Here is a review of How Asia Works from the blog of John Williamson, the man who coined the phrase ‘Washington Consensus’.
It is a thoughtful review to which I offer three brief points of response, whose relevance should become apparent as you read: a) I believe that Thailand’s very fast growth in the 1980s was based too much on a surge of FDI in low-value added processing activity and speculative real estate development and that this is why it proved to be unsustainable; I also think that far too much of Thailand’s manufacturing activity since the Asian crisis is still based on FDI and that this is one reason why the country will not progress towards developed nation status. b) since indigenous technological progress in manufacturing has characterised all the economic development success stories I have studied, I am unwilling to suggest to poor countries that there is ‘another way’, as Mr Williamson suggests there may be; such advice reminds me of the IMF telling poor countries in east Asia in the 1970s and 1980s to get rid of capital controls at an early stage of development despite the fact that no successfully developed country (outside offshore centres) ever did so; I am, if anything, a historian and so I go with what has been shown to work. c) I cannot see how I suggested in the book that Mr Williamson was personally in favour of open capital accounts in developing countries; I am quite sure he is sick to death of ‘Washington Consensus’ being misused, but I don’t think I said anything about how his personal views do or do not differ from the Consensus view.
In this book, the author lays out what he takes to be the conditions for catch-up growth à la Gerschenkron. These are essentially three. The first is land reform: letting the peasants own their own land and supporting this by the necessary ancillary services will result in maximizing output per hectare (and the labor input), with consequences that include a burst of output, increased savings, the creation of rural markets for urban-produced goods, without jeopardizing a ready-made supply of labor for the new urban industries. The second is the development of an industrial sector under heavy infant-industry protection, disciplined by the requirement of export success, and its progressive expansion into ever more advanced fields. The third is the use of a repressed financial system under government control in order to promote the first two conditions. He argues that this was the formula first pioneered by Meiji Japan and subsequently copied elsewhere in N.E. Asia (postwar Japan followed by Korea and Taiwan, and he hopes now China).
He also considers Indonesia, Malaysia, the Philippines, and Thailand (S.E. Asia), and dismisses claims that they have enjoyed comparable success. They failed to implement a serous land reform, nor did any of them institute an industrial policy aimed at growing industry and pushing it into ever more advanced fields. Entrepreneurs were not required to assist in “developmental” causes when privileges were extended to them, nor were the privileges dependent on revealed success, e.g. in exporting. Accordingly they have no chance of becoming developed.
Of course, countries are required to lie through their teeth in order to implement his strategy. His hero is Park Cheung-hee, who was prepared to assure the Americans that he was aiming to enhance free markets at the same time that he actually did the opposite. But Studwell admits that there is a problem with his prescriptions, which are aimed at development. For an advanced economy, it is quite appropriate to pursue efficiency. The problem is in knowing when to switch from caring for development to pursuing efficiency. Korea accidentally made the switch right, at the time of the Korean crisis in 1997, when its policies were fortuitously controlled by the IMF. Japan failed to make the switch, as a result of which it has suffered 2 lost decades.
One suspects that there may be other problems with his prescriptions besides the self-diagnosed one. Before elaborating on these, let me say what a pleasure it was to read a literate defense of land reform again, emphasizing the importance of accompanying land reform by the provision of extension services, credit, marketing, etc. This is a reform that we have almost forgotten about in recent years, yet it is surely of vital importance. The problem is that it involves destroying some people’s property rights, unless full compensation is paid, which tends to be expensive. That is why historically major land reforms have occurred only in the wake of major wars, when the rulers had no qualms about raiding people’s property rights, since these were widely regarded as having been illegitimately acquired. My guess is that under current conditions it would be worth compensating fully, even though this would add to government debt. (A compromise is available to countries that have previously imposed a land tax: pay compensation at the declared value of land, which is usually a gross under-estimate of its actual value.)
It is also a pleasure to have the logic of the industrial policies pursued in NE Asia laid out so clearly, though I am not filled with the same zeal for them as for the agricultural policies. Buying them essentially requires a similar act of faith to that involved in signing on to the neoclassical economics he so fervently despises, and accepting that there is no other way to develop except by the dirigiste strategy that he so well outlines. But is that really true? When I was young the developed countries comprised Western Europe and what Angus Maddison has called the “European offshoots”. To those we must now add not only Japan, Korea, and Taiwan, but also Southern Europe, Israel, Hong Kong, and Singapore.
