Review: John Williamson

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.

Review of Joe Studwell, How Asia Works: Success and Failure in the World’s Most Dynamic Region

Posted on August 22, 2013by 

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.

References

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.)

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.

 

 

The Economist

Boom and bust in Asia

Going for growth

Explaining Asia’s economic success is as easy as one, two, three

How Asia Works: Success and Failure in the World’s Most Dynamic Region. By Joe Studwell. Grove; 366 pages; $27. Profile; £14.99. Buy fromAmazon.comAmazon.co.uk

IN 1989 John Williamson, a British economist in Washington, DC, listed ten economic policies that enjoyed the backing of the IMF, the World Bank and many of their clients in Latin America. Whatever the merits of these policies, the “Washington consensus”, as he called it, proved badly named. Its prescriptions—stabilise, privatise and liberalise—have caused no end of controversy. Almost 25 years later, they get another drubbing in Joe Studwell’s provocative new book, “How Asia Works”.

Mr Studwell has no such inhibitions. Asia’s post-war miracle economies emerged, he argues, by following a recipe with just three ingredients: land reform; export-led, state-backed manufacturing; and financial repression.

The process began with the ousting of the landlords. Feudal estates were broken up and divided among small farmers, who also received cheap credit and valuable advice. Smallholder farming requires “grotesque” amounts of labour, Mr Studwell concedes. But that is a good thing, because countries as poor as Taiwan or South Korea were in the 1950s have labour—and only labour—in abundance.

Tightly planted, closely tended farms coax the best yields out of each parcel of land. This rural bounty then creates room for the next step: export-led manufacturing. The state, Mr Studwell argues, must nurse manufacturers through their infancy, helping them to learn how to stand on their own feet. This nurture should, however, be combined with discipline: the state must oblige firms to export. Foreign sales provide an external test of their progress, allowing the state to “cull losers”, even if it cannot pick winners.

The final secret of Asian success, Mr Studwell argues, was a cowed financial system. Captive savers, penned in by capital controls, were ripped off by the banks, which paid low interest rates. This allowed the banks to subsidise industrial firms through their years of education.

Mr Studwell’s recipe is not original: the formula dates back at least 140 years, he shows, to Japan under the Meiji emperor. Only the first step, smallholder farming, would be backed by this newspaper. But “How Asia Works” is a striking and enlightening book, which reflects the author’s unusual career. Having worked as an analyst (for the Economist Intelligence Unit, our sister company) and a consultant, he wrote books on China’s seduction of foreign businessmen and Asia’s crony capitalists. Then he went back to school, embarking on a doctorate at Cambridge, home to a number of unorthodox economists.

The result is a lively mix of scholarship, reporting and polemic. Its heart is a historical account of how smallholder farming, export-led manufacturing and financial repression took root in Asia’s miracle economies, such as Japan and Taiwan, but failed to bed down in the Philippines and Indonesia. This is punctuated by travelogues, describing Asia’s landscape of economic triumph and tribulation, from the kitsch houses of rice farmers in Japan’s Niigata prefecture, who have great agricultural know-how but little architectural taste, to the unfinished towers of Jakarta’s Bank Alley, their growth stunted by the Asian financial crisis.

The most impressive part of the book is the 68 pages of footnotes in which Mr Studwell dips into his trove of reading and reporting. He includes observations on Javanese chickens, the sex life of a Korean chaebol-founder, the constitutional rules that Meiji-era Japan copied from Prussia and his exchanges with Mahathir Mohamad, Malaysia’s former strongman.

In these notes, Mr Studwell wanders into the weeds of development (quite literally: Japanese rice is weeded nine times a year, he writes). But he never gets lost. The three-step doctrine he advocates is even shorter than the ten-step Washington consensus he opposes. But it will no doubt prove similarly controversial.

Asian Review of Books

An Interview with Joe Studwell, author of How Asia Works

by Caitlin Dwyer

How Asia Works; Success and Failure in the World’s Most Dynamic Region

Joe Studwell

Profile Books Ltd, March 2013

 

3 July 2013 — Joe Studwell has written about Asia and economics for a variety of publications. Founding editor of China Economic Quarterly, he is also the author of three books: The China Dream, Asian Godfathers, and his most recent, How Asia Works.

