Literary Review (UK)

Here is a review of How Asia Works by the venerable Jonathan Fenby. I only have a PDF, so you will have to read it as a download. Click on the link below.

HAW LitRev August pp34-5

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FT Longlist

The Financial Times published its longlist for the FT/Goldman Sachs Book of the Year today and I am honoured that How Asia Works is on it. Below is the full list of 14 titles.

 

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead, Alan Blinder, The Penguin Press

The Alchemists: Inside the Secret World of Central Bankers (UK subtitle); Three Central Bankers and a World on Fire (US subtitle), Neil Irwin, Headline Business Plus; The Penguin Press

Big Data: A Revolution That Will Transform How We Live, Work, and Think, Viktor Mayer-Schönberger and Kenneth Cukier, John Murray; Eamon Dolan Books/Houghton Mifflin Harcourt

The Billionaire’s Apprentice: The Rise of The Indian-American Elite and The Fall of The Galleon Hedge Fund, Anita Raghavan, Hachette Book Group/Business Plus

The End of Competitive Advantage: How to keep your strategy moving as fast as your business, Rita Gunther McGrath, Harvard Business Review Press

The End of Power: From Boardrooms to Battlefields and Churches to States, Why Being In Charge Isn’t What It Used to Be, Moisés Naím, Basic Books

The Everything Store: Jeff Bezos and the Age of Amazon, Brad Stone,Transworld/ Bantam Press; Little, Brown

Give and Take: A Revolutionary Approach to Success, Adam Grant, Weidenfeld & Nicolson; Viking (Penguin)

The Great Escape: Health, Wealth, and the Origins of Inequality, Angus Deaton, Princeton University Press

How Asia Works: Success and Failure in the World’s Most Dynamic Region, Joe Studwell, Profile Books; Grove Press

Lean In: Women, Work, and the Will to Lead, Sheryl Sandberg, WH Allen/Random House Group; Knopf

Making it Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy, Iain Martin, Simon and Schuster

The Org: The Underlying Logic of the Office, Tim Sullivan and Ray Fisman, Twelve

Scarcity: Why Having Too Little Means So Much, Sendhil Mullainathan and Eldar Shafir, Allen Lane; Times Books/Henry Holt

The Inquirer (Philippines)

Proving the old adage that any book recommended by someone called Teddyboy is worth reading…

 

Get Real

How to sustain our 7-percent growth rate

 By 

9:33 pm | Friday, July 26th, 2013

Teddyboy Locsin raved about the book and urged me to read it asap. When he told me what the key message was, and then gave me the gist of the author’s pithy remarks about the Philippines, I went home and did as I was told.  The book is “How Asia Works,” subtitled “Success and Failure in the World’s Most Dynamic Region.” It came out sometime in the end of March, and its author is Joe Studwell, an old Asia hand, journalist (Economist, Economic Intelligence Unit, Financial Times, Asian Wall Street Journal, Far Eastern Economic Review), broadcaster and author of several other highly acclaimed books, who is currently pursuing a mid-career PhD in Cambridge.

And what is Studwell’s message? Like all effective communicators, he says it both in the introduction and in the epilogue of his work, although using different words. And that is that based on the Asian experience, there are three critical interventions that governments can use to speed up economic development: restructuring agriculture into highly intensive household farming, directing investment and entrepreneurs into export-oriented manufacturing, and intervening in the financial sector to support the two sectors. A recipe for success that is “as simple as one-two-three.”

Studwell cites Japan, Taiwan, South Korea and China as countries that have employed these interventions, resulting in “the quickest progressions from poverty to wealth that the world has seen.” These countries radically restructured agriculture (compulsory land reform) after World War II, focused their modernization efforts on manufacturing, and made sure that the financial system accommodated this development strategy. Other countries, like Malaysia, Thailand, Indonesia and the Philippines, did not follow the recipe (and also accepted bad advice from rich countries), and while these countries (excluding the Philippines—or until very recently, anyway) may have exhibited high growth for relatively long periods, the progress was not sustainable.

What is especially intriguing about Studwell’s book is his justification of the three interventions. With respect to land reform, he points to the studies of Klaus Deininger, whose research findings show that “only one significant developing country has managed a long-term growth rate of over 2.5 percent with a very unequal distribution of land. That country is Brazil, the false prophet of fast growth which collapsed in a debt crisis in the 1980s in large part because of its failure to increase agricultural output.” Deininger’s two big conclusions, he continues, are that “land inequality leads to low long-term growth,” and that “low growth reduces income for the poor but not for the rich.”

