How Asia Works

Joe Studwell’s ‘How Asia Works’ is a seminal work examining the different trajectories adopted by the Asian countries in the aftermath of the Second World War. India doesn’t figure in the scope of this work. The focus is mainly on Northeast Asia (Japan, Korea), South East Asia (Malaysia, Indonesia, Vietnam) and of course China.

Studwell argues, with empirical data, that the path to prosperity for countries are threefold:

1) The first to maximize output from agriculture, which employs the vast majority of people in poor countries.

Successful east Asian states have shown that the way to do this is to restructure agriculture as highly labour-intensive household farming – a slightly larger-scale form of gardening. This makes use of all available labour in a poor economy and pushes up yields and output to the highest possible levels, albeit on the basis of tiny gains per person employed. The overall result is an initial productive surplus that primes demand for goods and services

2) The second ‘stage’ – is to direct investment and entrepreneurs towards manufacturing.

This is because manufacturing industry makes the most effective use of the limited productive skills of the workforce of a developing economy, as workers begin to migrate out of agriculture. Relatively unskilled labourers create value in factories by working with machines that can be easily purchased on the world market. In addition, in east Asia successful governments pioneered new ways to promote accelerated technological upgrading in manufacturing through subsidies that were conditioned on export performance. This combination of subsidy and what I call ‘export discipline’ took the pace of industrialization to a level never before seen

3) The third stage encompasses the interventions in the financial sector that focus capital on intensive, small-scale agriculture and on manufacturing development leading towards economic transformation

For me, the biggest takeaway was the realization that free markets do not emerge in a vacuum. Markets are created and nurtured by the State. Political power drives them. States that managed to create export discipline and encouraged firms to compete with the best in the world, created ecosystems that could move populations from agriculture to manufacturing without major disruptions. For this some states used protectionism to keep out foreign competition while at the same time weeding out domestic losers. I couldn’t help but feel bad for India’s lost decades. Even today, agricultural productivity in India is abysmally poor, landholdings are fragmented and farms are unable to absorb the labour pool during cyclical industrial downturns. The less said about manufacturing, the better. Our services sector has bailed us out for long but reading Studwell is a good reminder on the perils of embarking on such a path with limited manufacturing prowess.

In Korea, infant industry protection combined with export discipline, plus competition among multiple entrants, made manufacturing policy highly effective in securing technological upgrading. In Malaysia, industrial policy without export discipline and with insufficient attention to the need to foster competition came unstuck. Beyond these two states, other countries in north-east and south-east Asia provide only modest variations on what are two regional stories of success and failure in manufacturing development.

North-east and south-east Asia provide small variations around clear themes. What created the Canons, the Samsungs, the Acers and so on in Japan, Korea and Taiwan was the marriage of infant industry protection and market forces, involving (initially) subsidised exports and competition between manufacturers that vied for state support.

Technology policy, not science policy, is the key to the early stages of industrial development. As a result, a government’s industrial strategy is the most powerful determinant of success. If a state does not force the creation of firms that can be the vehicles for industrial learning – and then nurture them – all efforts at formal education may go to waste. The only caveat is that once a country reaches the ‘technological frontier’ in manufacturing, its optimal educational mix –and the relationship between institutions of formal education and learning within firms – changes. But that is not the focus of this book.

If you’ve traveled across the countries examined here, the book might be insightful as a substantial chunk of it is devoted to observations from his field work. Might revisit this if I someday end  up living in Korea, Japan or Malaysia. 😊