The News (Pakistan)

Asian tigers and paper tigers
Friday, November 01, 2013
The writer is special adviser to the Jang Group/Geo and a former envoy to the US and the UK.
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An important new book explains why some countries have become economic tigers in East Asia while others are relative failures or paper tigers. ‘How Asia Works’ by Joe Studwell is a bold and insightful work that is essential reading for anyone interested in understanding the ingredients for economic success in this continent.

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).

Twitter: @LodhiMaleeha

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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.

The Lowy Institute

This is an ongoing Q&A thing in which I will respond to questions when I can, with whatever time I can spare… The Lowy Institute, which asked me to do this, is an Australian think tank.

Interview: Author of ‘How Asia Works’

by Sam Roggeveen  – 11 July 2013 12:34PM

Last month Marginal Revolution blogger Tyler Cowen described Joe Studwell’s How Asia Works: Success and Failure in the World’s Most Dynamic Region as ‘perhaps my favourite economics book of the year‘.

I decided to see for myself what the fuss was about, and I must say I have rarely had my economic preconceptions so thoroughly tested. This book challenges a lot of free market notions I had taken for granted, and as this interview progresses, I will try to tease out some of those ideas with Studwell. For now, here’s my opening scene-setter question and Joe Studwell’s answer.

SR: How Asia Works is a bold assault on what we might call the neo-liberal consensus about what makes economies grow. You argue that protectionism and industry policy are actually important policy tools for countries at an early stage of development, and that Asian governments have adopted this model with varying degrees of success.

This is an almost heretical thought in the Western economic debate, and I suspect a lot of readers of this site would dismiss it out of hand. So what are some of the key facets of Asia’s economic development you would point to that prove your case?

JS: The distinction I make is between the ‘economics of learning’ and ‘the economics of efficiency’. Poor countries lack technological capacity and have low quality human capital. This is why they need to target investible funds at a learning process and such a learning process requires nurturing and protection as well as competition.

It was ever thus. Anyone who disagrees is simply historically ignorant. The history of British, American, German, and indeed Australian development is the history of government policies that nurtured globally competitive firms, whether those policies were Britain’s Navigation Acts, the average 40% tariff applied in the US in the 19th century, German export subsidies of the late 19th and early 20th centuries, or Australia’s own long history of tariff protection and industry subsidy.

Those ‘infant industry’ policies allow learning to take place and produce more competitive firms, especially when subsidy is predicated on exports, or what I call ‘export discipline’, as has very much been the case in the fastest growth stories in Japan, ROK, Taiwan and now China. The capacity to export into the global market tells governments of development countries if they are getting an acceptable return on their subsidies to domestic firms.

However, the economics of learning only get you so far. There comes a point when an economy is close to the global technological frontier and it is much harder, if not impossible, to run cost-effective industrial policy. It is then necessary to enter the world of Adam Smith or (to put things in Australian terms) Colin Clark. It is no surprise that Smith produced his ideas in the late 18th century, when Britain was close to global technological dominance but the British consumer was getting screwed every day by oligopolies and monopolies set up in the infant industry era. Britain needed to be more efficient, more focused on short-run profit, more fair to the consumer. And that was what gradually happened in the 19th century.

Colin Clark made similar points in Australia in the early 1960s and was fortunate that Labor Party politicians were receptive to his arguments about the need for deregulation so that Australia could continue to progress on its development path (I was going to say to the promised land of Kath and Kim, but I’ll leave that out).

Anyhow, the basic point is that it is a stages game, and there are different solutions for different stages of development. This, of course, is horribly problematic for modern economics because everything is supposed to fit in the same spreadsheet — there are no stages. And behind this problem is the other one that so many contemporary economists are really just (drug-less) hippies, whose every statement begins with ‘Imagine!’: ‘Imagine that there are large numbers of participants in every transaction, imagine that information is perfectly dispersed…Dude, you’d get a perfect price function. Pass the dooby!’

So I have a number of issues with the economics profession as it is presently constructed. But economics offers us powerful analytical tools and there are also some very smart, historically literate economists. In the book I quote Charles Kindleberger’s question about whether there really can be only one kind of economics. My answer, as stated above, is that, at a minimum, there is an economics of development and an economics of efficiency and what we really need to understand is where and how they meet in the middle. (But please don’t ask for the answer to this question because I don’t know and it is the subject of my next book.)

