Wednesday, December 18, 2013

[book] How Asia Works by Joe Studwell

Long-time journalist Joe Studwell (The Economist, Far East Economic Review, etc.) and now "mid-career PhD at Cambridge University” (what I’d love to do!) has thought about Asia for decades and concluded that three “interventions” are behind the successful Asian economies:
  1. First, maximize output from agriculture
  2. Next, direct all investment and entrepreneurs toward manufacturing
  3. Meanwhile, tame the financial sector to focus capital on intensive small-scale agriculture and on manufacturing development

Using examples from Japan, Korea, Taiwan to prove his point, and counter-examples from Thailand, the Philippines, and Malaysia, he shows in detail how government policies built on land reform helped struggling poor countries develop economies built on full employment through agriculture and the “garden-level” productivity that comes when people do everything by hand, without machines.  Countries without land equality couldn’t breed the light manufacturing that comes from the demand created by farmland product surpluses.

With rising surpluses from agriculture, successful governments targeted industry, but with an important caveat: only if the products were competitive internationally. This way, even if your officials are corrupt (inevitable), their money has to come from success in other countries. Selling natural resources breeds corruption because the gains all go to whoever controls the resources; in export-based manufacturing, corruption is useless unless a developed economy buys your stuff.

All the while, successful economies tame the banks to ensure their interests are aligned with both agriculture and industry.

One interesting aside that got my attention is how little education matters:

  • 55% of Taiwanese were illiterate at the end of WW2 and 45% remained in 1960.
  • S Korea literacy in 1960 was lower than 2010 Ethiopia
  • Meanwhile, Philippines has the highest university-educated students in SE Asia and places like Cuba have some of the highest literacy and university engineering grads in the world.

So far so good, and I liked his overall analysis.

But generally I found him overusing the term “market failure” and underusing the equivalent danger “government failure” (aka public choice). Like the similar analysis I didn’t like from Martin Jacques, I have the following thoughts:

  • His argument would be more persuasive if he analyzed all countries that apply his formula. He touches on India, but what about Africa, southern and eastern Europe, South America, etc.? (Note that he deliberately excuses Singapore and Hong Kong from his analysis because they don’t fit his thesis).
  • Culture plays a role, perhaps the biggest role. Japanese or Koreans would have been successful under a lot of different development models. They are driven people, with a deep level of pragmatism that you can’t ignore. There is a contrast between these people and other cultures. There just is.
  • State-directed capitalism, of the form this author likes (i.e. “not driven by free market ideology”), may be good at helping your country win in a basic industry (steel or cars). You know the road map, you know how to measure success.
  • Japan, the example I know best, has plenty of successes that were not driven by the state. Honda and Sony are the classic brands that thrived in spite of government inattention.
  • Predictability and stability are good attributes for the state, and here again Korea and Japan and Taiwan have some advantages. Governments can change, but the overall sense of drive is hard to kick out (it’s that culture again)

I have much more to say about this (check out this review by John Williamson, the man who coined the term “Washington Consensus” that Studwell pans) but overall I thought the book was well-written but with much to dispute.