Various from Asia

Just did three weeks in mainland China, Macau and Hong Kong. Here are some interviews:

FT’s Pilling on Indian IT after a chat.

Marginal Revolution likes the book. And is probably right that neither beach reader nor academic reader will be happy. There is a pretty informed discussion of the book by readers of the MR blog. Odd complaints are about insufficient elaboration on my part. Perhaps it should have been a 500 page book. But I decided not.

SCMP’s Tom Holland on the book.

Jake Van der Kamp responds to Tom Holland in the SCMP, except without reading the book. This is staggeringly lazy. File under Howard Davies. And I have often quite liked Van der Kamp’s stuff. But this thin, indolent drivel is a pretty good guide to why so many millions remain poor. How can anyone serious pass judgement on something they have not read? It is a book about stages, that takes in your view, Mr Van der Kamp, and the other one. Separately, and somewhat pedantically, ‘fulsome’ does not mean ‘full of’. It means ‘insincere’.

And now Holland responds. His main point is valid. I said at the beginning (and end) of How Asia Works that this is a book about economic development. Real development is also about social and political development. But I was not willing or capable to try to put the other parts of the equation in the same book. It would be too complex. And people would not absorb the basic message about economics. The next book will deal with the institutional stuff.

Hong Kong’s RTHK on the book. I had to download a plug-in to run this, but assume the average reader is more tech savvy than I. Trick is to do all this and then hit the play button to start the show. But first go to ‘Select segr’ and choose the 11.05 slot. With Phil Whelan. That is where the interview is. Very clunky stuff. But listenable if you get there.

Podcast interview by the Economist Intelligence Unit in Hong Kong.

Amcham in Beijing. The podcast should be here.

More to come when I remember what it was.

China Daily

Here’s the China Daily. One or two of the biographical details are wrong, and they made me a year younger than I am.

………………………………….

China the last big growth story

Updated: 2013-05-17 07:52

By Andrew Moody (China Daily)

Joe Studwell believes China might be the last emerging-nation economic success story the world sees for some time.

The leading Asian affairs author says it is wrong to assume that global development has somehow accelerated and that very soon everyone will soon enjoy Western standards of living.

“Everybody thinks the world is speeding up and after China it will be India and then it will be Africa. I don’t see this happening at all,” he says.

“China could be the last fast-growth story we see in the world.”

Studwell, former editor-in-chief of China Economic Quarterly, has set out his views in his latest book, How Asia Works: Success and Failure in the World’s Most Dynamic Region, which is already regarded as one of the major economic titles this year.

In it, he looks at why some Asian countries, such as South Korea and Japan as well as China, have had spectacular economic success and why others, such as the Philippines and Thailand, have not.

One of his central arguments is that it is not by applying free market principles that economies get rich. Instead, the basis for success has been agricultural development. China’s growth story, he argues, began when farmers became market gardeners in the late 1970s.

This gave it a platform for the country to become the manufacturing workshop of the world with the careful guidance of state planning, another Studwell ingredient for success.

“It (agricultural reform) is almost always overlooked. What have you got when you start? You have no capital. You have no technology. What you have got is that – as in any poor country – three-quarters of the population are farmers, and that is what you have got to work with.

China the last big growth story“If you ignore that part of the economy – as most developing economies do because they are run by people who live in cities – you have already shot yourself in the foot.”

Studwell says leaders of developing countries often ignore basic fundamentals when they address development issues.

He dismisses those in Africa who currently espouse the view the continent can ignore land reform and manufacturing and develop through retail or financial services.

“It is just rubbish but unfortunately there are people out there saying this. It is being endorsed to some extent by the multilateral agencies and the World Bank support for micro finance,” he says.

“Everybody (in Africa) buys a stall and starts selling each other sweeties or washing powder. If these sweeties and washing powder have been made by Unilever, where is this getting you?”

He argues that people are wrong also to see India’s development in the same light as China’s since it has not been based on land reform but on an IT revolution that has tended to benefit a middle class elite and not the majority farmer population.

