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.