In the process of justifying his arguments, Studwell earns his reputation as a myth-buster. For example, he cites data showing that following the shift to small-scale agriculture in his success countries, gross output of foodstuffs increased by somewhere between half (in Japan) and three-quarters (Taiwan). He also shows that sugar and banana yields in Taiwan from these home farms far exceeded plantation yields (which is what the Food and Agricultural Organization also has pointed out, but the data are ignored by large landholders and their supporters in the Philippines).

His descriptions of the land reform experiences of Japan, Taiwan, Korea and China are fascinating and instructional (I did not know that the programs of the first three were in major part influenced by the fear of communism, and there was resistance, too, from the elites, but this was overcome), and he emphasizes that the land redistribution was accompanied by massive credit, infrastructure and extension programs. And then he follows up with a second set of stories that begins with Negros Occidental and broadens to the entire Philippines, providing a brief history of the land reform attempts starting from the US colonial government in 1904 (165,000 hectares of religious estates—unsuccessful because the Americans insisted on a full market price, and of course the tenants had no money; most of the land was bought by businessmen).

Studwell has this to say: “Nowhere in Asia has produced more plans for land reform than the Philippines. But equally, no ruling elite in Asia has come up with as many ways to avoid implementing genuine land reform as the Filipino one.” I have to agree.

And this is how he describes the Philippines’ Comprehensive Agrarian Reform Law: “The result was a law that was long winded, unduly complex, insufficiently radical, with many loopholes and with an absurdly extended timetable for implementation.”  He then proceeds to go into the specifics of implementation failures—from the very large retention limits (five hectares + three hectares for every owner’s child over 15, compared to a maximum of three hectares in Japan and Taiwan), to the fact that the compulsory acquisition of land as of 2006 covered only 5 percent of the total “reformed” area, to the stock distribution option a la Luisita.

It is an indictment of the law and its implementation. As Studwell remarks, “In the Philippines, man’s capacity to seize failure from the jaws of opportunity is writ large.”  Again, one cannot help but agree.

But why bring it up now? Well, because the message seems clear that if we want to make sure that our 7-percent growth rate can be sustained, we better focus on agriculture and land reform. Otherwise, we will end up with a Third World state, with poverty rates to match.

More Lowy Institute

Below is a critique of How Asia Works with specific reference to Indonesia. Indeed there is a second part of the critique that you can track down via the Lowy site. I am just posting the first part and, underneath it, rejoinders to the main points it makes.

Indonesia’s development formula

by Stephen Grenville – 25 July 2013 11:10AM

I share Sam Roggeveen’s enthusiasm for the iconoclastic approach of Joe Studwell’s How Asia Works (his previous book on Asian Godfathers was a great read too). I also share Studwell’s scepticism about the ‘magic of the market’, his views on the IMF, and his admiration for the achievements of the South Koreans.

But I’m unconvinced by Studwell’s three-step development prescription, not because it is intrinsically wrong but because it is too hard to implement successfully.

The Koreans might have done so, but the strategy requires a level of sustained administrative competence, single-minded toughness and luck which are rare. Just as important, there are alternative development strategies, less demanding of skilled policy-making and administrative competence. The growth outcome won’t match Korea’s, but will be more feasible for countries like Indonesia (which Studwell sees as a development failure).

Let’s go through the three elements of the Studwell strategy. The first stage requires land reform and a boost to agricultural productivity.

It’s an old and sensible idea that agriculture has to provide the investable surplus which will propel the rest of the economy along the path of development. Fifty years ago, Clifford Geertz (Agricultural Involution) despaired about Indonesia’s failure to follow the example of Japan, which shifted surplus agricultural labour into factory work to create a modern urban/manufacturing sector. This failure would lead the excess population to atrophy, farming progressively more Lilliputian plots.

But things turned out better. With the average size of farms on Java around half a hectare, the opportunity for land reform couldn’t play the key role that Studwell advocates. But Soeharto, with his roots in agriculture, gave rice production high priority (extension services, high-yield seeds, fertilizer, pesticides and attractive terms-of-trade between agriculture and urban consumers via an active price stabilisation authority). Not very free-market, but big yield increases and self-sufficiency were speedily achieved.

What about a vigorous industry policy, the second Studwell requirement? Despite inheriting the usual disaster story of failed prestige projects from Sukarno, Soeharto was ready to have a go at ‘picking winners’.