“It is the liberation of the posh Indian. It is a facetious thing to say but it is not far from the truth. If you have been to one of the Indian institutes of technology everything is fine and dandy. If you are a landless peasant in Bihar, you are still a landless peasant.”

Studwell, who speaks Chinese as well as Spanish and Italian, almost stumbled into a China connection.

After getting a first in modern history at Bristol University, he spent most of the 1980s as a freelance journalist for the Observer and the Evening Standard. His wife, who had studied Chinese at Cambridge, suddenly said she wanted to go and live in China.

The move led to him eventually becoming founder and editor of China Economic Quarterly, which is published by Dragonomics, the macroeconomics research firm of which he was also co-founder.

His big breakthrough came in 2007 with the publication of his second book, Asian Godfathers: Money and Power in Hong Kong and Southeast Asia, which was listed by both BusinessWeek and Wall Street Journal Asia as one of the top 10 business books of the year.

How Asia Works has had a similarly good reception, having been described by the Financial Times as an “important book” that should make people “rethink the glib equation of free-market policies with economic success”.

Studwell argues in the book that agricultural reform has been central to all the Asian economic success stories, starting with Japan in the 19th century.

“Japan led the way in the late 19th century with probably the most radical land reform that had been done anywhere in the world at that point,” he says.

He argues that the problem with countries like the Philippines is that they only pay lip service to the idea.

“The Philippines still has a comprehensive agriculture reform law in force. They just prolong the thing indefinitely. It has been running for 25 years. It is something you need to do in six months and get on with it,” he says.

Studwell insists another essential ingredient of economic success in Asia has been protecting nascent industries and not exposing them to international competition.

He insists both South Korea and China have been particularly successful at doing this.

“The analogy that works best is like the education process of a child and it should not be taken in a patronizing way,” he says.

“When you don’t understand technology, you don’t know about it, you have to learn. What Deng (Xiaoping) said when he came to power was that China had to accept it was a backward country. It took enormous political courage to say something like that.”

As for China, Studwell believes there is too much of a tendency to see the country’s progress over the past 30 years as the easy period of its development process with the next 30 years seen as more challenging.

“I wouldn’t say it was easy at all. It has been a huge achievement.”

Although he argues that China needs to make further serious reforms including the opening-up of its capital markets, he also says that the country is not at some urgent crossroads yet.

“My expectation is that growth of 7 to 8 percent can continue for another decade and with this sort of momentum, the middle class would be happy with rising incomes, although they will become increasingly frustrated by some of the institutional failures,” he says.

“China is not going to collapse if it doesn’t do much over the next 10 years, but if they don’t do much, the country’s potential will be greatly reduced.”

 

Future of Business

Here is a review of both How Asia Works and Acemoglu/Robinson’s Why Nations Fail (which for me has some good stuff in it but fails to recognise that there are distinct ‘stages’ to economic development) from the UK’s Future of Business blog.

………………….

Why emerging economies are starting to fail and what might prevent it.

chinese builders on bamboo scaffoldingThere’s increasing anxiety that many of the emerging economies, even in places like Asia, are failing to perform as consistently as we once thought they might. Even some of the BRICS countries – until recently seen as the stars of the emerging world – have recently been reprimanded for their shortcomings, while Argentina – no stranger to economic catastrophe, of course – has attracted the attention of the IMF over its statistics and expectations about Africa, which only a few months ago often seemed quite bullish, have cooled in certain places.

So what explains the variations in economic attainment between different parts of the region? Two new books shed insight on this issue.

The first, “How Asia Works: Success and Failure in the World’s Most Dynamic Region” (Profile Books) is a hefty tome – as befits a work by somebody who has researched the subject as deeply as author Joe Studwell. But his explanation about what underpins Asia’s success is really quite simple – as basic as one, two, three.  In effect, there are three fundamental interventions by governments that make a real difference in these regions.

