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.

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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