Cement, fertilizer, textiles, paper production, food processing and petroleum refining all fitted Indonesia’s comparative advantage and made sense. Others were less defensible: Krakatau Steel,Tommy Soeharto’s national car and Ibnu Sutowo’s tankers. Habibie‘s IPTN aeroplane fits the Studwell strategy and might have succeeded if it hadn’t been stopped by the Asian crisis: ex-aeronautical engineer Habibie was well-qualified to lead this project, plane construction is quite labour-intensive (all those rivets) and the Indonesian archipelago needs lots of them (one airline recently ordered several hundred in one hit).

Whether IPTN would have succeeded is not the issue here: the point is that Indonesia, for better or worse, did try the sort of hot-house industrialisation Studwell advocates, and the IMF wasn’t able to stop this, at least until the 1997 crisis. Planning retained a central role, just as Studwell wants, and state-owned enterprises did the government’s bidding. Where Indonesia had comparative advantage, this often worked out well, and where the industry didn’t suit Indonesia’s attributes, generally it was a failure.

Indonesia’s development experience doesn’t fit the Studwell formula. Java’s rice production has done well without relying on his key element of land reform, and industry policy based on domestic entrepreneurship has been tried without much success.

Governments attempting to steer the process of development need effective administrative capacity; in a follow-up post, I’ll expand on the idea that market failure is common enough, but so too is government failure.

Joe Studwell’s response:

1. I doubt, contra Mr Grenville, that there is some arbitrary minimum land holding that makes land reform unworkable. If this were the case, then the micro-plots of a few tens of square metres championed by groups like Landesa would make no sense, when historical evidence around the world shows that privately-held micro-plots produce very high yields.

I am presently up my hill in Italy, and using a very slow Internet connection, and so cannot readily check the average Javan landholding. I assume Mr Grenville means that the average Javan landholding is half a hectare now, and would therefore be less after land reform. (The average land holding in most parts of China, Japan, ROK, and Taiwan after land reform was roughly half a hectare.) If my understanding is correct, my response is that Java has some of the best soil and climate conditions in the whole of east Asia, and so even smaller plots should be more than viable — if indeed size matters at all in a downward direction, a question which I think deserves real scrutiny.

Mr Grenville is correct that yields on Java are high by south-east Asian standards. The rice yield is over five tonnes per hectare. However this is still less than the average in north-east Asia. Given its soil and climate, it would not surprise me if north-east Asian style household farming could produce as much as 9 tonnes per hectare on Java — about as high as has been managed anywhere, because the growing conditions are so favourable.

Mr Grenville is correct that Suharto invested heavily (if patchily) in agricultural extension services and (eventually) used minimum price guarantees to promote higher yields. However he is wrong to say that self-sufficiency was achieved ‘quickly’. Rice self-sufficiency was not achieved until the mid-1980s, 40 years after independence, and wheat self-sufficiency never was. So I maintain my position that Indonesia is a real relative failure in agriculture.

2. On industry, much of my criticism of policy in south-east Asia focuses on politicians’ efforts to ‘pick winners’ rather than run industrial policy that periodically culls losers. I also talk at length about the need for ‘export discipline’ to anchor industrial policy. And I avoid traditional discussions of what is or is not a society’s comparative advantage because, to my mind, development is about changing (within reason) your comparative advantage. Economic development is about investing in a learning process in order to reap higher future returns.

Mr Grenville’s points about industry in Indonesia therefore seem to me to be based on a misreading, or mere scanning, of How Asia Works. He highlights industrial projects that were picked as ‘winners’, were not subjected to sufficient competition or pressure to export, and which consequently produced a poor return on industrial policy investment. His observations are essentially supportive of the policy requisites I highlight.

The one thing I think is truly misplaced in Mr Grenville’s comments is the argument in the third paragraph that, essentially, Indonesians are politically and administratively ‘not up to’ the task of accelerated economic development, particularly compared to people like the Koreans. Is this true? In 1945, South Korea was the rural backwater of a brutally colonised state in which Koreans had been allowed to play perhaps the most restricted administrative and economic role in any east Asian colony. I cannot see that the Koreans had much political, administrative or educational capital. Elite Indonesians, by contrast, held senior civil service positions under the Dutch, could win scholarships to study in Europe, and had much greater (formal) political, administrative and educational resources. The difference was not the endowments, but the change politicians wrought over 60 years of independent government.