  1. The most overlooked, says Studwell, is to maximize output from agriculture, which employs the vast majority of people in developing countries. Essentially larger-scale farming, this makes use of all available labour and creates the produce surpluses that in turn lead to demand for goods and services. As such, it proves more effective at getting countries on the development road than the drive towards mechanisation and other efficiencies associated with developed economies.
  2. Direct investment and entrepreneurs towards manufacturing on the grounds that this work is most suited to workers first moving away from agriculture. Allied to this is a government focus on export through subsidies designed to promote technological upgrading.
  3. There are financial interventions focusing capital on these two sectors. The idea is to keep money targeted as a development strategy aimed at producing the fastest possible technological learning and hence the promise of high future profits, says Studwell.

He accepts that such policies do not tend to find favour with either many businesses or consumers, both of which tend to think in a more short-term way. Perhaps more significantly, such an analysis pits Studwell – as he freely admits – against the received wisdom of the World Bank, the IMF and many western governments, which have for years argued that “laissez-faire” policies have been central to economic growth. Such institutions point to the success of Hong Kong and Singapore on the one hand and the speedy growth of Indonesia, Malaysia and Thailand on the other as evidence.

Are emerging economies failing?

But Studwell counters that the first two are more offshore centres than conventional countries, while the other three have not seen their development sustained. By contrast, Japan, South Korea, Taiwan and China have more or less followed the model set out above and so outperformed many neighboring countries. And confounded the so-called experts into the bargain.

This issue of how countries can continue to struggle in spite of huge amounts of attention from economists and other specialists and in the face of the much-vaunted “flattening” of the world through globalization is the subject of another recent book from Profile – “Why Nations Fail” by Daron Acemoglu and James A. Robinson.

Why-Nations-FailAs the authors acknowledge, there is much discussion of the roles played by climate and geography in poverty and prosperity. Certainly, it is true that there are a lot of poor countries in sub-Sahara Africa, for example. But then, as they point out, the climate and geography of North Korea are not that different from those in South Korea, while there is a great difference between the prosperity of Arizona and northern Mexico but not much difference in weather or terrain.

Another often-offered explanation for the discrepancy is ignorance – in the sense that certain countries do not know which policies to adopt. Quite apart from the sensitivities of such a suggestion, this is not grounded in experience, say Acemoglu and Robinson. In fact, they assert that there is no shortage of advice and the leaders of many countries “get it wrong not by mistake or ignorance but on purpose.” They go on to say that understanding this requires studying how decisions “actually get made, who gets to make them, and why those people decide to do what they do”. This, they add, is the study of politics and political processes – something that economics has traditionally ignored.

In his book Studwell describes how countries such as South Korea have subverted the current enthusiasm for free markets by talking the language while quietly getting on with the industrial strategies so opposed by Western governments. Never mind that these same governments have not always been adverse to a bit of intervention themselves. Indeed, there is a strong case to be made that Britain and the United States and other developed economies owe a lot of their strength to extensive use in the past of that most obvious of state interventions, protectionism.

Rich nations, poor policies

The Cambridge economist Ha-Joon Chang has pointed out that insisting that developing countries adopt large-scale trade liberalization as advocated by free-trade economists is akin to him forcing his young son into the labour market at an early age rather than educating him and otherwise nurturing him. As he writes in an article for the Independent newspaper (23 July 2007), based on his book “Bad Samaritans – Rich Nations, Poor Policies, and the Threat to the Developing World” (Random House), “industries in developing countries should be sheltered from superior foreign producers before they ‘grow up’. They need to be given protection, subsidies and other help while they master advanced technologies and build effective organizations”.

The phrase “effective organizations” is perhaps key to what is known as the infant industry argument. A central theme pursued by Acemoglu and Robinson is that nations fail because they are run by extractive political institutions. All over the world – from Africa to Asia and many places in between (the pre-Civil Rights southern United States is a classic case) – narrow elites have run things for their own benefit to the exclusion of the vast majority.

As recent events in the Middle East have shown, even holding elections – another activity much favoured by western developed countries – cannot necessarily break the cycle. Acemoglu and Robinson point out that a free media and developments in communications technology can help at the margins. But what really needs to happen is that a broad section of society mobilizes to create real political change. This means swapping extractive institutions for more inclusive ones, rather than – as often happens in revolutions – a simple change of control in the extractive institutions. In other words, creating prosperity can be as much about politics as economics.

