The writer is special adviser to the Jang Group/Geo and a former envoy to the US and the UK.
It challenges much conventional wisdom in the development debate. Most significantly the book questions key tenets of the so-called Washington consensus, which prescribes free market ‘solutions’ for all economies regardless of their level of development. Studwell establishes that a nation’s development destiny is shaped most decisively by government action and policies. History, writes the author, shows that markets are created, shaped and re-shaped by political power.
Studwell presents his case unambiguously, backing it with solid empirical evidence. “No significant economy has developed successfully through policies of free trade and deregulation from the get-go.” “Proactive interventions” have been essential in all cases of economic transformation – in agriculture and manufacturing – as they fostered early accumulation of capital and technological learning.
The book does two important things. First, by a historical recall of the East Asian and Chinese experience it shows that for all the talk of an ‘Asian miracle’, countries in the region have followed different trajectories and policies, which have produced sharply different outcomes. While north-east Asian states achieved extraordinary progress and prosperity, south-east Asian nations have lagged behind, in part because they took poor advice from multilateral financial institutions and failed to heed the lessons of history. China, Japan, South Korea and Taiwan are all remarkable economic success stories. But the Philippines, Thailand and Indonesia, despite initial spurts in economic growth, slipped back and have remained relatively poor. This divergence has created what the author calls “a tale of two East Asias”.
Second, the book draws a distinction between what it calls the ‘economics of development’ and the ‘economics of efficiency’. The first is like an education process where poor nations, lacking technological capacity and adequate human capital, acquire the skills necessary to compete globally. This requires investible funds, which in turn needs state intervention, “nurturing and protection as well as competition”. However at a later stage of development, countries have to transition to the ‘economics of efficiency’ to achieve profitability. This requires less state intervention, more deregulation and freer markets.
From this emerges the author’s central argument that economic development is a “stages game” with different policy solutions suited for different phases of development. This challenges the one-size-fits all paradigm of neoclassical economics. Studwell delves into China and East Asia’s varying experiences to substantiate this thesis. This leads to a provocative conclusion: “Poor states can only become rich by lying” – publicly supporting ‘free market economics’, advocated by the developed world, while pursuing “interventionist policies that are essential to become rich in the first place”.
At the very outset, Studwell identifies three critical interventions that successful east-Asian countries and China (after 1978) employed to achieve accelerated economic development. The first, “often ignored”, and now “off the political agenda” in developing countries, is land reform. This restructured agriculture into highly labour-intensive household farming. In the early phase of development, with the necessary institutional support, this helped to generate a surplus, create markets and unlock great social mobility.
The second intervention, as countries cannot sustain growth only on agriculture and must transition to the next phase, is to direct entrepreneurs and investment to industrial manufacturing. Manufacturing allows for trade and technology learning. And trade, says the author, is essential for rapid economic development. Studwell then demonstrates – while challenging the champions of free trade – how nurturing and protection, along with instituting “export discipline”, builds the capacity to compete globally. Manufacturing policy is a key determinant of success he says, as an infant industry strategy offers the quickest route to restructuring the economy towards more value-added activities.
Holding that development is quintessentially a political undertaking, the author sees the relationship between the state and private entrepreneurs as a critical variable. History, he writes, teaches that governments should not run everything themselves. But governments have to use their power and the right policy tools to make private entrepreneurs do what industrial development requires.
The third intervention necessary for accelerated development is in the financial sector, aimed at directing capital initially to intensive, small scale agriculture and to manufacturing rather than services. Studwell argues persuasively that it was the close alignment of finance with agriculture and industrial policy objectives that produced north-east Asia’s economic success.
Detailing the role of financial policy, he illustrates how premature bank deregulation exacted a high price in Thailand and Indonesia. China, on the other hand, and other north-east Asian countries resisted that, instead using financial management to serve development needs and an accelerated economic learning process.
The 1997 Asian economic crisis laid bare the sharp differences in policies followed by China/north-east Asian countries and those in the south-east. China, South Korea and Taiwan were either unaffected by the crisis or bounced back quickly to re-embark on the path to robust growth and technological progress. But the economies of Indonesia, Thailand and Malaysia were derailed. The first two remain mired in significant levels of poverty.
For Studwell, the Asian crisis underscored that these three interventions were what made the crucial difference between sustained economic success and failure. In China, Japan, Taiwan and South Korea, he writes “governments radically restructured agriculture after the Second World War, focused their modernisation efforts on manufacturing and made their financial systems slave to these two objectives”.
But in south-east Asian states, this didn’t happen. There was neither any real land reform nor creation of globally competitive manufacturing firms. This caused what were called “technology-less” developing countries to regress when their investment funds dried up.
It is in the context of the author’s lament about how, despite land reform being a vehicle for change, it does not figure in the development advice given today by rich countries or international institutions, that Pakistan gets mentioned in the book. Pakistan is cited as a prime example of where land inequality and agricultural dysfunction is at the heart of its economic and security challenges. Elsewhere the book says rural poverty nourishes terrorist groups that echo those suppressed in south-east Asian countries.
India doesn’t feature in the book. But it gets a mention when the author challenges the myth that poor countries can become prosperous by leap-frogging the stage of industrialisation. Studwell believes it is a mistake to think that India with its “much-vaunted IT service sector”, which employs a fraction of its labour force, “represents an alternative to manufacture-led development”. “There is no way that the specialist IT firms of Bangalore, or the financial services elite of Mumbai, will propel India to the kind of development success seen in China, Japan and Korea.”
Much of the book concerns itself with the three interventions. But the author is also emphatic in stating that they only take countries to a certain development stage. Over time, these policies create problems and have to change as countries transition to the next phase, when the ‘economics of efficiency’ has to kick in. As Studwell puts it: “The one, two, three approach only gets an economy – not to mention a society – so far. If policies do not change the economic sclerosis of contemporary Japan or Italy beckons”.
In making a powerful case for poor countries to make the right development choices and learn from other nations’ experiences, the book warns against the kind of free-market economic dogma routinely pushed down the throats of developing nations by wealthy countries and international institutions. As China has shown by example, countries must determine their own development path, stick to it and then stay the course – not lurch erratically between contradictory policies under donor or populist pressure as several developing nations including Pakistan seem to do.
Joe Studwell, How Asia Works: Success and Failure in the World’s Most Dynamic Region, (London: Profile Books, 2013).