Reflection on How Asia Works: Success and Failure in the World’s Most Dynamic Region by Joe Studwell

               This is a book about development economics that uses East Asian case studies as examples of success and failure, focusing on Japan, South Korea, and Taiwan as successes, Indonesia, Malaysia, the Philippines, and Thailand as failures, and China as a special, successful case. The policy prescription for development success is simple: maximize agricultural output through household farming, divert investment to manufacturing and protect local companies until they can export, and use long-term focused financial controls to divert money into the first two. The book largely ignores democracy, rule of law, and geography as drivers of development.

               Studwell argues that household farming is very good for developing countries because it allows the to use their surplus of people to a highly productive end. It is not necessarily good, he argues, to start farming at a large scale because that leaves many unemployed and doesn’t actually lead to the highest output. Larger farms are more efficient, but that is because they use fewer people, producing fewer crops as well. Since most developing countries have lots of young people living in rural areas, it is better to put them to work and focus on making agriculture more efficient later. Studwell points out that “urban bias” was the cause of the failure of many Latin American economies. The urban bias is the opposite of what he recommends. Instead of investing heavily in producing high agricultural output, countries on the wrong path try to industrialize too soon, filling the cities with people and leaving the rural areas without enough workers to feed them. This leads to these countries exporting little food or even importing food, which is really a waste of money for a country that is trying to develop. It is far better to provide one’s own food and export it, building up foreign exchange capital.

It is crucial, therefore, to increase agricultural production through land reform, which is easier said than done. Land reform also has the secondary effect of increasing social mobility in a society by distributing land equally. That means that the smartest and most able people will tend to use their new property wisely. If there is no land reform, plantation owners and large-scale property owners will control the market, and they have little reason to produce high yields. After all, the crops sell for higher prices if plantation owners keep yields down. Household farmers, on the other hand, cannot coordinate such a thing and are much more likely to just produce all that they can, as shown by Studwell using quantitative evidence from several countries. Crucially, as agricultural outputs increase, developing countries should scale up those family farms as technology and technology access improves. At this point, it is good to start deregulating and ending subsidies so that the most efficient farms can drive others out of the market, allowing the free market to take over and saving the government money. What can happen if a government does not do this is shown in Japan, where subsidies have prevented farmers from mechanizing as there is little incentive in harvesting more food.

               As a country begins to scale up in agriculture, there will no longer be a need of new workers in that sector. As such, the nation needs to provide jobs in urban areas for people to move to if they don’t want to work on a farm. This means developing an urban base of manufacturing, which will provide more riches to the country, especially if the native companies can develop enough to export abroad. The policy that Studwell recommends is protectionism in the early stages, gradually diminishing to favor only those companies capable of exporting their products abroad, which will naturally be the best products. Korea’s car industry was very successful with this in the second half of the 20^th century. A true revelation in the book is that in the game of government subsidies, it is not picking winners that is important, but weeding out the losers. There will always be mistakes made, but the latter is easier than the former. Ironically, while Studwell argues that the state has a crucial role to play, he points out that “export discipline,” or the process of weeding out losers who cannot export, is critical to manufacturing success; that is to say that many states fail by not letting the free market work to determine which of their companies is the best. This occurred in Malaysia, where the state was more haphazard in its investments than more successful states and focused too much on state-run enterprises. Malaysia also mixed up its export policies with affirmative action for certain Malaysian ethnic groups that did not have the know-how to lead companies. Furthermore, he circumvented the national bureaucracy, leading to people being afraid to express their opinions. All of these things created an environment where good, new ideas were stifled.

               Studwell also warns developing nations to have strict capital controls so that they can direct money towards development goals. He argues that a major problem that aggravated both the Latin American crashes of 1982 and the Asian crisis of 1997 was that large parts of the financial sector were controlled by business entrepreneurs who were unable to export a successful product but able to use their influence to secure loans to their unproductive companies. Firms can even become big enough that their failure would mean the failure of the banks that lend to them. This became a big problem for Korea in the late 1980s, and by the 1990s, many Korean chaebols controlled major non-bank financial institutions. This often leads to money flowing into luxury real estate instead of innovative new products. He argues that the IMF has had a terrible influence on the developing world as it has encouraged deregulation as an ideological position, yet most developing countries are not ready to do so. More so, Studwell argues that the problems that come from premature deregulation are worse than those that come from delayed deregulation, essentially being the difference between Thailand/Malaysia and Italy/Japan. Premature deregulation doesn’t lead to natural growth, just a movement into short-term profits.

               Studwell does a whole section (one of four in the book) on China, detailing successes (like protectionism) and failures (like premature scaling up of farming). He argues that going to far in protectionism, as China did, is better than going to far in opening up early on. I think he has a good point. While China wasted a lot of time reinventing the wheel with products that already existed in better forms elsewhere, slowing manufacturing, at least they didn’t end up like Indonesia or the Philippines, with no major manufacturing at all. Chinese growth is impressive, though now is the time to open up. State firms are not as responsive to consumer needs, especially retail consumers. It is no surprise then that China’s biggest firms (which are almost all state-run) are mid-stream, business to business sellers, which becomes problematic as those transactions are often subject to government approvals. In addition, due to the massive investments going into the Chinese economy now there is much growth, but we have already likely passed the peak.

               The “economic river” is a really good metaphor that Studwell uses in his book to describe development. He argues that all countries traverse the same river and that they must follow the same path, which is nurturing and protection of industry in the beginning, and a loosening of regulations and removal of subsidies later on to encourage independence. He says that there is development economics, which requires “nurture, protection, and competition.” Then there are efficiency economics, which requires “less state intervention, more deregulation, freer markets, and a closer focus on near-term profits.” The true question is when to switch from one to the other and how quickly.

Miscellaneous Facts:

• In China before the Communist Party gained power, landlords demanded that their laborers only poop in their toilets so they could use it as fertilizer.
• After signing the Bowring Treaty with Britain in 1855, Thailand kept the lowest import tariff in Asia of just 3%, ensuring that they could not protect infant industry. Studwell argues that this is why no international firms developed.