Introduction
In "How Asia Works," Joe Studwell takes readers on a fascinating journey through the economic development of East Asian countries. He explores why some nations in the region, like Japan, South Korea, and Taiwan, have achieved remarkable economic success, while others, such as Malaysia, Thailand, and the Philippines, have struggled to maintain sustainable growth. This book provides valuable insights into the key factors that drive successful economic development and offers lessons that can be applied to other developing nations around the world.
Studwell's analysis is based on extensive research and firsthand observations from his time spent in various Asian countries. He presents a clear and compelling argument for why certain economic policies and strategies have proven effective in fostering rapid growth and development. The book challenges many conventional ideas about economic development and offers a fresh perspective on how poor countries can transform themselves into prosperous nations.
The Three Key Steps to Economic Development
Studwell identifies three crucial steps that successful Asian economies have followed in their path to development:
- Land reform and agricultural development
- Export-oriented manufacturing
- Carefully managed financial policies
Let's explore each of these steps in detail and see how they have contributed to the economic success of certain Asian nations.
Step 1: Land Reform and Agricultural Development
The Importance of Small-Scale Farming
One of the most surprising insights in "How Asia Works" is the emphasis on the importance of small-scale, household farming in the early stages of economic development. Studwell argues that, contrary to popular belief, large-scale industrial farming is not the most efficient way to boost agricultural output in poor countries.
Instead, he presents compelling evidence that small-scale farming is more effective for several reasons:
Labor intensity: Small farms can make better use of the abundant labor force available in poor countries. This leads to higher yields per hectare compared to large-scale mechanized farming.
Attention to detail: Small-scale farmers can pay closer attention to individual plants, resulting in better care and higher quality produce.
Innovative techniques: Household farmers often employ creative methods to maximize their limited land, such as intercropping (growing multiple crops in the same area) and vertical farming.
Job creation: In countries with limited industrial development, small-scale farming provides essential employment opportunities for a large portion of the population.
Successful Land Reform Examples
Studwell provides several examples of successful land reform programs that have contributed to rapid economic development:
Japan: After World War II, the US-backed land reform in Japan set a maximum limit of three hectares for farms. This led to the redistribution of land from wealthy landlords to poorer farmers, resulting in increased rural output and reduced economic inequality.
Taiwan: Following the Chinese civil war, the Kuomintang government implemented land reform in Taiwan. This increased the percentage of farmers who owned their land from 30% in 1945 to 64% by 1960, while also significantly reducing income inequality.
South Korea: Similar land reform efforts in South Korea led to increased agricultural productivity and laid the foundation for future industrial development.
These examples demonstrate that well-executed land reform can create a stable economic base for further growth by increasing agricultural output and reducing inequality.
The Pitfalls of Premature Large-Scale Farming
Studwell warns against the temptation to move too quickly towards large-scale, mechanized farming. He argues that this approach can be counterproductive in developing countries for several reasons:
Job displacement: Large-scale farming reduces the number of agricultural jobs available, which can lead to unemployment and social unrest in countries with limited alternative employment options.
Lower yields: Contrary to expectations, large-scale farming often produces lower yields per hectare compared to small-scale, labor-intensive farming in developing countries.
Increased inequality: Premature adoption of large-scale farming can concentrate land ownership and wealth in the hands of a few, exacerbating economic inequality.
Step 2: Export-Oriented Manufacturing
The Importance of Manufacturing
Once a strong agricultural foundation is established, Studwell argues that the next crucial step in economic development is to focus on building a robust manufacturing sector. He presents several reasons why manufacturing is particularly important for developing economies:
Low skill requirements: Manufacturing jobs often require less education and training compared to service sector jobs, making them accessible to a larger portion of the population.
Global market access: Manufactured goods are easier to trade on the global market compared to services, which often require the free movement of labor.
Technological learning: Manufacturing provides opportunities for countries to learn and adapt foreign technologies, gradually building their own technological capabilities.
Protectionist Policies and Infant Industry Support
Studwell challenges the notion that free trade alone can lead to economic development. Instead, he argues that successful Asian economies have used protectionist policies to nurture their manufacturing industries until they become globally competitive. Key aspects of this approach include:
Import substitution: Encouraging the production of goods domestically rather than importing them, to build local industrial capacity.
Tariffs and quotas: Implementing trade barriers to protect nascent industries from foreign competition.
Government investment: Direct government involvement in establishing pilot factories and supporting key industries.
Examples of successful protectionist policies include:
Japan: The government established pilot factories in industries like silk reeling, mining, and cement in the 1870s, importing machinery and expertise to bring companies up to international standards.
South Korea: The government provided subsidies and access to credit based on export performance, forcing companies to become globally competitive.
Taiwan: The government implemented similar export-promotion policies and invested heavily in key industries.
The Importance of Export Discipline
Studwell emphasizes that protectionist policies alone are not enough. Successful Asian economies have combined protection with a strong focus on export performance. This "export discipline" ensures that companies become globally competitive rather than relying solely on protected domestic markets. Key aspects of export discipline include:
Export targets: Setting specific export goals for companies and industries.
Performance-based support: Tying government support (such as subsidies or access to credit) to export performance.
