Studwell - How Asia Works

HOW

ASIA
WORKS

ALSO BY JOE STUDWELL

The China Dream

Asian Godfathers

HOW

ASIA
WORKS

SUCCESS AND FAILURE IN THE
WORLD S MOST DYNAMI C REGION

JOE
STUDWELL

Grove Press

New York

Copyright 2013 by Joe Studwell

All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by a reviewer, who may quote brief passages in a review. Scanning, uploading, and electronic distribution of this book or the facilitation of such without the permission of the publisher is prohibited. Please purchase only authorized electronic editions, and do not participate in or encourage electronic piracy of copyrighted materials. Your support of the authors rights is appreciated. Any member of educational institutions wishing to photocopy part or all of the work for classroom use, or anthology, should send inquiries to Grove/Atlantic, Inc., 841 Broadway, New York, NY 10003 or .

First published in Great Britain in 2013 by Profile Books Ltd

Jacket Design by Christopher Moisan
Jacket art: map from Historical Atlas, by William R. Shpherd. 1926.
Courtesy of the University of Texas Libraries, The University of Texas at Austin.

Printed in the United States of America

Published simultaneously in Canada

e Book ISBN: 978-0-8021-9347-6

Grove Press

an imprint of Grove/Atlantic, Inc.

841 Broadway

New York, NY 10003

Distributed by Publishers Group West

www.groveatlantic.com

For Tiffany

Contents

Land: The Triumph of Gardening

Tokyo to Niigata

Negros Occidental

Manufacturing: The Victory of the Historians

Seoul to Pohang and Ulsan

Across Malaysia

Finance: The Merits of a Short Leash

Jakarta

Where China Fits In

Learning to Lie

I went out in the heat of the moment, and in the bitterness of my heart...

William Gladstone, Midlothian campaign

Authors Note

T wo key data sources I have used are the International Monetary Funds World Economic Outlook database, which starts from 1980, and the World Banks World Development Indicators database, which starts from 1960. If no source is given for a data point, it has been taken from one of these two databases. The decision to not always quote the IMF and World Bank sources aims to reduce the number of endnotes.

The World Bank has changed its terminology and now refers to Gross National Product (GNP) as Gross National Income (GNI). While some readers may be used to the older term, GNP, GNI has been used throughout this book. According to the World Bank, there is no methodological difference between the two. The methodological difference that readers should take note of is that between GNI, which covers a countrys income from both domestic and international sources, and GDP, which reflects income in the domestic economy alone.

Despite my efforts to contain the number of endnotes, there are still a good many that are necessary to elucidate a point or show that there is a substantive source for what I am saying. It is not expected or intended that readers will look up all the notes. The best way to proceed for many people will be to only turn to the endnotes if the point being made is one you consider particularly important or controversial. For those interested, I hope to publish more of the academic research that supports what I say in a separate addendum. Any progress on this front will be reported at www.howasiaworks.com .

Unless otherwise noted, exchange rates are those that applied in the year or period that is being discussed.

Finally, pretty much every country in Asia has produced competing systems of romanisation of Asian languages. In writing names of people and places, I have attempted to use the romanised forms that are most familiar to contemporary English language readers. Hence Deng Xiaoping is rendered in the mainland Chinese pinyin system, whereas Chiang Kai-shek is rendered in the Wade-Giles system favoured in Taiwan. In South Korea, a degree of romanisation anarchy reigns. The McCune-Reischauer system, the Yale system, the new Revised Romanisation system and more exist concurrently and Koreans take their pick when romanising their names. Moreover, there is no accepted convention for the hyphenation and capitalisation of given names. I have therefore followed expressed preference or what appears to be the most common usage. Park Chung Hee preferred to be styled thus. Ha-Joon Chang writes his name thus. Byung-kook Kim is styled thus. And South Koreas first president insisted on, and is still known as, Syngman Rhee (if I called him the more standard Lee Seung Man, no one would know him.) In North Korea, there is unanimity that Kim Il Sung is the way to style a name. In Indonesia I have avoided the older, Dutch-influenced spellings such as Soeharto, since post-colonial spelling, such as Suharto, is now very widely accepted. I apologise in the knowledge that in dealing with eight countries there will be some romanisation choices, and some name stylings, that readers disagree with.

Introduction

T his is a book about how rapid economic transformation is, or is not, achieved. It argues that there are three critical interventions that governments can use to speed up economic development. Where these interventions have been employed most effectively in east Asia in Japan, South Korea, Taiwan and now China they have produced the quickest progressions from poverty to wealth that the world has seen. When, by contrast, other east Asian states have set off with the same ambitions and equal or better endowments, but have not followed the same policies, they have achieved fast growth for a period but the progress has proved to be unsustainable.

The first intervention and the most overlooked is to maximise 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.

The second intervention in many respects, a 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 industrialisation to a level never before seen.

Finally, interventions in the financial sector to focus capital on intensive, small-scale agriculture and on manufacturing development provide the third key to accelerated economic transformation. The states role is to keep money targeted at a development strategy that produces the fastest possible technological learning, and hence the promise of high future profits, rather than on short-term returns and individual consumption. This tends to pit the state against many businessmen, and also against consumers, who have shorter strategic horizons.