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.

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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