It is difficult to know what Studwell would make of Southern Europe (at least outside Italy, which he considers to have developed properly) and Israel. But Studwell tells us quite explicitly that he is not going to consider Hong Kong and Singapore, because they are merely “anomalous port financial havens” (p. 63). The implication is that it is wrong to compare city-states to “real” countries. This would make sense if the cities normally sacrificed for the benefit of their hinterland, but surely they have, on the contrary, generally exploited their hinterlands, so that it is more and not less difficult for a city-state to develop. Of course, addition of Hong Kong and Singapore to the comparators is devastating to his thesis. Hong Kong developed under the purest laissez-faire that I know of; its addition to the list of comparators suggests that we look to what the countries of NE Asia have in common—competitive exchange rates, reputable educational systems, demographic transitions, and high savings—rather than to what is different between them—industrial policy—in explaining their success. And the inclusion of Singapore in the reference set would force him to admit that part of SE Asia has already made it.
His attitude to SE Asia is in fact something of a mystery. He says on p.160 that it is difficult for him to see how any of the Asian stock markets contributed to development. Let me tell him: by letting firms raise money, and without the danger of strangling themselves by excessive leverage. On p. 166 he tells us that Thailand had been going completely the wrong way prior to 1997, but two pages before that he told us that Thailand was the world’s fastest developing country over the decade 1987-96. He added that this did not signify real development. In the sense in which he defines real development, as implying mastery of more advanced techniques, this may be right, but it makes one wonder about his definition. If there are alternative paths to advanced-country living standards that maybe involve less sacrifice of the current generation, why not take them?
Let us suppose for the sake of the argument that Studwell is correct in his description of how NE Asia developed. (I have a feeling that he is closer to the truth than all those who tried to make out that they succeeded because they were really paragons of liberal virtue.) At the same time, he does not convince me that this is the only route to development. What stands out from his description is the price that was paid for developmental success: he records how Korean businessmen were at one stage locked up (p. 89); foreign holidays by Koreans were banned as late as the 1980s (p. 149); the high rates of inflation that were endured by Koreans right up to the 1980s; the negative real rates of interest paid on Korean deposits and even in the kerb market when there was a crisis (p. 149); and so on. (Not to mention the deprivations experienced by Chinese consumers as the counterpart to the massive accumulation of reserves—reserves that will have a negative yield—by the People’s Bank of China.) Surely development à la NE Asia works, but it works at a terrible cost to the first (and maybe second) generations. If (as I argue above) there are alternative routes to high-income status and these alternatives demand fewer sacrifices en route, then one has to judge the demand that countries master ever more advanced techniques as quixotic.
Another paper that I read (in Portuguese) simultaneously with this book calculates the expected proportion of GDP contributed by industry over the period 2001-07, the expected proportion being determined by a regression equation containing per capita income, its square, population, and population density (Bonelli, Pessoa, and Matos 2013). An extract of their results shows:
Observed value Lower limit Expected value Upper limit
Brazil 0.15 0.16 0.18 0.20
China 0.32 0.22 0.28 0.33
Germany 0.21 0.16 0.19 0.21
India 0.15 0.18 0.22 0.26
Japan 0.21 0.19 0.21 0.24
Korea 0.24 0.20 0.22 0.24
Thailand 0.34 0.17 0.20 0.23
UK 0.13 0.13 0.16 0.19
US 0.14 0.10 0.14 0.17
None of the NE Asian countries, nor Germany for that matter, are shown as falling significantly above the expected proportion of income. Ironically, the one country exhibiting clear signs of what they dub the “Soviet disease” (the opposite to the famous Dutch disease) is Thailand. Ah, but doubtless Studwell would fault them for having the wrong type of industry!
Let me note in closing that Studwell uses the term “Washington Consensus” with great frequency and always in what I think of as the populist sense. In n.3 he asserts, quite wrongly, that in introducing the term I favored floating exchange rates and unrestricted capital mobility: in fact I was quite explicit in condemning both. It is this that distinguishes the populist sense of the term (“populist” because it is used to signify policies that would discredit it in the minds of the audiences addressed) from my initial usage.
To return to the main theme, I welcome, though without much hope of his making an impact, the emphasis on land reform. But to assert that real development consists only of the process of mastering ever more advanced industrial techniques condemns most countries to remaining undeveloped. It has still to be proved that most countries cannot aspire to developed-country living standards without mastering the most advanced techniques. Unless this happens to be true, the notion of having a separate economics of development and then changing over to a concern with efficiency at some point in time, makes no sense.
Bonelli, Regis, Samuel Pessoa, and Silvia Matos. 2013. “Desindustrialzação no Brasil: fatos e interpretação”, in E. Bacha and M. Baugareten, eds., O Futuro da Indústria no Brasil (Rio de Janeiro: Editora José Olympio Ltda).
Studwell, Joe. 2013. How Asia Works: Success and Failure in the World’s Most Dynamic Region. (New York: Grove Press.)