How Asia Works

Author: Joe Studwell

• The Japanese economist Yoshihara Kunio had warned in the 1980s that south-east Asian states risked becoming ‘technology-less’ developing nations.

• Part 1 of this book explores why agriculture is so important. It does so partly through journeys to Japan and the Philippines.

• Part 2 moves on to the role of manufacturing. It investigates how Japan, Korea, Taiwan and China perfected ways to marry subsidies and protection for manufacturers – so as to nurture their development – with competition and ‘export discipline’, which forced them to sell their products internationally and thereby become globally competitive.

• Part 3 looks at financial policy. In successful east Asian states, the structure of finance was determined by the need to achieve the objectives of high-yield, small-scale agriculture and the acquisition of manufacturing skills.

• Premature financial deregulation in south-east Asia led to a proliferation of family-business-controlled banks which did nothing to support exportable manufacturing and which indulged in vast amounts of illegal related-party lending.

• North Korea, Laos, Cambodia, Myanmar and Papua New Guinea, all of which are found near the bottom of the United Nations’ Human Development Index (HDI) rankings,8 are not discussed. The reasons for the failure of these states are varied, but one common characteristic leaps out: they are all politically and economically introverted. In varying degrees, these countries are

• North Korea, Laos, Cambodia, Myanmar and Papua New Guinea, all of which are found near the bottom of the United Nations’ Human Development Index (HDI) rankings,8 are not discussed. The reasons for the failure of these states are varied, but one common characteristic leaps out: they are all politically and economically introverted.

• Rapidly declining death rates – particularly for children – and rapidly rising working-age populations have been a big part of the east Asian developmental story since the Second World War.

• The other influence on development that is given only a background role in this book is education. Here, the reason is that the evidence of a positive correlation between total years of education and GDP growth is much weaker than most people imagine.11

• Looking further afield, Cuba has the world’s second-highest literacy rate for children over age fifteen, and the sixth highest rate of school enrolment. Education has been a top priority there since the revolution in 1960. Yet the country ranks only ninety-fifth in GDP per capita in the world.

• A shortfall of vocational training and engineers, however, cannot be more than a tiny part of the explanation for the laggardly performances of south-east Asian states and others with educational profiles like them.

• Technology policy, not science policy, is the key to the early stages of industrial development.

• In the Philippines, a democratically elected Ferdinand Marcos announced in 1972 that he needed martial law in order to make vital reforms that would expedite development, and then went on to set a new standard of plunder.

• There are moments, as with General Park Chung Hee’s temporary imprisonment of business leaders and re-nationalisation of the Korean banking system in 1961, when actions of an extremely authoritarian nature have produced clear dividends.

• The miseries visited on ordinary people by a lack of attention to institutional progress deserve attention in their own right. Economic development is the subject of this book, but economic development alone is not a recipe for human happiness.

• Another lately fashionable institution – ‘rule of law’ – belongs in the same category as democracy in being a part of development rather than a prerequisite of economic progress.

• Finally, there is the old chestnut that geography and climate are major determinants of economic development.

• Despite a very real tendency of countries to copy their neighbours, geography fits sufficiently poorly with economic success and failure in east Asia that it has had to be treated with considerable licence in this book.

• What follows is not a set of detailed policy recommendations because the conditions of each country vary. But it does claim a degree of historical accuracy in describing what happened in east Asia. That history reminds us that, however fleetingly, the developmental destiny of a nation is in its government’s hands.

• Why should land policy be so important to development? The simple answer is that in a country in the early stages of development, typically three-quarters of the population is employed in agriculture and lives on the land.

• The problem with agriculture in pre-industrial states with rising populations, however, is that when market forces are left to themselves agricultural

• The problem with agriculture in pre-industrial states with rising populations, however, is that when market forces are left to themselves agricultural yields tend to stagnate or even fall.

• The vehicle for the change was a series of land reform programmes undertaken

• The vehicle for the change was a series of land reform programmes undertaken in China, Japan, Korea and Taiwan.

• (the cognoscenti place radishes and carrots in the same furrow because the radishes mature before the carrots begin to crowd them out; but then the radishes can only be harvested by hand).

• But the logic of the labour-intensive gardening approach to cultivation is the same wherever you do it: it gets more out of a given plot of land than anything else.

• The problem is that the gardening level of output needs so much labour.

• Although the island continued to produce large volumes of rice and sugar, its new boom crops of the 1950s and early 1960s were asparagus and mushrooms – two of the most labour-intensive crops there are. Taiwan, the most successful agricultural development story in the whole of Asia, really is a story that vegetable gardeners can relate to.

• However, the evidence of what occurred in China, Japan, Korea and Taiwan is powerful: good land policy, centred on egalitarian household farming, set up the world’s most impressive post-war development stories.

• A third way of thinking about the benefits of agricultural output maximisation is from the perspective of foreign trade. States beginning their economic development never have enough foreign exchange, and one of the easiest ways to fritter it away is to spend more than is necessary on imported food.

• As a result, as incomes rose and people ate more food – including meat, which is more land-intensive to produce than vegetable crops – different Latin American countries either reduced their agricultural exports or increased their agricultural imports. Either way, the net effect was that agriculture tended to bleed away any foreign exchange that industrial exports (or reduced imports) created.

• different Latin American countries either reduced their agricultural exports or increased their agricultural imports. Either way, the net effect was that agriculture tended to bleed away any foreign exchange that industrial exports (or reduced imports) created.

• By giving rural families equal amounts of land to farm, governments created conditions of almost perfect, laboratory-like competition. This was the kind of competition involving large numbers, no barriers to entry and freely available information about which mathematical economists fantasise (and at which many other people scoff because it occurs so rarely).

