Would you believe that, in 1950, Philippines was richer than Korea and Taiwan? Or that there was hardly any difference between Taiwan, Korea, Indonesia and Thailand? Or that China was lagging Indonesia and Philippines? Here are their GDP per capita figures for 1950: Japan $1,873, Philippines $1,293, Taiwan $922, Korea $876, Indonesia $874, Thailand $848, China $614, India $597*. Today, Japan, Korea and Taiwan have all ascended to the developed country status, while Indonesia, Philippines and Thailand have been left behind. The question is why.
In his latest book, "How Asia Works", Joe Studwell tries to answer that question. He identifies a magic formula with three ingredients: land reforms; state-supported manufacturing development; and state-controlled financial sector being harnessed to support manufacturing.
The first one, land reforms, consists of restructuring agriculture into labor-intensive household farming, which maximizes agricultural productivity by making use of the excess labor available in the initial stages of development. This results in a surplus that creates demand for goods and services and sets the stage for the second initiative, development of state-supported manufacturing.
State-supported manufacturing means channeling investment towards manufacturing rather than other types of businesses. This creates productive jobs for workers with limited skills as they migrate out of agriculture. For this process to be successful, Studwell lays down two essential conditions: rapid learning of advanced manufacturing technologies and subjecting manufacturing to export discipline to make sure that only the globally competitive industries survive.
The third intervention is to control and harness the financial sector to provide the necessary capital for the agricultural and manufacturing development, rather than other types of businesses, including services and personal consumption. The financial sector could also be used as a tool to ensure export discipline for the manufacturing industries.
Well, that's it - the magic formula. Having explained this right upfront in the foreword, Studwell spends the rest of the book mainly presenting the historical evidence for his theory. Much of his evidence is anecdotal and historical; not much of statistical tables and charts, but a lot of narrative economic history. In between, the narrative is interspersed with his observations from his travels in some of the countries, in so far as they are related to his theory.
In general economic commentaries, we do not generally read much about state-directed manufacturing and finance as elements critical to economic development. Hence Studwell’s theory is an interesting one. But I could not help questioning it as I read along.
One issue is whether these historical lessons are still relevant. In other words, can the lesser-developed countries start implementing this formula today and achieve development? For instance, it can be argued that what is holding back India are misdirected and wasted subsidies, corrupt and inefficient bureaucracy and the plutocratic political class. For India, the solution has to start with dismantling the current economic and political structures rather than more state-directed support for selected manufacturing industries or state-directed lending for farming and manufacturing.
In many places, the book comes across like extolling central planning and state control. Studwell praises the economic model followed by Park Chung-hee, Korean dictator from 1961 until his assassination in 1979. It so happened that Park’s economic policies contained some of the positive elements such as manufacturing development, rapid technological acquisition and development of globally competitive industries, which helped Korea’s fast economic development. But central planning and government control over the economy can easily turn into crony capitalism, as it happened in Indonesia’s Suharto period or in India until the economic liberalization of 1991. Russia is another ongoing example of how state control has not managed to lay the foundations for sustained economic performance – the country remains sorely dependent on oil and gas revenues. The point is that, for every one successful state-directed economic development, there are myriad examples of misdirected, corrupt and failed attempts of state-directed economy.
It is not clear to what extent Studwell’s model applies to China’s incredible rise in the last four decades. While China has followed the export-led growth model and turned itself into the world’s factory, it has yet to prove its ability to acquire and develop advanced technologies. Although Studwell provides some figures about the growth in the total profits earned by state-owned firms, there is a lot of other evidence that their return on capital invested is much lower than that achieved by private firms. It is then no wonder that China's incremental capital-output ratio has been rising. China today stands at a crossroads, when it needs to shift from export-and-investment-led growth to domestic-and-consumption-led growth.
A good question may be worth more than one good answer. As such, books should not be judged solely by their ability to provide answers. In that sense, Studwell’s book provokes many interesting questions. For example, how is India going to achieve economic prosperity and provide jobs to its expanding young population without developing its manufacturing sector? Its vaunted information technology sector has created 3m direct jobs, hardly enough to scratch the surface, leave alone making a dent in the country’s employment levels. While Indonesia has ridden the commodity boom for the last 10 years, how is it going to climb further without a coherent competitive strategy? Malaysia has got stuck in the middle-income trap without a clear strategy of how to develop further.
As Studwell points out, the economic profession seems to have adopted the mantra of free market, the government’s role being only to build the infrastructure, provide the legal and institutional framework and set the monetary policy, leaving the manufacturing and services sectors to decide their growth strategies. This book raises interesting questions about whether governments should legitimately play a more interventionist role in fostering development.
I had immensely enjoyed Studwell’s earlier book, “Asian Godfathers”. It was a riot of a read about Asia’s business tycoons and their escapades, although with a solid message about how they had cornered the economic systems to their own advantage. “How Asia Works”, on the other hand, is much more of a slow and difficult read.
* "All countries compared for Economy> GDP per capita in 1950, Angus Maddison. Aggregates compiled by NationMaster." 1950.