*How Asia Works*

by on June 11, 2013 at 12:54 pm in Books, Economics, Food and Drink, History | Permalink

The author is Joe Studwell and the subtitle is Success and Failure in the World’s Most Dynamic Region.  That’s an excessively bland title and subtitle, but so far this is perhaps my favorite economics book of the year.  Quite simply, it is the best single treatment on what in Asian industrial policy worked or did not work, full of both analysis and specific detail, and covering southeast Asia in addition to the Asian tiger “winners.”

Studwell explains that South Korean policy was based in a notion of “export discipline” and that policymakers were quite ready to see leading chaebol go bankrupt, which indeed they did often.  Everything was directed toward export capacity and they didn’t worry about what rate of price inflation, often in double digits, the cheap credit policies might create.  It was a gamble on a world-historical scale, noting that South Korea engaged in much more borrowing than did the other Asian tigers.  His p.111 account of how Park and his cronies started arresting most of the nation’s leading businessmen, to teach them a lesson and to skew corruption in nation-building directions, is sobering and thought-provoking reading.

Here is one instructive bit of many:

Thailand holds the record for the most consistent import substitution industrialisation (ISI) policy in south-east Asia, running from the early 1950s into the 1980s.  Industrial policy also was led by probably the most competent, professional bureaucracy in the region.  But, as the Japanese scholar of development Suchiro Akira observed, there was almost no pressure for favoured manufacturers to export…Unlike in northeast Asian states, the Thai bureaucracy never  brought export discipline to bear because the Thai generals and politicians who ran the country did not prioritise it.

In other words, industrial policy has to work with the market and rely on market discipline, not try to circumvent such constraints.  That is hard to pull off, although clearly it happened in South Korea.

It is also an excellent book on the agrarian pre-histories of East Asian industrialization and why South Korea, Japan, and Taiwan pulled off successful land reforms and Indonesia and the Philippines did not.

I would wish for more coverage of education and labor markets, and the final section on China still awaits me.  Think of it as a kind of “tweener” book: too specific and analytic to be truly popular, too broad, historical, and anecdotal to count as formal economic research.  That is not a complaint.

Definitely recommended, you will learn lots from it, and it will upset people of virtually all ideologies.

Addendum: Here is a good FT review.

prior_approval June 11, 2013 at 1:55 pm

It certainly makes sense to assume Park refers to Park Chung-hee, a man who counted on American support, just like that South American economic wunderkind, Pinochet –

‘Park seized power through a military coup d’état that overthrew the Korean Second Republic in 1961 and ruled as an unelected military strongman at the head of the Supreme Council for National Reconstruction until his election and inauguration as the President of the Korean Third Republic in 1963. In 1972, Park declared martial law, suspended the country’s constitution and made himself President for Life while ushering in the Korean Fourth Republic due to the constant communist threats within the nation. Despite surviving several assassination attempts, including two operations by agents of North Korea, Park was eventually assassinated on 26 October 1979 by Kim Jae-gyu, the chief of his own security services.[1] He had led South Korea for 18 years.’ http://en.wikipedia.org/wiki/Park_Chung-hee

And it is fascinating to see just how much Park relied on America for money –

‘Park is credited with playing a pivotal role in the development of South Korea’s tiger economy by shifting its focus to export-oriented industrialization. When he came to power in 1961, South Korea’s per capita income was only US$ 72.00. North Korea was the greater economic and military power on the peninsula due to the North’s legacy of high industrialization such as the power and chemical plants, and also the large amounts of economic, technical and financial aid it received from other communist bloc countries such as the Soviet Union, East Germany and China. Park encouraged the sex trade in order to generate revenue, particularly from the U.S. military.[15] The U.S. military camptown sex industry generated nearly 25 percent of the South Korean Gross national product.’ http://en.wikipedia.org/wiki/Park_Chung-hee#Economic_policy

And some people wonder why a number of South Koreans despise the U.S. But then, with his background, there is an excellent chance that Park knew all about ‘comfort women’ ( http://en.wikipedia.org/wiki/Comfort_women ) –

‘Following the outbreak of the Second Sino-Japanese War, the ambitious Park decided to enter the Changchun Military Academy of the Manchukuo Imperial Army. He graduated top of his class in 1942 and was recognized as a talented officer by his Japanese instructors, who recommended him for further studies at the Imperial War College in Japan.[2] After graduating third in the class of 1944, Park was commissioned as a lieutenant in Japan’s elite Kwantung Army, and served during the final stages of World War II.’

That’s right, Park fought for the Japanese. That was before he became our dictator, of course.

So Much For Subtlety June 11, 2013 at 8:07 pm

That’s right, Park fought for the Japanese. That was before he became our dictator, of course.