How Asia Works seeks to debunk the classical rationale for why some Asian countries have flourished economically and others not. Three factors—agriculture, manufacturing, and finance—need supportive government policy to encourage development, Studwell posits. Using examples from Malaysia, Korea, Japan, China, and the Philippines, Studwell shows that the economics of developing nations are necessarily different from developed, free-market countries. Studwell calls his model “the economics of learning”, noting that until nations have achieved a certain technological self-sufficiency, they cannot possibly succeed with a neo-classical economic model. An extract from the book is available here.

Asian Review of Books spoke with Studwell about the economics of learning and how Asia offers a new model for development.

 

ARB: How much research was involved in writing this? You’ve got very extensive footnotes—can you talk about where these ideas came from and how you developed them?

JS: I lived for ten years in China, and in that time I spent some time working in Southeast Asia as well. I arrived in China not speaking any Chinese. Most of the people who spend a long time in China become China people, but gradually I evolved into a person who was more interested in the comparative development of the major economies in East Asia. I focused on the major economies because it allows you to take the basket-case countries out of the equation and focus down.

In 2007-8, I did a Masters in Economics [Development Economics] and I started reading more into the economic literature, which is pretty strong on Japan, Korea, and Taiwan in particular. In the era of the Cold War, the U.S. put a lot of resources behind stabilizing and supporting those economies. They were written about in the way that China’s being written about now. There’s actually a much stronger literature on Japan, Korea, and Taiwan in terms of what happened than there is on any other country in the region, including China. There hasn’t really been a developmental classic about China yet. But if you take your knowledge of Southeast Asia and your access there, put that together with what has already been done about China, and bring the whole thing together, maybe that’s a useful project.

I also gave some thought to what the shortcomings are of the neo-classical view of economics that has dominated the world in an overwhelming way since the 1970s and 1980s.

ARB: It was clear in the book that you consider your theory is a deviation from the standard economic model. What can economists and development experts learn from this book? What is the standard economic view not seeing when it looks at Asia?

JS: The main message is about there being two kinds of economics. That really is a response to a question that was posed by Charles Kindleberger, who’s a very good economist, very historically literate. He posed the question: is it really possible that there is only one kind of economics?

The answer that I give in this book is that there are at least two. It has to do with objectives. Developmental objectives are about learning. It’s a learning process. Alexander Hamilton, the American treasury secretary back in the late 18th century, came up with the term “infant industry”. This theme of learning and likening it to the experience of going to school is one that people have often reached for as a way to explain what happens. Poor countries have the people, but they lack know-how and technology. When you start to think of learning as the objective, of course, that’s very different to when you’re thinking about short-term profit as the objective, or even efficiency.

What do we really mean by these terms? Well, efficiency could be short-term profitability. That isn’t necessarily the efficiency you’re looking for during a development period. The efficiency you’re looking for is how can we learn, or, in another respect, how can you go around the deficiencies of your human capital? Because people take such a long time to change. The economics of learning and development is largely about finding ways to go around human capital constraints.

You do that in agriculture if you use householdfarming, and turn it into gardening—because you’re just throwing the labor at the problem without a major restructuring. More than that, you’re employing all your human resources and getting something out of all your people. You do that in manufacturing by helping low-skilled people to build their knowledge base.

ARB: India is noticeably missing from this book, except for a mention that they have delved into IT and service-based industry rather than following the agriculture/manufacturing/finance model. Can you talk about why you didn’t include India here and how it differs?

JS: The media suggests sometimes that India has a different model and it’s based around services. I’m not sure that’s fair. I think it’s just that they don’t have a proper strategy. This is just the place they’ve ended up.

They have a very elitist education system left to them by the British. They have the Indian Institutes of Technology, and they graduate very sophisticated engineers, who work in IT and speak English. They work in software businesses, but in software, the capacity to absorb your human capital isn’t great. You can’t even write a single line of code until you’ve learned software code, whereas if you’re absorbing people into a manufacturing economy, you can put people in a factory and they can start to add a tiny bit of value from day one, because they’re working with and through machines.