• Deininger’s two big conclusions are that land inequality leads to low long-term growth and that low growth reduces income for the poor but not for the rich.12

• In short, if poor countries are to become rich, then the equitable division of land at the outset of development is a huge help.

• However, by throwing off feudalism in short order, switching to private smallholder agriculture and mobilising an impressive level of national bureaucratic support, Japan was able to begin industrialisation despite having a three-quarters rural populace.

• The supply of new agricultural land stopped growing, while population continued to increase. At the same time, the so-called ‘terms of trade’ between agriculture and manufacturing – what a unit of agricultural output could buy in terms of manufactures or vice versa – began to favour manufacturing,

• And that is the reason why Japan has so little cultivable land – the country is covered in hills and mountains, which in turn are covered in forests.

• The People’s Liberation Army secured many recruits during the civil war, first by giving their families confiscated land and then by organising supporters to farm it while the young men were away at the front.

• Agriculture was still the provider of two-fifths of employment and almost one-fifth of national income in 1955. The introduction of a more deep-rooted, enduring land reform – which kept the agricultural economy focused on yield gains rather than tenancy profits – set the stage for Japan’s post-war miracle.

• Korean agricultural output did not increase as fast as that in Japan.

• It was in the 1960s and 1970s, when the state provided household agriculture with the kind of support seen in Japan and Taiwan in the 1950s, that yields increased appreciably.

• Taiwan is the most interesting agricultural story in north-east Asia, for two reasons. First, the island produced the most remarkable developmental results as a consequence of land reform. Second, with its subtropical climate Taiwan is geographically more south-east Asian than north-east Asian and hence the success of land reform there gives us a powerful reminder that geography is not destiny in development.

• In contrast to what was to occur in south-east Asia, popular participation in the process was at the root of successful implementation.

• By one estimate, the transfer of wealth involved in the land reform was equivalent to 13 per cent of Taiwan’s GDP passing from one group of people to another.49

• Household income surveys in Taiwan showed that the country moved from a Gini coefficient – the standard measure of equality, where 0 is perfect equality and 1 is perfect inequality – on a par with Brazil in the early 1950s (scoring 0.56) to a level in the mid 1960s that was unprecedented for a developing country (0.33).50

• Taiwan stands out among north-east Asian states for the extent to which agricultural goods drove and dominated exports at the beginning of the country’s development process.

• if you have travelled down from north-east Asia, that you have left the world of 0.3 Gini coefficients and entered the world of 0.5 Gini coefficients – that is, a different kind of ‘developing’ economy.

• Nowhere in Asia has produced more plans for land reform than the Philippines. But, equally, no ruling elite in Asia has come up with as many ways to avoid implementing genuine land reform as the Filipino one.

• Combined with US training for the Filipino military and an anti-insurgency drive, these very limited agricultural reforms were enough to take the heat out of the Huk rebellion.

• Marcos opined: ‘Land reform is the only gauge for the success or failure of the New Society … If land reform fails, there is no New Society.’

• During the land reform legislation debate, Cory Aquino produced some of the Philippines’ most famous political last words: ‘I shall ask no greater sacrifices,’ she told her countrymen, ‘than I myself am prepared to make.’63

• Legislation passed in 1955 and 1967 was supposed to increase tenant security and ban tenant cash deposits known as ‘tea money’, but the laws were weak and enforcement was left up to individual states, largely run by landed elites.

• Subsidies were introduced for agricultural essentials such as fertiliser, but again their distribution favoured large farms over small.

• This is another reminder that, in order to thrive, smallholders require not only their fields, but also the extension, marketing and credit infrastructure that allows them to compete.102

• In the Philippines, Indonesia and Malaysia, the post-independence governments had inherited plantations and scale agriculture from their colonisers. In Thailand, it was a state that had not been formally colonised that created and nurtured this sector.

• Even the best policy is only a solution to the developmental challenges of a particular moment in time.

• As a country develops, like its industry its agriculture needs to specialise by activity.

• However, protection was relatively less than in Japan and Korea, and Taiwanese farmers were therefore forced to diversify more and to develop more internationally competitive products. They became, for instance, important regional exporters of pork products.

• Land reform created a kind of ‘consumption shock’ as waves of spending power for basic, domestically manufactured consumer goods spread through the economy.

• The second effect of land reform was separate from the output and consumption shock effect, but combined with it to produce yet more economic virtue. It was the creation of a high level of social mobility as the result of an equal initial distribution of society’s most basic non-human asset – land.

• In India, the state governments of Kerala and West Bengal pushed through land reforms in the 1960s and 1970s despite the rest of the nation’s failure to do so.

• Today, even though the service sectors have come to dominate the economies of rich countries, manufacturing remains critical to the rapid economic transformation of poor countries.

• International sales have been the feedback mechanism by which successful governments have known whether the manufacturing businesses they have nurtured are approaching global standards,

• Where export discipline has not been present, development policy has become a game of charades, with local firms able to pretend that they have been achieving world-class standards without having to prove it in the global market place.

• The fact that north-east Asian governments concentrated on weeding out losers rather than picking winners also helps to explain the existence of large businesses which grew up without significant direct state support and outside state plans – like Sony and Honda in Japan, or Acer and HTC in Taiwan – in addition to ones which received more state largesse.

• In short, protectionism has always been the rich man’s entry ticket to industrial development.

• Ha-Joon Chang, a contemporary Korean economist, has argued that a developing country’s investment in industrial learning follows exactly the same logic as parents’ investment in their children’s education.

• North-east Asian industrial policy was not invented out of thin air.

• North-east Asian industrial policy was not invented out of thin air. Instead it was copied from examples of successful economic modernisation

• North-east Asian industrial policy was not invented out of thin air. Instead it was copied from examples of successful economic modernisation in the United States and Europe.