And thank God he did. Western cultural values, including liberal democracy, do not work well outside the West. The alternative to the people the Japanese trained were people the Soviets trained. And while I think the Korean War was a mistake and the North should have been left to conquer the South, the South Korean people ought to go down on their knees every night and thank the Lord that they did not get what they wanted, and got Park instead.

david June 11, 2013 at 2:57 pm

The traditional New-Institutional-Econ defense of an export focus is that it minimizes rent-seeking, because you can’t coerce distant foreigners into accepting your goods as superior, your goods actually have to be competitive.

Studwell writes as if this was an overt ideological goal of the 1960s generation of East Asian bureaucrats, but this seems unlikely. Take the succession of Korean automotive companies, which Studwell makes much of. As noted here, the Park administration actually altered its favoured maker in succession from Sammi to Saenara to Shinjin because of the financial contributions (that is, bribes) made by each conglomerate. It opened up to Hyundai and Kia when Shinjin, in turn, began coughing up the rent to its Toyota partner instead of the domestic regime. In short, the motive here was to cull cronies who couldn’t deliver financial support to the regime. That is why these states were so ready to keep eliminating losers. Call it competitive cronyism: the regime wanted powerful industrialists who could act as political cronies, but didn’t really care who, in particular, these were.

And it is that which drives the difference with Malaysia and Indonesia, which Studwell goes into but doesn’t satisfactorily explain. He puts it down entirely to the idiosyncrasies of Mahathir and company, but Mahathir had to care about who, exactly, he trusted with power. The ethnic reality of modern Malaysia is that a relatively tiny English-speaking Westernized elite claim legitimacy through membership in an ethnic majority they are actually quite culturally distant from. Same with Indonesia, although without the English. The result is that an entrepreneur can’t just be any Malay, it has to be someone who has personal ties to the Westernized style of government that these states inherited. Both Mahathir and Suharto ascended to power in cautious balances of power with other leaders with different visions of ethnic identity. That is why both Malaysia and Indonesia did not demand that handpicked cronies meet export demands: neither Mahathir nor Suharto was really prepared to remove cronies who fail to meet such objectives. They would have to personally vet every candidate for political reliability. Malays don’t wear stickers on their foreheads showing how Westernized they really are.

Studwell complains about Mahathir’s reliance on his own personal judgment of character, but there’s another East Asian strongman with a similarly notorious faith in his own personal judgments, namely Lee Kuan Yew. Yet Singapore Inc. did not wilt under Lee’s micromanagement. Singapore had successfully viciously purged non-Westernized Chinese from political relevance in the 1960s. Studwell dismisses the entire country as a free-trade tax-haven, but it wasn’t either during the 1970s and 1980s. Neither Hong Kong, in fact; the earlier postwar governments were quite dirigiste; the positive-non-interventionism era came later, when earlier governments had already established all the instruments of control, right down to using the Unofficial Member system of the executive council to favour handpicked Hong Kong corporate executives in the way the Studwell so approvingly describes of Korea.

david June 11, 2013 at 3:22 pm

And Studwell gets so close to realizing this, too: he snarks that Mahathir was from an educated background, whereas Park was the son of a peasant farmer. But he uses it as a cheap jab and doesn’t see that this might actually be relevant. Park’s primary ideological competitors were all across the DMZ. Mahathir had them in his own party.

Mike H June 11, 2013 at 3:17 pm

“In other words, industrial policy has to work with the market and rely on market discipline, not try to circumvent such constraints.”

Can’t speak for South Korea or other East Asian countries, but from what I know it was really the free market that sparked what people called “Taiwan miracle”. In the last two decades economic literature published in Taiwan that discuss this part of our history have increasingly abandoned the so-called “export-led growth” theory as the explanation of what happened. Instead, it has become more and more apparent that it was the shrinking of government influences in the 1970s and the resulting growth in the private sector that produced the miracle.

Before the 1970s the economic growth of Taiwan was really slow, under the authoritarian Kuomintang government the country was spending around 30-40% of the GDP on defense. The government also spent huge money on subsidizing inefficient state-owned enterprises such as Yulon (a domestic car manufacturer similar to East Germany’s Trabant) hoping they would build up the export market, that never happened though. The slow growth combined with diplomatic isolation following Taiwan’s withdrawal from UN in 1971 finally brought the reformists to power and throughout 1970s trade restrictions with Japan and elsewhere were abolished, together with a large scale privatization and deregulation of the industry. Investments and imports of technology from Japan quickly helped started up many of the Taiwanese companies that later became the major contributors of growth. For example Taiwan’s Evergreen Marines, currently the fourth largest container shipping company in the world, was started by a Taiwanese businessman but funded almost entirely by Japanese money in the 1970s and would never have took off without the relaxing of regulations on foreign investments.