Forced competition: Encouraging multiple domestic companies to compete in the same industry, even in small markets.
A prime example of this approach is South Korea's development of its automotive industry. The government supported three private firms to compete in a domestic market of only 30,000 cars per year, forcing them to become efficient and export-oriented to survive.
Step 3: Carefully Managed Financial Policies
The Dangers of Premature Financial Deregulation
Studwell argues that premature financial deregulation can hinder economic development by diverting resources away from productive investments. He provides several reasons why careful management of the financial sector is crucial:
Directed lending: Governments can use the financial system to channel funds towards priority sectors and industries.
Preventing speculation: Tight financial regulations can help prevent the diversion of resources into unproductive speculative activities.
Supporting long-term investments: Managed financial systems can encourage patient capital for long-term industrial development.
Studwell contrasts the experiences of countries that maintained tight control over their financial systems (such as Japan, South Korea, and Taiwan) with those that deregulated prematurely (like Malaysia). He shows how premature deregulation in Malaysia led to a lack of financing for crucial industrial development projects.
The Role of State-Controlled Banks
In successful Asian economies, state-controlled banks played a crucial role in supporting industrial development. Key aspects of this approach include:
Policy banks: Establishing specialized banks focused on supporting specific development goals, such as export promotion or agricultural development.
Directed lending: Using the banking system to channel funds towards priority sectors and industries.
Subsidized interest rates: Providing low-interest loans for key industrial projects and export-oriented businesses.
Examples of effective use of state-controlled banks include:
Japan: The Japan Development Bank provided long-term, low-interest loans to key industries.
South Korea: The Korea Development Bank played a similar role in financing industrial development.
China: The establishment of policy banks like the Export-Import Bank of China and the China Development Bank to support specific development goals.
The Exceptions: Singapore and Hong Kong
Studwell acknowledges that there are exceptions to the general rule of tight financial control. Singapore and Hong Kong have succeeded with more open financial systems due to their unique circumstances:
Geographic advantages: Their strategic locations make them natural trading and financial hubs.
Small populations: They don't require large-scale manufacturing or agricultural sectors to provide employment.
Focus on services: These city-states were able to build their economies around financial services and trade from the start.
China's Economic Development
Studwell dedicates a significant portion of the book to analyzing China's economic development, which provides a fascinating case study of the principles he outlines.
Overcoming Communist Policy Mistakes
China's economic transformation began with the reversal of two major communist policy mistakes:
Collectivization of agriculture: The belief that large-scale farming was more efficient led to widespread famine and the deaths of millions.
Self-sufficiency: Limiting international trade cut China off from the foreign technology needed to develop its industries.
Deng Xiaoping's Reforms
Under the leadership of Deng Xiaoping, China implemented three key strategies that mirrored the successful approaches of other Northeast Asian states:
Agricultural reform: The "household responsibility system" gave farmers more autonomy and incentives to increase production, leading to a massive boost in agricultural output.
Opening up to international trade and technology: China began making deals with foreign companies to acquire technology and know-how, laying the foundation for its manufacturing boom.
Financial control: The government maintained tight control over the banking sector, using it to drive development policies and investment in key industries.
Ongoing Challenges
Despite its remarkable progress, China still faces significant challenges:
Over-reliance on state-controlled businesses: While effective in some industries, state-owned enterprises struggle to compete in dynamic consumer markets.
Rural-urban income gap: The income disparity between rural and urban areas remains high, with urban incomes on average three times larger than rural ones.
Land ownership issues: Farmers in China don't own their land, which discourages long-term investment and development of agricultural properties.
Lessons for Other Developing Countries
The insights from "How Asia Works" offer valuable lessons for other developing countries seeking to achieve rapid economic growth:
Prioritize agricultural development: Focus on small-scale, labor-intensive farming to boost productivity and create employment before transitioning to larger-scale operations.
Implement land reform: Redistribute land to create a more equitable and productive agricultural sector.
Protect and nurture manufacturing industries: Use protectionist policies to support infant industries, but combine this with export discipline to ensure global competitiveness.
Manage the financial sector carefully: Maintain control over the banking system to direct resources towards productive investments and avoid premature deregulation.
Adapt policies to local conditions: While the general principles may be widely applicable, it's crucial to tailor specific policies to each country's unique circumstances and challenges.
Conclusion
"How Asia Works" provides a compelling analysis of the factors that have driven economic success in East Asia. By focusing on the three key steps of land reform and agricultural development, export-oriented manufacturing, and carefully managed financial policies, Studwell offers a roadmap for economic development that challenges many conventional ideas.
The book's insights are particularly valuable for policymakers and economists working in developing countries. By understanding the strategies that have proven successful in Asia, they can adapt and apply these lessons to their own unique contexts.
However, Studwell also acknowledges that the path to development is not without challenges. As seen in the case of China, even successful economies face ongoing issues that require careful management and policy adjustments.
Ultimately, "How Asia Works" is a thought-provoking and informative exploration of one of the most dynamic economic regions in the world. It offers hope that with the right policies and strategies, other developing nations can achieve similar levels of rapid growth and prosperity.