Monday, January 19, 2015

How Asia Works

This Bill Gates recommended book makes a compelling case for why certain countries in Asia are relatively well-off while others are mired in poverty.

Author Joe Studwell makes the argument that Asian countries that have gotten richer than the others (e.g. Japan, South Korea, China) have done so by getting the following three things right to a large extent:

1) Land reform

Most workers in poor countries are farmers, so first off getting the right agricultural policies going is imperative. When elites own all the land, feudalism occurs and excess output does not end up in the hands of those who would potentially create it. This leads to stagnant productivity and keeps output per worker low.

2) Manufacturing focus

Once excess food supply is created through #1, workers have money to spend and are also freed up for other sectors. The most important of these sectors is manufacturing, as it requires minimal skill and yet offers immense productivity benefits, as imported machines do most of the work. The key here is government focusing incentives on the export market, as this subjects firms to real competition and therefore forces productivity upward.

3) Financial support

States must support nascent industries with credit and market protection so that manufacturing companies can get up to global standards, and they must provide infrastructure so that agricultural know-how and distribution capabilities are able to drive growth.

While Studwell's arguments are compelling for the most part, determining what factors drove success in a complex economy isn't an exercise that can lead to a lot of confidence. But somehow he has it. Unfortunately, that makes it harder to buy his arguments.

For example, do protectionist measures in certain infant industries lead to leadership in future decades? Studwell points to the individual successes of such policies (POSCO, Hyundai, Samsung in Korea, for example), but it's difficult to measure all the failures on which money was blown. Not to mention that even the successes were subsidized by the rest of the economy (e.g. low interest rates paid on deposits, tariffs raising prices for consumers), making consumers poorer in the process, and stifling other businesses that may have otherwise emerged.

There is also the question of political power. It's easy to say that countries that will increase competition will benefit, but that's not necessarily a choice that's available. It is the countries where politicians are in bed with big business that impose policies that restrict competition. But these are the choices made by those in charge who want to keep exploiting the population; for example, it's not that people in charge don't know that serf-like agricultural policies won't lead to productivity gains, but they don't want to force elites to give up their land because elites have too much political power. Countries where elites have so much power are bound to have poorer economies, so pointing to the richer ones and their better policies is getting the cause and effect reversed.

There were also areas that didn't quite jive with my understanding of economics. For example, I don't understand why scale isn't important in agriculture and yet is so important in non-agriculture that it requires protectionist policies. Competition is needed in all sectors. But in poor countries there is a lack of competition, as monopologies/oligopolies in bed with governments act as barriers to entry; I submit that the main reason export policies are passable in such countries is that exporting firms steal market share from firms that don't have political clout within the country.

I also wasn't sure why the economies of Hong Kong and Singapore were totally irrelevant to Studwell's analysis, as I don't buy that geography alone makes the path these states took to getting rich any less useful to the analysis. I suspect it's because these states were successful but did not follow the methodology outlined by the author, making the analysis subject to exclusion bias.

Finally, I was disappointed that India and its neighbouring states were totally ignored.

Nevertheless, this was an educational book that I found highly useful for describing what policies various Asian states used over the last several decades to arrive at the current states they are in.

1 comment:


This post is exactly the kind of
appreciation of our complex reality that drew me to this blog in the first place.
Well done,Mr.Karsan,Well done