Also worth mention is the rise of Taiwan’s electronics and IT industry in the 1980s which, ironically, were exactly the area of industry that the government didn’t expect to be able to compete with the industrialized West and therefore put little regulations and protections on them. Companies like Asus, Acer, Gigabyte were all started in the 1980s similar to the conditions under which Bill Gates started Microsoft. The government at the time didn’t pay them any attention at all, and those companies managed to become the world’s largest manufacturers of motherboard and computer parts in just a decade.

Again, I don’t pretend to know anything about what produced the economic growth in South Korea at the same time period. What I am quite certain is that the kind of growth Taiwan experienced in the 1970s through 1990s cannot be fully explained as some intended outcomes of export-loving government bureaucrats. It seems to me that Taiwan’s growth was not “export-driven” as many have claimed, but it was the growth itself that was driving both the exports and imports.

david June 11, 2013 at 3:26 pm

Yet the Taiwanese economic miracle started in the early 1960s, not the early 1970s, if you simply look at real GDP growth.

And FDI has never been a significant source of Taiwanese growth, even by the 1980s.

Mike H June 12, 2013 at 12:33 am

“Yet the Taiwanese economic miracle started in the early 1960s, not the early 1970s.”

It was only in the 1970s that the country as a whole started to stand out among the developing nations. This is quite obvious if you look at the huge jump in exports and imports during this period. Taiwan was buying and selling ever more stuff at an astonishing rate when the other countries were growing at the same rate as the 1960s.

>Exports from Taiwan, $1.4 billion in 1970, were $4.3 billion by 1973, and imports more than doubled.”

http://books.google.com.tw/books?id=ljHq6-HnW1QC&q=taiwan#v=snippet&q=taiwan&f=false

“And FDI has never been a significant source of Taiwanese growth.”

…and my argument isn’t about FDI being the primary source of economic growth. I said those funds and imported technologies were crucial for the Taiwanese companies at the time to get a competitive edge over other countries. If you look at the successful Taiwanese companies that emerged during that period, most of them had some help from Japan or elsewhere.

Peter Schaeffer June 12, 2013 at 3:35 am

david, Mike H,

The online data shows staggering gains in Taiwanese output from 1950 onwards. See the TED database.

1950 GDP – 6,828 – 11,025
1960 GDP – 14,697 – 23,721
1970 GDP – 36,868 – 59,529
1980 GDP – 93,563 – 151,072
1990 GDP – 200,477 – 323,700
2000 GDP – 366,943 – 592,485
2010 GDP – 536,020 – 865,486

The first number is GK GDP. The second number is EKS GDP.

It is true that the 1970s were the peak decade for growth. However, the 1950s and 1960s were quite strong as well with GDP more than doubling in each decade.

Ricardo June 12, 2013 at 3:55 am

The original argument was that the “free market” and “shrinking of government influences” produced the Taiwan miracle and, in support of this argument, you claimed that economic growth before the 1970s was slow. Given that this supporting claim is not true (average growth in real GDP per capita during the 1960s was above 10% per year and the double-digit growth started in 1963) I don’t see how it does your argument any good to then claim that we shouldn’t look at economic growth but should instead use exports and imports as a metric of economic success when you also claim elsewhere that exports and imports themselves are the results of underlying economic growth.

Taiwan started out extremely poor: the Penn World Tables have GDP per capita in 1960 at $350 compared to India’s 1960 figure of $135. Even double-digit growth for an entire decade in such an incredibly poor country may not make it “stand out” in qualitative terms but it is still a remarkable achievement compared to India’s 5% growth over the same decade.

Mike H June 12, 2013 at 12:25 pm

“I don’t see how it does your argument any good to then claim that we shouldn’t look at economic growth but should instead use exports and imports as a metric of economic success when you also claim elsewhere that exports and imports themselves are the results of underlying economic growth.”

My argument was that the changes in business environment as a result of policy shift in the 1970s unleashed the industrialization, transformed the economy and thus produced the huge increase in exports and imports. There are a number of reasons I can think of why GDP does not accurately reflect the magnitude of this movement. First there was the reductions in military and government spending, it was at that time the government abandoned the decades-long military preparation to “retake” mainland China and you had all the resources suddenly available to be used in the private sector. Also there was a shift of outputs from agricultural sector to manufacturing and transportation industry, because you had all the business people started to do things they weren’t allowed to do previously. Just because the growth in GDP is similar to the previous decade doesn’t mean my theory about industrial transformation is wrong.

Looking at the huge growth of exports and imports in the 1970s and you have to admit that there was really something different about that particular period. As you have said Taiwan was really a poor country in the 50s and 60s, it was only in the 70s that things started to change dramatically. Taiwan’s living standard was on par with countries like India till the 70s when people started to buy TVs, refrigerators and other items that weren’t available or affordable previously.

dearieme June 11, 2013 at 3:36 pm

I understand that Hong Kong got rich with the industrial policy of … leave well alone.

