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. It also explains why some of their neighbors from the southeast: Philippines, Malaysia, Indonesia, and Thailand were unable to do the same.
For a poor or fairly developed country trying to rise through the stages of economic development, Studwell has a formula. This formula comes in three steps. The first step is to equip the agricultural sector. This is done by restructuring the sector to highly labor-intensive household farming; enabled by a policy approach that gives everyone (whether poor or rich) the opportunity to access land for farming. This, accompanied by government subsidies and deliberate investments in agricultural infrastructure, raises the incentive for people to venture into agriculture -ensuring the use of all available labor in a given economy. As a result, the output is pushed to the highest possible levels enough to feed the entire local market and raise the exports. The outcome begets a surge in income. The surge raises savings. The savings are then used to finance industrial investment.
The second step is to direct investment and entrepreneurs towards manufacturing. The government promotes accelerated technological upgrading in manufacturing through subsidies, conditioned on export performance. Local firms are cushioned and offered credit support to excel and become globally competitive. Those that do not perform are culled.
The third step is in making crucial interventions in the financial sector, focusing capital on intensive small-scale agriculture and manufacturing. Financial institutions are closely controlled by the state. 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 one with short term returns.
The four successful economies transformed themselves by using the steps above and did so in a relatively short period of time. For example, S. Korea transitioned from a poor to a developed country in a span of 50 years; a process that took Britain a century.
Fair distribution of land, an idea that most developing countries have long eschewed (read Africa), is deliberately discussed. The countries under study made drastic reforms to their land policies; transferring land from the control of feudal systems to ownership by the state. The state took to leasing pieces of land to citizens at affordable rates. This promoted household farming on a wide scale and pushed agricultural output to epic proportions.
It is interesting how some of these countries, like S. Korea, decided to go for risky options and failed to settle for what was viable. Like planning to establish a steel plant, an ostensibly expensive option for a poor country Korea was in the early 70s. IMF and World Bank denied them the loan but the country went ahead and raised capital through other means. At the time, when ideas of globalization and free markets had already taken precedence, policies to protect a country’s local industry and create a forced march for exports sounded like a list of crimes. The notion was, that all rich countries had gained their wealth through open competition and it was fair that any other country opens its market to ‘everything’ foreign. But this was a lie and these countries were smart enough to know that. Rich countries, in their formative stages, had used protectionist policies. It goes, that free trade should be a country’s ultimate goal after manufacturing capacities have first been raised through protectionism. The countries enacted policies to make this possible and later opened up upon transitioning to developed status.
Most importantly, good leadership and to an extent dictatorship (of the positive kind) was instrumental in bringing about these transformations. Therefore, leadership is key.
Joe Studwell did an outstanding job on this book. I highly recommend.