This helps to explain why every developed country, with the exception of anomalous offshore financial centers (like Hong Kong and Singapore), everybody’s gone through this manufacturing experience. You can look at agricultural super-specialists like Australia and New Zealand, but even they have some manufacturing related to the agricultural sector.

ARB: Myanmar is kind of a blank slate at the moment. What’s going to happen there? Can they follow the model you’ve laid out?

JS: I don’t know what will happen in Myanmar, other than to say that the countries that develop are the ones that take control of their own destiny. If the government there says to the World Bank and the IMF, What’s on your shopping list?, they are going to end up with micro-finance and all kinds of at best superfluous and at worst damaging policy distractions. But if they do what successful states have done, which is to look at the world and see what other people have done, figure it out for themselves, and adjust it to their national condition, they’ll be fine.

The DPRK [Democratic People’s Republic of Korea] is easier to talk about. They have collectivized agriculture, so in the last decade or so they use a points system to differentiate people who work harder. They’ve brought the points-reward down to a very low level, a sub-group level, so they’re pretty close to rewarding the family as a unit. They could move very swiftly to household agriculture. If they were able to put the agronomic support in place around that, to make sure that farmers get the upside of growing more, then I could see, bizarrely, North Korea becoming the last fast-growing success story. It sounds extraordinary, but I can see that it’s possible they could turn on a dime.

ARB: In the book Japan emerges as a major success story developmentally, but one that failed to make an adjustment at some point and has stagnated as a result. Can you talk about that pivot point, where economies need to make a shift?

JS: This is most poorly understood part of the debate, including by me. Things are so misrepresented that one struggles just to communicate the idea of the economics of learning or development as distinct from the economics of efficiency that come later. Between these two things there is a relationship. The nature of that relationship is to do with the transition and the building of institutions, and it’s a very difficult thing to understand.

Take a legal system as an example. There’s a whole stream of literature that says property rights and a legal system are critical to economic development. Well, look at China. Does China have a functioning legal system? No. Has China developed? Yes, it has. But can China continue indefinitely to develop without a functioning legal system? I think not. Look at Italy!

The counter-example is South Korea. They got caught up in the Asian financial crisis largely through bond market interaction. Then the IMF went in, changed company law, changed the financial system, a bunch of stuff. Today, Korea appears to have the upside of developmental economics. It has its Samsung and Hyundai, very successful companies. Household indebtedness is still quite high, but maybe Korea gives us a window onto the relationship between these two kinds of economics and how one transitions from one to the other.

ARB: Also in China, manufacturing is big business, but industry expansion is causing serious environmental issues with economic and also social costs. At some point are these costs going to outweigh the benefits? How does the environment play into your model?

JS: In Japan and South Korea, they created one hell of a lot of pollution and then they cleaned it up. Why did they clean it up? Public pressure. By the late 60s in Japan people were getting very upset, and in Korea by the 80s. So government moved to clean that up.

In China we can see the beginnings of that as well. Such a high proportion of incidents of civil unrest are attributable in one way or another to poisonous rivers and air. In any situation you have to find the positive. China’s in a position to do that, because the world has been working on cleaner energy technologies and the size of the Chinese market means that they can push forward the development of those technologies—essentially, using the scale of the domestic market. They are incentivised to do it because they don’t have a lot of mineral resources—they have a lot of coal, but they can see down the road… [Environmental protection] won’t happen as fast as many people would like, but I suspect we are at the apex of dirtiness at this point.

 

Caitin Dwyer is a freelance writer. Her work has appeared in print and online throughout Asia and North America. Caitlin spent three years working and studying in China and has her Master of Journalism degree from the University of Hong Kong. She now lives in Oregon.

Irish Times

Elites behaving badly and other theories: why only some Asian states are ‘Tigers’

A new book offers some plausible explanations on the patchy rate of economic success across Asia

Clifford Coonan

Monday 1 July 2013

 

There’s a 500kg gorilla in the corner of the room when discussing Asia’s remarkable rise over the past few decades: why has the success has been so uneven?

JapanSouth Korea and Taiwan in the northeast have become fabulously wealthy while the Southeast Asian states, such as Thailand, the Philippines and Indonesia have advanced, but at a far less impressive pace.

