Joe Studwell’s book,’ How Asia Works’ gives a concise analysis of how the Asian miracle came about. How Japan, S. Korea, Taiwan and China achieved rapid economic transformation. And goes a step further to explain why some of their South East neighbors were unable to do the same. These are Philippines, Malaysia, Indonesia and Thailand.
Studwell argues that three government interventions are critical to speed up economic development (based on the study of the mentioned N.East Asian countries). First is maximizing output from agriculture by restructuring agriculture to highly labor-intensive household farming. This makes use of all available labor in a poor economy and pushes up yields and output to the highest possible levels. The overall result is an initial productive surplus that primes demand for goods and services. Increase in agricultural output leads to increase in surplus. This implies more savings which are thereafter used to finance industrial investment.
The second intervention/ideally the second stage is to direct investment and entrepreneurs towards manufacturing. The governments promotes accelerated technological upgrading in manufacturing through subsidies conditioned on export performance. For the case of N. East Asia, local firms were cushioned and offered credit support to excel and become globally competitive. Those that did not perform were culled.
Third is to make crucial interventions in the financial sector, focusing capital on intensive, small-scale agriculture and manufacturing. The state’s role is to keep money targeted at a development strategy that produces the fastest possible technological learning and hence the promise of high future profits rather than on short term returns.
The emphasis that Studwell puts on land distribution is one developing countries cannot afford to eschew. Land is a valuable natural resource that if effectively put to use can lead to agricultural output of epic proportions . Successful countries, as Studwell observes empowers the citizens by giving them access to land. Coupled with massive subsidies, better technical infrastructure, a cushioned market and a window to export, performance shoots. Interestingly, collective household farming in an area leads to high aggregate agricultural produce vis-à-vis the large scale model. Most developing countries have failed to exercise this because of poor land reforms.
I get miffed when western powers reprimand developing countries for doing what they ‘themselves’ did in their earlier stages of development. The author bears out the irony at some point. He acknowledges that in the modern economic era where ideas of free markets have taken precedence, policies to protect local industry and create a forced march for exports may sound more like a list of crimes. That we are raised to believe that in rich countries all the wealth is the product of competition. The shocking reality is that every economically successful society has been guilty, in its formative stages, of protectionism. The aforementioned N. East Asian governments understood this well and continuously ignored the policy advice rendered by the US and the Bretton woods institutions. They never took interest in ideologies pioneered by Adam Smith and David Ricardo but took to heart Friedrich List’s ideology in favor of protectionism. According to List, free trade should be a country’s ultimate goal after manufacturing capacities have first been raised through protectionism. Accordingly, the countries enacted policies to protect themselves against the shocks and whiplash of global-capital flows and made sure their financial institutions served the country’s long-term development ends.
The author’s brilliant assessment got me to jot down a number of points. First, it appears that if a country wishes to industrialize it first needs to develop its agriculture. As agriculture grows and enough savings are made, it transitions to industrialization using the savings to fund this phase. Second is that these ‘important’ international institutions do not hold all the answers to development. At some point, a country needs to take their advice with a ‘pinch of salt’ or keep its economy on a short-leash. Third is that at its formative stages, a country needs an ‘iron-fist’ kind of leadership and that democracy, though good, can drag down the development process. Fourth, is that though the ascend to the top might have looked rosy going by these 4 countries’ romantic ‘rags to riches’ stories, it is far from the truth. It was no walk in the park. The countries were built on sweat, tears, humiliation and sacrifice. There were lots of tests, trials and multiple errors. And therefore developing countries ought to keep that in mind.
Joe Studwell did an outstanding job on this book. I highly recommend.