How Asia Works - Joe Studwell
Jan 22, 2023
Note on How Asia Works
Notes and thoughts on reading Joe Studwell’s How Asia Works. It is one of the best books I have read, and often recommend it to anyone asking for a suggestion on what to read. This is a great read even if you aren’t interested in economics, policy making or development. My notes don’t capture this fully, but it will make you look at the world differently upon reading it; for me it fostered the idea of how to systematically explore my curioisties.
Also, I read this in the November of 2021, and as I write this summary in 2023 I realise it is likely I may have missed many crucial points, hopefully the notes I took while reading which form the second part of this post will, at the cost of repetition, cover them.
Summary
I am reading this book to know how Asian countries took decisions for development. What worked and what didn’t are secondary. But knowing them might open avenues to know why they chose those decisions. What led them to arrive at those good calls and stick with them?
North East Asia had a different growth trajectory to the South East post the Second World War. Joe Studwell’s How Asia Works explores this contrast in economic development to find why did the two regions diverge in their growth paths - what worked for North Asia and what went wrong for the South?
Studwell narrows it down to pure government policy.
Japan, South Korea and Taiwan formed and followed a development policy through the post war period that was informed by the ones taken by UK, USA and Germany in their early stages of industrial development and economic growth. This included nurturing infant industries through a focus on protectionism, export oriented manufacturing policy and tight financial controls to direct funds to productive assets. South Eastern countries such as Thailand, Indonesia and Malaysia were influenced by the modern policies recommended by the IMF and World Bank for growth that included liberalisations, free and open market, a lack of export discipline and monetary controls to support on domestic manufacturing and competition.
This resulted in the North East Asian countries developing the skills and muscles over a period of time to learn how to make world class products and sell them globally. The international trade thus favoured them, leading to economic growth. The South East Asian countries as a policy never invested in developing global competence for domestically produced products for a sustained period, and neither built the skills now the environment for quality and productive performance. This led to them spending on debt for their economic sustenance which eventually led to the Asian Financial Crisis that they are yet to recover from.
Studwell breaks down the successful development of Japan, Taiwan and especially South Korea to three policy implementations -
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Agriculture an Land Reforms - Invest in agriculture in the early stages of economic growth. When you have a large unskilled and poor population the country’s first goal should be to put them to productive work. The north Asian countries helped their people grow small farm holdings and invested in increasing their efficiency, by first implementing led reforms and land redistribution, and then providing the credit and resources to run a successful small farm.
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A focus on competitive manufacturing - Once the population becomes productive and moves out poverty through farming, the governments invested in upskilling them, first through food processing an small industries, thereafter, a focused policy on developing domestic manufacturing of exportable products. They did this by providing cheap finance, encouraging domestic competition and intervening to strengthen domestic winners through consolidation, and then using the now scaled up manufacturing performers to perform globally under tight export discipline and supervision.
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Financing growth - The governments formulated and implemented a financial policy that was at odds with the recommendations of international organisations such a s the World Bank and IMF, and took steep debt to invest in manufacturing, ensured the debt is not squandered on non productive assets such as real estate, and provided cheap and at times a negative interest rate loans to strengthen manufacturing even at the cost of domestic inflation.
In contrast, the south East Asian countries didn’t implement a proper land reforms policy, didn’t encourage competitive domestic manufacturing, instead developed a rent seeking elite with bulk of the development money channelled into land grabbing and real estate; these were funded through debt and a monetary policy that focused on consumption and growth over development. Instead of becoming producers they became a market for other countries and their products, leading to fiscal deficits instead of surpluses.
What is not addressed
How Asia Works breaks down economic miracles into two clear aspects - one learning from history, and second government handholding through policy around development. The book does not account for the life of the populations under the regimes that brokered such economic growth, barely touching on the Korean citizens lives during the 70s and 80s under Park Chung Hee’s dictatorship when the Miracle on the Hun happened.
As we know today, high inflation and an extreme focus on productivity has taken its toll on both Korean and Japanese societies. This leaves one with the question if copying the development model of North Asia is a prudent choice for the larger society? Japan’s own economic progress stalled in the 90s and has never recovered back to its heydays as an economic superpower. Taiwan didn’t have a militant focus on export discipline and eventually ceded ground to Korea and others. The book has a big portion on China, but written in 2013, the changes in the last decade is neither anticipated nor accounted. The book doesn’t speak of the Indian subcontinent much and barely touches on West Asia.
Notes From the Book
This section details more notes from the three sections of the book. These are my paraphrased understandings of the chapters as I read through them.
Introduction
How Asia Works is a 2013 book that studies the growth and development (or lack thereof) in select East Asian countries. Written by Joe Studwell, it breaks down the success of nations like Japan, South Korea, Taiwan and China and the failures of Philippines, Thailand, Indonesia (relatively) to purely government policies. It rejects ideas of differences in people’s attitutudes, skills, geographical and climatic conditions. It concludes that the destiny of any country’s development rests solely with its policy makers.