You hear some odd theories – the climate is too warm near the equator for these economies to thrive – which I’m sure is news to Hong Kong’s tycoons and their colleagues across the border in Guangdong.

Then there are cultural arguments put forward, that the Chinese or the Japanese are intrinsically hardworking. (I know plenty of lazy Chinese people, for the record, just like there are many lazy Germans.)

In How Asia WorksJoe Studwell goes a long way to cut through the cliches about Asian growth and explain why things have happened at a varied pace. If this is indeed to be the Asian Century, this engaging, thought-provoking book is required reading for anyone serious about understanding the structural dynamics of the continent.

Studwell says the blame is largely due to a lack of political leadership and a tendency by ruling elites to behave, well, badly. And for countries to do well, they have to be prepared to introduce land reform.
Success and failure
“No one had put this together before, a book covering the nine major economies, explaining the differences between the ones that succeeded and the ones that failed, and how in the end it came down to policies devised and implemented by human beings rather than anything else,” says Studwell in an interview.

He describes as “folly” the ways of the iconic leaders in the region in the past few decades, such as Mao in China, Sukarno in Indonesia and Mahathir in Malaysia, constantly railing against western hegemony and sticking “your rhetorical finger in the eye of its leader, the United States”.

“Far better to take a page out of [Korean leader] Park Chung-hee or contemporary China’s book: make public pronouncements about the importance of free markets, and then go quietly about your dirigiste business,” he writes.

One of the striking elements working in the region is the way in which countries like the Philippines, with its resources, its educated, often English-speaking workforce and its central geographical position have done much worse than countries such as Korea, which was devastated by war in living memory and has little in the way of natural resources to lift it, but has gone on to become one of the world’s richest economies.

“In east Asia the countries with the best endowments have pretty much done the worst. That’s why it’s such a fantastic laboratory for understanding economic development. People who had it all have thrown it all away, and the people who had less have gotten themselves organised and have done well,” said Studwell, who has written about the early days of the China boom in The China Dream and looked at tycoons in the region in Asian Godfathers.

“The main thing that prevents you from seeing that clearly in east Asia is the racial overlay. The rubbish you hear – largely generated by indigenous people in the region – about Chinese culture or Japanese culture, or Korean hard work versus . . . [people] down near the equator. It’s all just rubbish but it’s amazing how many people believe that stuff,” says Studwell.

“It’s been my observation at an entrepreneurial level as well. I’d never rate entrepreneurs that I met in China over the years higher than, say, entrepreneurs in places like Malaysia. They are not producing better businessmen,” he says.
Politics
Chinese business communities thrive in many areas of Southeast Asia, but this is down to political structures in the region.

“You find societies that settled into a feudal equilibrium. If you command political power, you command all power, and you can allow other people to come in and play the economic role. This is no different to the way feudal monarchs in western Europein the medieval and early modern period made use of Jewish financiers and it’s no different to the way Southeast Asian rulers made use of Persian and Arab traders before the Chinese were there,” he said.

He does not see much chance that the situation in Southeast Asia will change anytime soon.

There is no Konrad Adenauer equivalent to bring the countries in the region together as he did with the European Union core states in the 1950s.

“They found their equilibrium and it was one where the elites live pretty well. There just isn’t the political leadership. I don’t see a single politician down there who is going to change the trajectory of the region. Southeast Asia is the Latin America of east Asia, basically, and that is their political choice . . . they are relative economic failures though they have made significant economic advances since the end of the colonial period.”

Many of the Southeast Asian economies are former British colonies and Studwell talks of how the British empire was successful at marshalling structures in the region, and the long-term impact has been disastrous on many countries.

“The British empire in particular because it was so efficiently and subtly run, working with small numbers of people and working through local elites, it was extremely good at reinforcing and shoring up these kind of economic operating systems. This is why the colonial influence was so utterly perfidious.

“The British don’t come in and put a knife in your back, they finish you off with a warm embrace. They were fantastic at running systems on that basis which in developmental terms have proven to be enormously damaging.