A sense of history – something else said to be somewhat lacking in the modern study of economics – might also help. Just as some are calling for a relaxing of the austerity programmes in developed countries, partly on the grounds of questions over the intellectual underpinning for them, so it might be worth looking at whether there might be benefits for all in shifting away from the conviction that developing countries need to rush to adopt the free-trade policies so beloved of western policymakers. Certain economic issues are just too important to be left to economists.

Management Today

Here is a rather garbled review from Management Today, a British monthly. It is not particularly negative, just rather bad journalism. Mostly it claims that things are in How Asia Works that are not; it also misquotes the book.

If you have not read How Asia Works, there is no praise for Kim Il Sung, nor Chiang Kai-shek, in it.

The ‘heroic and contestable generalisation’ cited below is quoted as: ‘’Outside the offshore port financial havens of Hong Kong and Singapore, there are no economies in the world that have developed to the first rank through policies of free trade.’

In the actual book the text reads ‘offshore port financial havens such as Hong Kong and Singapore’, an important difference, and there is an endnote expanding on this point. More importantly, if the point is contestable, it ought to be possible to name a country other than an offshore haven that did develop through policies of free trade from the get-go. Why say something is contestable and not contest it?

Otherwise, I should point out that I have never fallen foul of ‘Singaporean bureaucracy’, I am not American, I don’t chew gum, and none of the text of How Asia Works has previously appeared as journalism.

Management Today

What if Kim Jong-un gets his hands on this?

Friday, 26 April 2013

Books: A study of how Asian nations can achieve rapid economic growth was a thought-provoking read for reviewer Howard Davies.

It is a safe bet that the average MT reader will digest few books this spring that praise Kim Il-sung.

Yet, for Joe Studwell, the Great Leader features in a group of far-sighted Asian decision-makers who understood how to kick-start growth in the region, along with General Park Chung-hee, the president of South Korea in the 1960s and 1970s, and the great Chinese leader Chiang Kai-shek, who also ruled Taiwan till his death in 1975.

They are the heroes of How Asia Works. On the dark side of the account are the faceless bureaucrats of the IMF and their American and British paymasters, President Marcos of the Philippines and his kleptocratic successors, and the Singaporeans. They are all excoriated for advocating or pursuing a faulty growth model.

Things have not gone so well for the Kim dynasty recently in economic terms. But Kim Il-sung is praised for distributing land to peasants in 1946 at a time when the Americans, and their South Korean stooges, were opposed to the idea.

To win hearts and minds after the war, they were obliged to follow suit, paving the way for a great leap forward in agricultural production.

The point Studwell wants to make is that agrarian reform, and especially the distribution of small plots of land to the peasantry, is the essential first of three key steps on the road of dynamic growth in Asia.

Smallholdings, he argues, are far more productive than large farms, even if more labour-intensive. They are by far the best model for countries with abundant labour. The alternatives of protecting the interests of large landowners, as was done in the Philippines, or of collectivisation, as practised by Mao’s China, are far less efficient.

The second step is the promotion of manufacturing, and for Studwell it is crucial how it is done. Successful countries prioritised exporters by protecting infant industries with tariffs and other systems of local preference, such as public purchasing.

These policies are at variance with the standard IMF toolkit, which emphasises competition and open goods and capital markets. Competition, on Studwell’s analysis, is important, but it must be carefully managed.

Prioritising exports makes sense, as if companies can succeed in export markets they must be producing good products (albeit perhaps uncompetitively early on).

It also makes sense to promote competing domestic firms, as long as the weaker brethren are ruthlessly culled. That happened in South Korea.

The third, closely linked, dish on this menu is the organisation of the finance sector to support the first two priorities. So there is a need for banks that are focused on financing small-scale agricultural development, and also on mechanisms to channel capital to large-scale manufacturing investments.

The argument is persuasive, but, like many polemicists, Studwell overdoes his criticism of anyone with a different view.