Interview: ‘How Asia Works’ part II

by Sam Roggeveen  – 12 July 2013 11:59AM

Below is the second part of my exchange with Joe Studwell, whose book, as I said in the intro to part 1, has tested some assumptions about economic development I’ve been carrying around with me for a long time.

SR: Asia is home to some of the great cautionary tales of industry policy: Malaysia’s national car brand, Proton, and Indonesia’s aircraft manufacturer IPTN come to mind. So what is it that distinguishes those failed efforts from success stories such as Hyundai?

And how do you get around the argument that, even where state-backed companies succeed in the long term, they still represent a misallocation of resources and an attempt to pick winners? Why wouldn’t these governments have been better off creating favourable tax and regulatory conditions for industry to flourish, rather than backing specific industries themselves?

JS: This is a number of different questions.

First, what makes industrial policy cost-effective? The answer to this in east Asia has been what I term ‘export discipline’, or the conditioning of subsidy (in all its myriad forms) on a significant level of exports at the firm level. In essence, export discipline solves an information problem. If you give subsidy to entrepreneurs they are amazingly good at taking the money and pretending to do what you want in terms of developing globally competitive firms that carry an economy forward, but not actually doing so.

Most obviously they tend to concentrate on services, which employ and ‘upgrade’ relatively few people, avoid adding value through manufacturing by importing components of manufactured goods or even finished manufactured goods, and they tend to limit the competition they face by sticking to the domestic market. They then take the cash flows from subsidised domestic activity and invest it on a portfolio basis in more advanced and competitive economies.

This is the story of what my last book dubbed ‘godfathers’ — the oligarchs who dominate economies from south-east Asia, to Russia, to Latin America (KS Li, Ambramovich, Carlos Slim, if you want three examples). In essence these entrepreneurs outplay the state in its efforts to foster economic development based on technological learning and broad-based improvement of human capital.

When you have export discipline, the game changes. First, export discipline is almost inevitably bound up with a focus on manufacturing because manufactures are way more freely traded in the world than services (services are only 19% of world trade and have been stuck at that level for a quarter century). So entrepreneurs manufacture because manufactures are readily exportable.

Then comes the information bit. The capacity to export tells the state whether firms it subsidises and otherwise supports are globally competitive. Domestic financial institutions benefit from the same information feedback. Of course you can sell at a loss for a while, but not long if you have to export, say, 30% of your output, because it will bankrupt your firm. As a result, the capacity of the entrepreneur to deceive the state is undermined. He or she faces the horrible reality that in order to feed their insatiable desire for wealth and recognition (those ‘animal spirits’) they have to knuckle down, actually make stuff, and sell it in the viciously competitive world market.

Hyundai is a good example because founder Chung Ju Yung was himself a godfather, bribing his way to construction contracts under Syngman Rhee in the 1950s. Then came Park Chung Hee’s coup in May 1961. Park brought in so much export discipline that firms had to file their export returns to the government on a monthly basis. Suddenly Chung became a big fan of manufacturing for export and had to get rich that way.

In Southeast Asia, industrialisation programs like Proton and IPTN did not face export discipline. As a result the state’s return on industrial policy was very poor. Was it zero, however? I think not. There has been some industrial learning in Malaysia and, to a lesser extent, in Indonesia. So I doubt they would have been better off without Mahathir or Habibie, the main people who drove those programs. However, the performance was lousy by the standards of Japan, ROK, Taiwan and China and I talk in a lot more detail in the book about exactly why. After the Asian financial crisis, when the IMF went in to Indonesia and dismantled/emasculated its industrialisation strategy, it made things worse. If you look at IPTN, on which the Indonesians spent billions training engineers, designers and so on, many of the key people went off in the late 90s and 2000s to work in places like the US or Germany. Indonesia’s learning-oriented subsidy ended up going to the world’s richest nations (that’s why we have black humour).

On the inevitability of misallocation of resources in industrial policy, the answer is ‘yes’. There is a lot of waste in industrial policy. But the waste is at an acceptable level when you are far behind the technological frontier because you can see where you need to go. Steel, chemicals, plastics, construction materials, etc — you have to learn to make this stuff just like everybody before you. You have to fill your society with tacit, value-adding knowledge. Critically, manufacturing is the way to learn because people learn on the job, in factories, generating the capital to pay for their education. It is affordable in the way that more schooling for everybody would not be because school is just a sunk cost until you leave and get a job. (Indians — don’t get me started — only think about learning through investment in formal education and have no real manufacturing strategy, which is why they are relatively so much poorer than the Chinese.)

