a readable survey of the growth policies pursued in the tiger economies and also offers some helpful analysis of why similar strategies failed in Southeast Asia. He notes, correctly, that leaders there never had sufficient political determination to impose such draconian policies. If he had stopped there, this would be a serviceable if rather incomplete book. But his ambition is to undermine “neo-classical ‘efficiency’ economics” by demonstrating that the more illiberal policies of the tigers were superior in achieving development. This is a serious misreading of the Asian story.

For one, the policies Mr. Studwell commends have been far costlier than he admits. He glosses over the hundreds of thousands or even millions of Chinese who died as a result of pre-Great Leap Forward land redistribution. Mr. Studwell also underestimates the capital formation undone by land reforms. He dutifully reports that, for instance, under Japanese rule before 1945 Taiwan had enjoyed significant investment in yield-boosting technologies in the countryside. But he seems strangely uncurious about why earlier land regimes around the region had experienced deteriorating levels of investment in agriculture, a line of inquiry that might have suggested less drastic alternatives to the policies the tigers ended up following. Onerous agricultural taxes and murky protections of property rights were often to blame for stunted rural capital accumulation.

Likewise, he plays down the costs of tiger-style industrial and financial reforms. Here, the basic principle was simpler than Mr. Studwell makes it out to be: force people to pay more for things. The combination of import-protectionism and financial repression engineered a sustained wealth transfer from households to exporting companies, in order to facilitate investment. This undeniably leads to rapid GDP growth, at least for a spell. But is it fair to tell poor citizens of low-income countries to sacrifice their preferred level of consumption today for some “optimal” level of growth tomorrow? Might it be better to open up to imports, thereby allowing citizens to benefit from the resulting competition?

Asians are answering these questions themselves. In South Korea, “economic democratization” is now a buzzword that at its best means removing industrial supports for exporters in favor of creating a more competitive domestic market. In Japan, many of Shinzo Abe’s reforms—such as joining the Trans-Pacific Partnership trade talks to reduce barriers to imports—would lower consumer prices and foster competition at home. Chinese leaders say they seek the same, although their willpower is in doubt.

Meanwhile, countries like Indonesia and the Philippines are belatedly experiencing growth spurts fueled in large part by domestic consumption, and India continues a piecemeal liberalization with similar effects. Free trade played a key role in Asia’s development story. But as Mr. Studwell shows so clearly, true liberalism has never been attempted by any nation in the region. Before concluding that the tiger way, for all its costs, is the best path for Asia, it might be worth awaiting the results of an experiment in a more liberal alternative that is only now beginning.

Mr. Sternberg is an editorial-page writer with The Wall Street Journal Asia, where he edits the Business Asia column.

East coast US

Here are a first few links to lots of media stuff I did last week in the United States. I believe the book is officially available in north America from today. Certainly you can buy it on Amazon.com now, which many people were emailing to say was not possible in recent weeks.

Bloomberg TV. About 10 mins.

Bloomberg Radio. About 16 mins.

Florida Radio. A little bit more on US historical involvement in east Asia. About 21 minutes. Not sure this link is permanent — you have to click through to ’06/28/13 Joe Studwell’ — but it is working today.

Michigan Radio. 10 mins. This guy’s studied ignorance early on gets me just about irritated enough to focus down on some important points, in less than 10 mins.