How Asia Works Summary

Why do some Asian countries thrive while others falter? The answer lies in the steps they take and the policies they pursue in their economic journeys.

1. Small-Scale Farming Sets the Foundation for Development

Starting with agriculture, small-scale household farming proves far more effective than large-scale operations in poor countries. Human labor can yield better results than machinery, allowing farmers to utilize their limited resources and land efficiently.

Mechanization often reduces jobs and agricultural output in poor nations, as it's geared toward environments with scarce labor. Instead, efforts like planting shade-tolerant crops together or hand-harvested produce maximize yields, addressing both employment and food production needs.

Small-scale farming ensures economic stability for rural populations, serving as a stepping stone before industrial opportunities arise. By creating jobs through small farms, nations keep citizens employed when alternatives in other sectors remain scarce.

Examples

• Shade-tolerant crops like celery inter-planted with others optimize space while employing labor-intensive farming.
• In post-World War II Japan, small farms maximized rural output using manual labor and fertilizers.
• South Korea focused on agriculture before transitioning to manufacturing, securing economic stability for rural areas.

2. Land Reform Balances Agriculture and Equality

Redistributing land among smaller holders ensures economic equality and boosts productivity, essential for growth. Land reform strengthens agriculture, creating a sustainable foundation for industrial development.

Historical examples highlight its effectiveness. In Japan's postwar reforms, limiting farm sizes to three hectares increased food production and improved equality. Similarly, Taiwan's reforms in the 1950s reduced inequality dramatically and resulted in higher agricultural output.

Without redistribution, land ownership remains concentrated in a few hands, curbing economic progress and increasing disparity. By taking proactive measures, governments uplift rural populations and lay the groundwork for prosperity.

Examples

• Post-WWII Japan redistributed excess land from large landlords to small farmers, boosting output.
• Taiwan raised farmer-owned land percentages from 30% in 1945 to 64% in 1960 through reforms.
• The Gini coefficient in Taiwan dramatically improved, reflecting reduced inequality.

3. Protecting Manufacturing Grows an Economy

Agriculture provides a base, but developing nations must move toward manufacturing for real growth. This sector creates tradable goods, requires less specialized education, and offers higher value-added opportunities.

Manufacturing industries often need shielding from global competition while they find their footing. The use of protectionist policies, like limiting imports, allows domestic firms to learn, imitate, and gradually catch up to global standards. Historical evidence highlights that economies such as Germany and the United States grew their industries through early protectionist measures.

Premature exposure to global markets can destroy emerging industries. It is only once they deeply root themselves in their domestic economy that they can survive and thrive on the world stage.

Examples

• The United States and Germany used protectionist measures in their early phases of industrialization.
• Japan nurtured its manufacturing sector by setting tariffs and limiting imports early on.
• South Korea supported its young car industry by protecting local firms from international competition in its initial years.

4. Government Investment Fuels Industrialization

Government involvement kickstarts industrialization by investing strategically in pilot projects, infrastructure, and essential industries. These early investments create a bedrock for private entrepreneurs to build thriving businesses.

Historical examples expose how this works. In the 1870s, the Japanese government launched pilot factories in textiles, mining, and cement, meeting domestic needs. Once these began producing and improving, the state sold factories to businesses for further growth.

Additionally, policies can provide raw materials or finance to help industries scale. In the 1880s, Japan allowed free import of raw cotton, helping industries evolve and end the country's chronic trade deficit.

Examples

• Japan funded silk and cement pilot factories for domestic needs in the 19th century.
• The government sold profit-generating firms to private entrepreneurs for long-term industry growth.
• Relaxed taxes on raw cotton benefitted Japan’s economy and solved its trade imbalance.

5. Export Incentives Drive Competitiveness

Countries sustain industrialization by making global markets essential for business survival, pushing firms to evolve and innovate. Export incentives link company survival with performance in global markets.

