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.

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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.

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