This note is a summary of what I gathered reading it and as such is neither comprehensive and nor a critique.
Part 1: Land Reforms
Equitable land distribution through land reform policies have been the biggest contributor of social and economic growth of populations across the post war economies in the world.
Without land reforms a market for land develops where a small percent of the population holds a large share of the land. It is in their benefit to earn profit from the land through rents as opposed to using it productively. This leads to lower food yields, higher indebtedness and landlessness and generally makes a majority of the population unproductive.
For developing countries without any manufacturing base, a large percent of rural, unskilled and unproductive populations growth then becomes a distant dream. Such countries lag others in economic development and often fall behind in social indicators of growth.
Countries in their early stages of development, should look to put their abundant and cheap labour to productive use. Small farms with land ownership are the best way to enable this. Small holding farmers optimise for higher yield per unit of land because labour is cheap (they don’t have to pay themselves). Higher yields lead to food security and exportable surplus. This leads to rise in incomes and creates a consumer base for manufacturing to eventually come in. At that stage, land reforms should encourage larger farms so that machinisation becomes possible. Labour moves out of agriculture and into manufacturing. And farmers will start to optimise for profits in place of yield because now land is abundant and labour is expensive.
Post war Japan and Taiwan are the best examples of effective land reforms that led to stupendous economic growth for decades.
References
Intervention report - land redistribution
Main Actors
Wolf Ladejinsky, land reformer, Hiroo Wada, Japanese socialist minister
Part 2: Manufacturing
An industrial policy of developing manufacturing to produce export grade products is the second stage of development of a developing economy. Following [[Land Reforms]], nurturing industries that operate at scale and productively use unskilled or semi skilled labourers should be the number priority of policy makers.
From Elizabethan England to nineteenth century America, from Prussian Germany to twentieth century Japan, every country that succeeded economically followed the same playbook:
- Protect and nurture ‘infant industries’ while they learn and acquire skills and technology. Do this through protectionism and import barriers.
- Focus on exports in a disciplined manner to improve and hasten this learning. Support entrepreneurs with subsidies and tax breaks, but force them to compete globally. Encourage technology transfer through policy
- Nurture competition amongst domestic firms. Cull losers and create large firms through forced mergers and acquisitions, offer support only to those firms who ensure export growth and discipline. Remove rent seeking entrepreneurs
- Countries should understand that high quality manufacturing is a skill that needs to, and can be, learned. However this learning curve takes time, and until your industries reach a certain standard and scale to compete globally they must be protected and nurtured through industrial policy. Korea learned this from Japan, Japan from Germany, Germany from America and America from England.
Once this goal is achieved however, policy makers should shift focus to small and medium enterprises and consumers to avoid stagnation of growth. Japan and Germany fell victim to this, but Korea was forced (fortunately) to adopt this post the Asian Financial Crisis.
Main Actors
Friedrich List, Alexander Hamilton, Park Chung Hee, Mahathir, Park Tae Joon
Part 3: Finance
Financial institutions should be directed towards industrial credit that advances country’s development. Foreign funds that can take flight anytime should be restricted. This is to ensure agricultural or infant indsutrial growth over a long horizon is not disturbed. It also restricts financial instituitions credit doesn’t flow outward for profitable opportunities. These institituons should only be deregulated once the economic development is on a surer footing; without these controls only short terms profits and consumer spending is achieved. Technological and agricultural upgration will suffer, and as a consequence indsutrial learning will leave a gap that will get progressiely hard to fill. And the industry will not be able to produce high quality goods that can beat the global competition. Without globally competitive products, industries cannot maintain export discipline, they would not be of an acceptable quality. They will enter the vortex of high leverage and low forex inflow.
The North East Asian Financial Framework:
- Capital controls by state to ensure money is diverted to encourage manufacturing at scale
- Forex control to ensure money doesn’t flee overseas for profitable opportunities while domestic indsutry is still developing
- Govt. directives to banks to facilitate low credit to ensure competitive performance globally
- Export discipline for industrial borrowers to continue low interest or negative interest credit
- A mindset to not lose development momentum no matter what economic shock it met
- A high level of foreign debt is only bad if it is deployed to non productive non forex earning assets
Korea had a far lower savings than other North Asian countries because of a finance policy that literally paid industries to borrow money. The real interest rate in South Korea between 1974-80 was ‘-6.7%’. Exporters got loans for as cheap as -10 or -20%. The Korean conumers paid for this with inflation in the 15-20% range steadily for nearly 2 decades.
Main Actors
Park Chung Hee, Mahathir Mohammed