South Korea took an aggressive stance by tying bank loans directly to export performance. Underperforming businesses had to merge or shut down, fostering stronger industries. Similarly, by rewarding export efforts, Taiwan and Japan encouraged companies to compete internationally, improving quality and efficiency locally.

Ignoring export potential risks stagnation. For instance, Malaysia's monopsony in cars shielded its firms, but lack of competition left them globally irrelevant when post-crisis markets demanded resilience.

Examples

• South Korea rewarded exporters with better credit options and financial backing.
• Japan and Taiwan subsidized top exporters to encourage global competition.
• Malaysia neglected competition, resulting in a weak industrial sector.

6. Over-Zealous Financial Deregulation Hurts Emerging Economies

Poorly timed financial deregulation redirects critical capital into speculation instead of productive investments. Developing nations require regulatory oversight to channel resources toward industries that will strengthen the economic base.

Malaysia’s 1989 stock market deregulation meant lenders prioritized speculative ventures over supporting businesses. Japan, Taiwan, and South Korea avoided this pitfall by keeping tight control of banks and financial systems, ensuring funding reached manufacturers and exporters effectively.

Nations like Singapore and Hong Kong succeeded with deregulation only because their geographic advantages reduced reliance on industries requiring loans, unlike larger economies.

Examples

• Malaysia faced stagnant manufacturing growth due to money flowing into speculation.
• Japan provided discounted bank loans targeting industrial upgrades.
• Financial regulation ensured South Korea's banking sector focused on impactful economic projects.

7. Agricultural Reforms Reversed China’s Missteps

China struggled under communist policies that favored collectivized farming and self-sufficiency, leading to famine and slow progress. Reforms under Deng Xiaoping revived efficiency and output by allowing household farming and international trade.

Adopting new strategies, China restructured quotas and embraced market-driven incentives. By engaging international companies like Westinghouse, China imported expertise while fostering local industrial growth in high-value sectors like turbines.

Adjustments in financial institutions also ensured capital prioritized infrastructure and export competitiveness, setting a path similar to Japan and South Korea.

Examples

• China's household responsibility system allowed farmers to profit from surplus production.
• Collaboration with Westinghouse introduced turbine technology, now a Chinese strength.
• State-run banks invested in development instead of speculative ventures.

8. Challenges Persist Despite Progress in China

While China has progressed, several barriers throttle its potential. A reliance on state enterprises fosters inefficiencies in consumer-driven markets, where adaptability is key. Private companies struggle against state-backed giants.

Rural-urban income disparities remain stark despite increased subsidies and infrastructure investments. Policies addressing this must aim to empower rural communities further, possibly through land ownership reforms.

Without tackling these structural issues, China faces risks. Rebellions or stagnations could result if citizens lose faith in equitable opportunities to share wealth and prosperity.

Examples

• Urban incomes in China are three times greater than rural incomes, widening gaps.
• Land ownership reforms in Japan and Taiwan boosted their rural economies significantly.
• Geely and Chery, Chinese automakers, lack competitive strength against state-backed peers.

9. Balancing Growth and Global Integration is Key

Countries develop most effectively when they balance internal policies with international trade. Over-dependence on either can limit their transformation into stable, prosperous economies.

Japanese carmakers initially built domestic capacity before becoming export powerhouses, ensuring competitiveness. South Korea adopted structured reforms aligning local strengths with global needs, succeeding further.

Failure to balance leaves countries like Malaysia stagnant. Before full liberalization, nations must have strong industries and skills prepared to engage globally.

Examples

• Japan’s automotive industry dominated locally before succeeding globally.
• Policies tied South Korea's local industries to overseas markets, fortifying their growth.
• Malaysia's limited exports and monopolies left it unstable during crises.

Takeaways

1. Focus on increasing agricultural productivity through small-scale farming before jumping into large-scale mechanization.
2. Employ land reforms to promote equality, stimulate productivity, and empower rural populations economically.
3. Regulate financial systems during development phases to ensure investment incentivizes industries and long-term growth.