It also leads him into heroic and contestable generalisations: ‘Outside the offshore port financial havens of Hong Kong and Singapore, there are no economies in the world that have developed to the first rank through policies of free trade.’

He cannot type the letters IMF without a sneer, and has a well-developed dislike of Singapore, whose policies in ASEAN have, he maintains, been ‘developmentally deeply unhelpful’. I think he may have fallen foul of some part of Singaporean bureaucracy: perhaps like many Americans he has a chewing gum habit.

But the bigger problem with How Asia Works is that this strongly argued thesis is larded with anecdotes and war stories in which it is easy to get lost.

Studwell has followed the corporate histories of Japanese zaibatsu, Korean chaebol (types of conglomerates) and assorted Indonesian, Philippine and Thai tycoons for years from his perches at the Economist and the China Economic Quarterly.

Pages of upmarket journalism on these topics are shovelled into the book. There are also several ‘journeys’ in the region, which are supposed to illuminate the arguments, but they add more heat than light.

Studwell certainly offers a particular perspective on Asian development, which is a useful corrective to the Washington Consensus. At the same time, Studwell paints a vivid picture of business life in the region.

If a copy of the Korean edition finds its way across the demilitarised zone to Pyongyang and Kim Jong-un discovers steps two and three to complete grandpa’s vision, we may find we have yet another Asian Tiger in our midst.

Later:

Holy Moly. I assumed this guy was some under-paid hack trying to climb the greasy pole of small-time business journalism. Turns out he is Sir Howard Davies who was Director of the LSE when they were taking the Gadaffi buck. He is also a paid advisor to the Singaporean government, which might explain his concern that How Asia Works shows insufficient love and respect for that place. And he was Special Adviser to the British Chancellor of the Exchequer during one of the two most incompetent eras of financial management of my life, Nigel Lawson’s stoking of late 80s inflation (the other era being the pre-2008 one). And he was Executive Chairman of the Financial Services Authority from 1997 to 2003, the era when the FSA began to realise that the best approach to regulation was to let bankers and asset managers look after themselves, cos they are not the kind of people to create problems…

As Saul Bellow observed: there is nothing too rum to be true. I am going off for a run and a giggle.

 

5 May:

This wee story seems to have found its way into the Sunday Times Prufrock diary. Howard Davies has said he resigned from paid employment with the Singapore government in September last year (so that’s alright then) and he, or someone else, has swiftly amended his wikipedia entry.

FT review

Reap what you sow

David PillingReview by David Pilling

How Asia Works: Success and Failure in the World’s Most Dynamic Region, by Joe Studwell, Profile, RRP£14.99, 288 pages
A woman plants rice seedlings in a flooded paddy field, Taiwan

 

Why are the northeast Asian states of Japan, South Korea and Taiwan rich, while the southeast Asian ones of Thailand, the Philippines and Indonesia are relatively poor? Is the failure of the latter because of their geography or climate, or is it because their leaders chose wrong-headed policies?

One of the many virtues of the pithy, well-written and intellectually vigorous How Asia Works is that Joe Studwell does not equivocate. South-east Asian nations have ended up on what he calls the “rubbish heap of industrialisation” because they failed to learn the lessons of history. Instead of taking what he presents as relatively simple steps to technological advancement, leaders were captured by their ruling elites or took bad advice from international institutions such as the World Bank. The latter pushed neo-liberal policies – including no protection for fledgling industries – that Studwell considers wholly inappropriate for countries trying to get on the first rung of the developmental ladder. His recommendation to poor nations is to emulate Park Chung-hee, the South Korean strongman who oversaw what became known as the miracle on the Han river: “make public pronouncements about the importance of free markets, and then go quietly about your dirigiste business.”

The measures taken by Japan, then South Korea, Taiwan and, after 30 years of Maoist missteps, communist China were, argues Studwell, threefold. They involved land redistribution, the development of an export-oriented manufacturing policy, and the formation of a closely controlled finance system. The three important development insights, he argues, are that “a country’s agricultural potential is most quickly released when its farming is transformed into large-scale gardening supported by agricultural extension services; that the technological upgrading of manufacturing is the natural vehicle for swift economic transformation … and that finance must be harnessed to both these ends”. Only the small city-states of Hong Kong and Singapore have successfully taken a different path.

