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.

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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.

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CNBC and Monocle Radio

Here is a brief interview on CNBC on 19 April about How Asia Works.

And here is a longer discussion on the UK’s Monocle Radio ‘Globalist’ programme on 19 April, beginning at the 16 minute mark.