“Malaysia doesn’t get independence until 1957 when the Cambridge University-educated leader of the country agrees to allow the British plantation and mining interests to remain in place and it was only the race riots in the 1960s which changed that,” he says.

“The same thing in the Philippines – independence in 1946 but the Americans locked them into various trade agreements which kept the ruling elites in a comfortable position.

“No country has ever acted generously having become rich, with the exception of theUnited States for a brief period after the second World War, in very particular circumstances.”
History of selfishness
He cites the remark by 19th century German economist Friedrich List about kicking away the ladder once you get to the top.

“That’s very much what Britain did. China fits much more into the British model. I don’t see them having a positive developmental impact in places like Africa, or inNorth Korea. The Chinese go in and trade for their own benefits. All that ‘pragmatic’ really means is that countries that climb the ladder of development have a very long history of being revoltingly selfish,” says Studwell.

So much is a question of approach. It’s not about prudence or stability, at least not necessarily.

“Macroeconomic stability was not a clear determinant of developmental success in northeast Asia, and nor was it in Southeast Asia, where there was also notable variation – for instance, between less ‘prudent’ Indonesia and more prudent Thailand, both of which ended up on the industrialisation rubbish heap,” he writes.

“Equally, there is the example of Ferdinand Marcos, who borrowed and printed lots of money like Park Chung-hee and Chun Doo-hwan in Korea, but blew his cash like a drunk in a casino.

“I think China will be the last fast growth story that we will see. You can’t have that kind of very fast development without land reform and I don’t think that kind of land reform is going to occur in Southeast Asia because the politicians can’t get it together.”

For those looking for a punt on a future growth story, Studwell recommends North Korea.

“The place most likely to have a 10 per cent growth story is North Korea. The reason would be is that Korean agriculture is collectivised but they have been moving tentatively towards household farming essentially and it wouldn’t require much of a push for North Korea to significantly increase its output and push to industrialisation and go for the east Asian miracle. It has the political infrastructure. It will of course require a political shift.”
How Asia Works: Success and Failure in the World’s Most Dynamic Region by Joe Studwell, Profile Books, £14.99

Wall Street Journal

Here is the Wall Street Journal we know and love. Most obvious observation is that the reviewer has not read the back end of the book. Otherwise he wouldn’t have set me up as an ‘attacker’ of neo-classical economics in the way he does.

His best effort at a substantive riposte is in this par:

<Mr. Studwell also underestimates the capital formation undone by land reforms. He dutifully reports that, for instance, under Japanese rule before 1945 Taiwan had enjoyed significant investment in yield-boosting technologies in the countryside. But he seems strangely uncurious about why earlier land regimes around the region had experienced deteriorating levels of investment in agriculture, a line of inquiry that might have suggested less drastic alternatives to the policies the tigers ended up following. Onerous agricultural taxes and murky protections of property rights were often to blame for stunted rural capital accumulation.>

But there is nothing really there. Just a bit of fantasy about low taxes and property rights being the solution to any given problem. (A bit like the less thoughtful Republican view of the current US malaise.)

I guess Rupert Murdoch will be happy enough. And I’m not much fussed.

 

Don’t Think Of A Tiger

by Joseph Sternberg

 

Readers of a certain age will remember when Japan was going to eat the world’s lunch. These days, we gird ourselves for a “Chinese century,” while awarding an honorable mention to those scrappy South Koreans every time we buy a Samsung phone or a Hyundai. The successes of these so-called tiger economies, which also include Taiwan, fascinate economists and policy makers.

Joe Studwell attempts a concise explanation of the Asian miracle in “How Asia Works,” and his book comes across as a how-to of sorts: Make Your Own Economic Miracle in Just Three Steps. First, reform agricultural land ownership to encourage small-plot, high-yield farming. Next, implement industrial policies to nurture infant industries and impose discipline on exporters to up their competitive games by requiring companies to export to foreign markets where they will face more intense competition. Finally, deploy the financial system in support of items one and two, steering capital to exporters.