The most original part of the book deals with farming. Studwell, whose Asian Godfathers (2007) dissected the failures of crony capitalism, argues convincingly that successful Asian nations were built on radical land reform. Japan began parcelling out land after the Meiji Restoration of 1868, a policy continued after the war when the US occupation oversaw a seemingly un-American exercise in land confiscation and redistribution. South Korea and Taiwan followed suit. Large farms are often considered more efficient because they can be highly mechanised to produce higher yields per farmer or per unit of investment. In other words, they are more profitable. But in poor, labour-abundant countries, Studwell contends, that is not the point. The goal should be to use available labour to maximise yield per hectare, something achieved on smaller, intensively farmed plots.

Maximising yields serves several broader development goals: farmers earn money to spend on local manufactures; higher food production means the state doesn’t have to waste precious foreign exchange on imports; and farmers’ savings can be recycled through the banking system into industry. Both the indulgent leaders of the Philippines, who left vast haciendas in the hands of absentee landlords, and Maoist ideologues, who collectivised land into unproductive large-scale co-operatives, ignored the basic insight on what he calls “the triumph of gardening”.

The sections on industrial policy and finance are more familiar, though the ideas remain controversial among free-market economists who argue that governments can’t “pick winners”. Such economists, says Studwell, misunderstand what Japan, and later South Korea, actually did. The key was to force manufacturers, whether of steel or cars, to export and thus compete on international markets. Those that couldn’t hack it were killed off. Korea, for example, had three putative car champions in 1973 at a time when local auto sales were only 30,000 cars a year. In the early years, the market leader was the now-forgotten Shinjin. Only later did Hyundai emerge as the last car company standing. “The economics of development requires nurture, protection and competition,” he writes. The alternative to such hard-headed, nationally driven policies, he says contemptuously of the Philippines, is “an authentic, technology-less Third World state with poverty rates to match”.

Studwell’s thesis is bold, his arguments persuasive, and his style pugnacious. It adds up to a highly readable and important book that should make people rethink the glib equation of free-market policies with economic success. He also writes with disdain for those who would peddle the “fairy tale” that poor countries can become rich by skipping industrialisation. Of India’s attempt to build wealth through IT services, which employ only a few million people, he says: “Punditry that likens India’s economic development to that of the more northerly countries is fatuous.”

The implication of Studwell’s analysis is that talk of globally converging living standards is overdone. Those countries that do not begin with comprehensive land reform or bully their entrepreneurs into nation-building – as opposed to rent-seeking – are bound to fail. Even the relatively successful ones won’t get further than Malaysia, he says, a country whose botched efforts at industrialisation he likens to attending school but not paying much attention.

That leaves China, which in many ways has emulated the successful northeastern model, through post-1978 land reform and the creation of state champions financed through policy banks. China’s biggest companies, he argues, are closing in on international standards in heavy industry. But consumer businesses are not. As demographics worsen and as vested interests worry more about personal gain than national development goals, he wonders whether China will get stuck.

Studwell’s book is a warning to those who believe that developing countries in Asia, Latin America and now Africa have cracked the secret of growth and will inevitably catch up with rich ones. Only those nations with good policies will make it, he argues. And good policies are out of fashion.

David Pilling is the FT’s Asia editor

中文: FT 中文网的书评

 

Coming soon

This is the official site for the launch of How Asia Works, Joe Studwell’s latest book.

The official press date (which determines when reviews are published) is April 4.

As of March 20, I have been told that books have already appeared in bookshops in Hong Kong.

More news will follow shortly.

In the meantime, here is the UK, Commonwealth and Asia cover from Profile Books:

How Asia Works UK cover Jpeg

And here is the north American cover from Grove/Atlantic:

How Asia Works US cover Jpeg

Anyone wanting to buy 10+ signed (!) copies of the Profile edition can contact me directly. But since there are not yet any reviews, it is a bit of a risk. You only have my word that this book is the most interesting thing that I have written…