On ‘picking winners’, this is a term of abuse coined by neo-liberal economists in Europe in the 1970s (I have never managed to identify first use of the term) when they were beginning to criticise the industrial policies that made a country like Italy grow 5-6% for a quarter century after World War II. It is a term of abuse because, as far as I can see, successful industrial policy has never been about picking winners. It is about culling losers, which is very different. Culling losers means cutting off state support to subsidised firms that are failing to make the grade, judged by profit & loss and export performance. There is a period of culling losers going on in China right now, so you can watch live!

On ‘favourable tax and regulatory environments’, development requires these, but the objective remains that of learning, as I have said, not efficiency expressed in terms of short-run returns. That comes later. I think that perhaps the answer you want to this question is the following statement: if you can show me a country, other than anomalous offshore financial centres/trading entrepots, which has developed to the first rank through policies of free trade from the get-go, then tell me which country it is. (Certainly not yours or mine…)

Reading through the first part of this answer, I realise that I simplified and exaggerated considerably to make a point. Perhaps too much so. But people need to read the book!

Can we talk about the rugby now?

 

Below is the third part of my exchange with Joe Studwell, author of How Asia Works. Here’s part 1and part 2.

SR: In your previous answer you took a swipe at the IMF for its behaviour towards Indonesia during the currency crisis, so I wonder if you could say some more about the role of international institutions.

I notice that Michael Pettis, in his Amazon review of your book, says the merits of industry policy are so obvious as to be not worth debating. The fact it is debated ‘suggests to me how unreal academic economics has become and how divorced from historical understanding.’

But it’s not just academic economics, clearly. It’s also the policy advisers in the IMF and World Bank (and perhaps even the NGOs?) who push a pure free market line. How do you account for the fact that these institutions seemingly continue to ignore the evidence of successful industry policy? And how have Asian governments dealt with advice from the IMF, World Bank and others? Do they just ignore it?

JS: The story of the international institutions is a complex one, so I’d like to try to reflect that complexity. I would also like to say that I am not an expert in the history of these institutions and mostly know them from the work I have seen them doing in east Asia.

The first point is to consider the origins of the IMF, the institution that is best known for going in to countries after financial crises occur and agreeing (forcing?) and overseeing reform ‘programs’. The IMF was created at the end of the Second World War and gained its early crisis experience in the 1970s in already quite mature western European countries after the Bretton Woods fixed exchange rate regime broke down. The IMF played an important role cajoling countries that had employed what I earlier called the ‘economics of development’ or ‘economics of learning’ in order to get back on their feet after the Second World War towards what I called the ‘economics of efficiency’.

In other words, the institution moved countries along from one kind of economics to the next (at least in my conceptualisation). For the most part this involved deregulation, the imposition of freer markets and the gradual removal of currency controls (the latter not in the UK, for instance, until the advent of Margaret Thatcher as prime minister in 1979).

In the 1980s the IMF then took its medicine to Latin America with the onset of the Latin American debt crisis. As far as I can see (again, I am not an expert), Latin America had messed up its development policy in two main ways. First, land reforms were absent or ineffective (because of lousy execution). This left a very skewed income distribution in place, failed to give landless farmers any capital (in the form of land) with which to play the capitalist game, and did not maximise yields.

During the post-war industrialisation drives in countries like Brazil, agricultural exports either flatlined or fell, or imports increased, exacerbating the balance of payments stresses that occur in the early stages of industrialisation when countries always run trade deficits (because of the need to import producers’ goods — typically, machines to make stuff with). The second policy cock-up was the shortfall of ‘export discipline’ to ensure adequate returns on subsidy and protection to manufacturers.

The wrong agriculture policy and the failure to export enough manufactures created balance of payments pressures and a capital shortfall that were filled with foreign loans. When dollar interest rates rose under the Reagan Administration, the loans could not be serviced, and governments resorted to printing money (just like in the Philippines under Marcos, which was east Asia’s Latin American state).

In this respect, the deflationary macro policies the IMF brought in were necessary and stabilised the situation. However, the IMF also dismantled industrial policy and has never, as far as I can see, understood anything about agriculture. The upshot was that the IMF undermined Latin America’s ability to develop quickly and sustainably. But then one can say that the Latin Americans had already done that for themselves by borrowing lots of money and investing it unwisely.

I make the point in How Asia Works that, scaled for GDP, the Koreans borrowed more money overseas than any Latin American country, but it didn’t matter because they had export discipline which meant they were creating lots of globally competitive manufacturing firms. Latin America seems to have produced one: Embraer.