Therapsid June 11, 2013 at 3:52 pm

What large Asian nation has gotten rich that way? That’s Studwell’s point.

So Much For Subtlety June 11, 2013 at 8:11 pm

But that is not a fair comparison. The benefits of rent seeking are simply too great for any politician in any large Asian nation to ignore. Both financial compensation and the ego stroking that comes from being in charge. Only Britain could have a civil service made up of people who looked to Britain, not to Hong Kong, and Hong Kong’s economy was originally too small to be very tempting for British officials.

So if any Asian country does develop, with the rent seekers in place, the rent seekers will claim it was their doing and so retrospectively justify their theft. But most of them do not. Hong Kong did. Development is hard and most Asians have not been able to do it. Most of them have a lot of government industrial policies.

Rafael June 11, 2013 at 10:50 pm

Given the very robust growth of China and India I think that we can safely say that most of Asia is well on the path of development. About 200 million Asians live in developed countries and a few hundred million now constitute the middle and upper classes in the developing Asian countries, hundreds of millions have left poverty over the past 30 years as well. Asia currently houses 45% of the world’s manufacturing output and it’s economic importance today is bigger than North America or Europe, and over the next decades Asia will probably have most of it’s population move to the middle class.

Overall, it appears to me that the process of industrialization in Asia is rather natural from a long run point of view (beginning in the 1870′s) and it appears that it is rather stable and, even if the various countries have vastly differing performances right now, I think that they will tend to converge over the next decades (well, China, Southeast Asia and India are already growing much more than the more advanced Asian economies).

So Much For Subtlety June 12, 2013 at 2:15 am

India finally did what the West had been telling them to do for a long time in 1991. But India has been backsliding. And their rate of growth has suffered. In 2007 their economy was growing at something like 10% a year. This year, it will grow at something like 4%.

India has twice before tried these sort of reforms – in 1966 and 1985. They were reversed in 1966 and 1987 (I think, when Rajiv Gandhi was killed anyway). They did not take. They know what they have to do. But the political price is too high to pay and so their politicians will not.

So when you say Asia is doing well what you really mean is that China is doing really well. The East Asian model of development is the only successful non-Western model. But it seems to be failing in Japan – they have not had any growth for over a decade and no signs of putting their house in order any time soon. Taiwan and South Korea also seem to be topping out at a much lower rate than you would expect. Their growth has not been that robust lately anyway. Which really leaves Hong Kong and Singapore.

Industrialization and modernization seem naturally because we did it. Without knowing how or why. But it has been very hard for other people to do it. I don’t think it is naturally at all. So many things seem to goes against it. Maybe the Asian economies will catch up. I hope so. But I am not confident it will be easy or inevitable.

mw June 11, 2013 at 3:55 pm

And now they have the classic western economy based on…financialization and tax evasion. Now there’s a tradeoff silly countries like Thailand wish they had made.

david June 11, 2013 at 4:22 pm

Hong Kong, like all the other Asian tigers, went through a lengthy period of textile and then heavy manufacturing and then deindustrialization and move into services. Studwell pushes the “it’s only a tax haven” idea, too, but this just isn’t reflected in the history of its GDP sectoral breakdown.

david June 11, 2013 at 4:14 pm

Not really. Rather, industrial (and monetary) policy was de facto delegated to HSBC and Standard Chartered Hong Kong. Same with Jardine Matheson, which still owns most of the buildings in Hong Kong’s downtown and carried out most of the reclamation work back in the 1960s: Jardine carried out the commercial land development, whilst the government of Hong Kong built the housing and schools. Both of these then had representatives of their corporations appointed by the governor to the executive council of Hong Kong, as “unofficial members” (where “unofficial” means “Chinese rather than British”, not “of no formal status”).

This gets confused as non-intervention by Western observers, but colonial Hong Kong always delegated a vast amount of government power to the local Chinese, by propping up favoured Chinese lobby groups with vast monopoly powers.

dearieme June 11, 2013 at 5:33 pm

“colonial Hong Kong always delegated a vast amount of government power to the local Chinese”: HSBC and Jardine Matheson were surely stuffed with Scots not Chinese.

david June 11, 2013 at 5:50 pm

No, not really. They had been founded a century earlier, over the period the locals began populating the ranks of staff and customers. Ownership is not the same as control.

Emil June 11, 2013 at 4:25 pm

Sorry, but claiming that the Thai bureaucracy is/was the most competent doesn’t pass the laughing test.

JO June 11, 2013 at 5:34 pm

Can anyone recommend a book on similar topics in Europe?

Steve Sailer June 11, 2013 at 6:20 pm

An incredibly bad ideology (e.g., Maoism or juche in North Korea) will hold Northeast Asians down. Within the rational range of policies, however, it seems as if Northeast Asians do pretty well whatever the details of how their governments manage the economy.

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