Japan charted the course that others followed. As far back as the 1860s, the government pensioned off the class of powerful landlords known as daimyo in order to redistribute their land to smallholders who had previously been tenant farmers. South Korea followed suit in the late 1940s and ’50s, as did Taiwan (with an assist from the Americans). At least those reforms were relatively peaceful, and some attempt was made to compensate displaced landlords. China achieved the same result but with greater violence during the first years of communist rule. This actually boosted productivity dramatically in the early 1950s, until Mao Zedong succumbed to the siren song of collectivization less than a decade later.

Then came manufacturing. Mr. Studwell notes that the goal across the tiger economies was to protect national champions at home while forcing them to be competitive abroad. Exports provided a source of capital and exposed companies to cutting-edge technologies in developed markets instead of allowing them to retreat into uncompetitive, high-profit domestic markets. In Japan and Korea a system of incentives rewarded companies for export success in competitive global markets, for instance by making capital available only to those companies that boosted market share abroad. Yet in other countries, such as Malaysia, protectionism simply allowed companies to profit at home without ever making much of a push abroad.

image

How Asia Works

By Joe Studwell
(Grove, 366 pages, $27)

This is where Mr. Studwell’s third prong comes in, since the financial system was often the preferred tool for implementing such rewards. Companies who notched export successes would enjoy preferential access to capital; others wouldn’t. By suppressing interest rates paid to savers to enable lower lending rates for manufacturers (a technique known as financial repression), Asian governments could redirect capital toward industry and, in the process, reward certain kinds of industry. Chinese banks do the same today.

Mr. Studwell, whose earlier works include “Asian Godfathers,” on the continent’s new tycoons, here delivers a readable survey of the growth policies pursued in the tiger economies and also offers some helpful analysis of why similar strategies failed in Southeast Asia. He notes, correctly, that leaders there never had sufficient political determination to impose such draconian policies. If he had stopped there, this would be a serviceable if rather incomplete book. But his ambition is to undermine “neo-classical ‘efficiency’ economics” by demonstrating that the more illiberal policies of the tigers were superior in achieving development. This is a serious misreading of the Asian story.

For one, the policies Mr. Studwell commends have been far costlier than he admits. He glosses over the hundreds of thousands or even millions of Chinese who died as a result of pre-Great Leap Forward land redistribution. Mr. Studwell also underestimates the capital formation undone by land reforms. He dutifully reports that, for instance, under Japanese rule before 1945 Taiwan had enjoyed significant investment in yield-boosting technologies in the countryside. But he seems strangely uncurious about why earlier land regimes around the region had experienced deteriorating levels of investment in agriculture, a line of inquiry that might have suggested less drastic alternatives to the policies the tigers ended up following. Onerous agricultural taxes and murky protections of property rights were often to blame for stunted rural capital accumulation.

Likewise, he plays down the costs of tiger-style industrial and financial reforms. Here, the basic principle was simpler than Mr. Studwell makes it out to be: force people to pay more for things. The combination of import-protectionism and financial repression engineered a sustained wealth transfer from households to exporting companies, in order to facilitate investment. This undeniably leads to rapid GDP growth, at least for a spell. But is it fair to tell poor citizens of low-income countries to sacrifice their preferred level of consumption today for some “optimal” level of growth tomorrow? Might it be better to open up to imports, thereby allowing citizens to benefit from the resulting competition?

Asians are answering these questions themselves. In South Korea, “economic democratization” is now a buzzword that at its best means removing industrial supports for exporters in favor of creating a more competitive domestic market. In Japan, many of Shinzo Abe’s reforms—such as joining the Trans-Pacific Partnership trade talks to reduce barriers to imports—would lower consumer prices and foster competition at home. Chinese leaders say they seek the same, although their willpower is in doubt.

Meanwhile, countries like Indonesia and the Philippines are belatedly experiencing growth spurts fueled in large part by domestic consumption, and India continues a piecemeal liberalization with similar effects. Free trade played a key role in Asia’s development story. But as Mr. Studwell shows so clearly, true liberalism has never been attempted by any nation in the region. Before concluding that the tiger way, for all its costs, is the best path for Asia, it might be worth awaiting the results of an experiment in a more liberal alternative that is only now beginning.

Mr. Sternberg is an editorial-page writer with The Wall Street Journal Asia, where he edits the Business Asia column.