Anyhow, we can say the IMF did well in western Europe, and then did well-ish (at best) in Latin America. Next it came to east Asia after the Asian financial crisis. Here, for me, it really made a terrible mess of southeast Asia by imposing Anglo-Saxon financial systems in Thailand and Indonesia after the crisis, having already done the same thing in the Philippines following the fall of Marcos in 1986. Industrial policy has been almost completely undermined and the banking systems now focus loans on consumers (making very tidy profits, just like in post-crisis Latin America). But the banks do not support sensible developmental policies that make national economies more value-adding. It should be no surprise that southeast Asia has had east Asia’s best performing stock markets since the Asian crisis while, in terms of the real economy, a country like the Philippines is on the brink of a return to the Third World. The only positive thing the IMF has done in southeast Asia is to make the place work for hedge fund managers. In fact I often think the IMF should become a hedge fund.

In defence of the IMF, I would point out two things. In southeast Asia, Malaysia did much of what the other major economies did, but without an IMF intervention; it just copied them anyway. With that kind of lack of political leadership, a country is in a lot of trouble anyway. And second, the IMF intervention in South Korea, which got caught up in the crisis, was much better timed, at least in my view.

South Korea was already a US$10,000 GDP per capita country when the crisis hit and the IMF forced sales of equity in the financial system to foreigners, required major changes to company law, and oversaw other adjustments in favour of consumers and minority shareholders. Contrary to Ha Joon Chang (whom I admire enormously), I think these interventions were well-timed. Of course the good timing was totally by chance because the IMF does not believe in timing, if you get what I mean! South Korea, in short, was ready for the economics of efficiency.

So that’s the IMF. The World Bank, by contrast, was set up specifically to support economic development at the micro level, and should be judged on this basis. Its real name is the International Bank for Reconstruction and Development.

My own observation over the years has been that the World Bank has some fantastic people, but that the institution is only as good as the use governments make of it. This means knowing what you want and getting World Bank specialists to work within some kind of brief that is defined by the developing state. If you just ask the World Bank (or the IMF) what to do, the ideologues in these institutions will their list of currently fashionable options, almost all of which have been between useless and disastrous for the past 40 or more years.

Classic examples include ‘privatise your banks’, ‘develop your stock markets’, and ‘concentrate financial intervention on micro-finance’. Note that each one is a financial liberalisation policy, reflecting exactly what has been fashionable (often rightly so) in rich countries and is deemed to be good for poor ones too. We may be about to get a new fashion menu based more around ‘institutions’. Again my expectation is that in timing terms the advice will be out of kilter. The institutional stuff becomes critical after the basic structural stuff that I talk about in How Asia Works. However now we are getting on to the subject of my next book again…

Successful developing countries have ignored the fashion menu(s) and instead have asked the World Bank’s technical people to support a proper development strategy. This is what China did in the 1980s when it had the World Bank, for instance, bring over Korean government people to explain what they had done and produce a bunch of comparative historical development studies. The process is described from different perspectives in Ezra Vogel’s biography of Deng Xiaoping, and in Harold Jacobson and Michael Oksenberg’s China’s Participation in the IMF, the World Bank, and the GATT, and, in Chinese, in Wu Jinglian et al (eds), Chinese Economists 50 Forum Looking at Thirty Years: Retrospective and Analysis (中国经济50人看三十年:回顾与分析).

Other developing countries would do well to study the manner in which China, the ROK and Japan have handled the IMF and the World Bank and gotten value from them. It is basically about avoiding the ideologues and making use of the technical people. You don’t want people like the World Bank guy in Jakarta who, shortly before the fall of Suharto, held a press conference lauding a successful telecoms ‘privatisation’ that had actually just been handed to one of Suharto’s daughters. You do want the ones like Edwin Lim, the Filipino Chinese who led the early World Bank mission in China.

Your last question is the one about why the bad advice continues to flow. I think it mainly comes down to ignorance, although just the other day someone was saying that they once asked a USTR guy in a bar to name one instance in which policies of free trade from the get-go had led to a positive developmental outcome, and the person just got up and left.

So maybe there is some pre-meditated desire to screw poor countries. Friedrich List claimed that one British prime minister used to keep a copy of The Wealth of Nations in his pocket and quote it to French leaders at every meeting in a cynical attempt to have them accept their (then very backward) division of labour in grain and wine production and leave manufacturing and services up to Britain.

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