How Asia Works - Book Summary

Unlock the Secrets of Economic Development in Asia

Over the past few decades, Asia has been a theater of profound economic transformations, showcasing some of the most compelling development tales on the global stage. Nations such as Japan, South Korea, and Taiwan have risen to prominence, charting a course of rapid and sustainable growth — a blueprint many sought to replicate. However, not all who embarked on this journey fared the same. Countries like Malaysia, Thailand, and the Philippines found the path to enduring success elusive, their economic booms fizzling out after brief spurts of growth. This raises the crucial question: What differentiates the economic development trajectories among these nations?

The journey to become an economic powerhouse is intricate, demanding a precise sequence of steps and policies. It's akin to mastering the art of walking before attempting to run; there's an inherent order that, if adhered to, can pave the way for transformative growth.

In this exploration, you'll unravel:

- The perils that financial deregulation poses to the scaffold of economic development.

- An intriguing insight into agriculture: the counterintuitive efficiency of small-scale farming over its large-scale counterpart.

- The strategic reasoning behind South Korea's support for not one, but three car manufacturers within its modestly sized market.

Through these lenses, we'll delve into the mechanisms that have propelled certain Asian economies to the forefront of global prosperity, while others remain caught in the traps of short-lived success. By understanding these dynamics, we can uncover the essential steps and strategies that are instrumental in steering a state towards enduring economic vitality.

The First Step to Prosperity: Empowering Small-Scale Farmers

In the quest to bridge the vast chasm separating developing countries from their more technologically advanced Western counterparts, certain Asian nations have charted a remarkable path to transformation. Japan, South Korea, Taiwan, and, in more recent times, China, have made leaps that many would not have deemed possible. Their secret? A strategic emphasis on boosting agricultural output through the promotion of household farming.

At the heart of this approach is the unexpected hero of small-scale farming, a method that has surprisingly outpaced large-scale operations in terms of efficiency and productivity. This commitment to nurturing the agricultural endeavors of individual households has unlocked a level of agricultural output that large-scale farms, with their vast expanses and mechanized processes, have struggled to match.

This strategy may turn heads — after all, the sprawling fields and towering machinery of large farms have long been symbols of agricultural prosperity. But what these large operations gain in scale, they lose in labor-intensive care that only human hands can provide. In agriculture, unlike in manufacturing, more isn't always better. The quality and quantity of output hinge not on size but on the meticulous application of fertilizer and the painstaking labor of farmers. It's a setting where the human touch trumps mechanical intervention.

Mechanization, a hallmark of large-scale farming, brings with it a reduction in employment opportunities and diminishes the potential yield per plant. This shift toward machinery over man is counterproductive in contexts where labor is plentiful and job opportunities scarce. For developing nations, where industry and services are yet to offer a robust employment landscape, agriculture remains the primary occupation. Thus, the promotion of household farming not only maximizes agricultural productivity but also ensures that jobs are plentiful.

Consider the example of cultivating shade-tolerant vegetables like celery beneath the canopy of taller plants. This ingenious method allows for maximized land use but demands manual planting and harvesting — tasks that machines cannot adeptly handle. Such labor-intensive farming techniques result in agricultural yields that leave mechanized, large-scale operations in the dust.

In promoting household farms, these successful Asian states not only unlocked the secret to maximizing agricultural output but also bolstered their economies by creating a wealth of employment opportunities. As these countries have demonstrated, laying the foundation of economic development starts with recognizing the potential of small-scale farming — a strategy that makes both agricultural and economic sense in developing nations awaiting the ripening of industrial and service sectors.

Land Reform: The Foundation of Agricultural Revolution

At the core of promoting household farming lies a crucial challenge — addressing the disparities in land ownership. The vision of a thriving agrarian economy anchored by small-scale farmers hinges on resolving who owns the land and who stands to benefit most from its cultivation. The answer? A sweeping and strategic implementation of land reform.

Land reform, or the redistribution of land from the landed elite to the less privileged farmers, has been a linchpin in the economic ascension of several countries. By examining instances where land reform catalyzed profound economic transformation, we can glean insights into its pivotal role in promoting household farming.

Consider Japan in the aftermath of World War II, where the United States' efforts to instill its policies floundered amidst widespread resentment toward the occupying forces. It was Wolf Ladejinsky, an agricultural adviser witness to the tremors of the Russian Revolution, who proposed a radical solution: land reform. His insights led to the implementation of legislation that would reshape Japan's agricultural landscape. Central to this reform was the imposition of a three-hectare limit on farm sizes, compelling affluent landowners to relinquish their surplus land for redistribution among impoverished farmers. By the early 1950s, this move had not only enhanced rural output and consumption beyond pre-war levels but had also significantly narrowed the gap of economic inequality.

Taiwan presents another emblematic success story of land reform. In the wake of the Chinese civil war, the defeated Kuomintang government, now retreating to Taiwan, found itself in a precarious position. Urged by American policymakers to bolster popular support, they embarked on an ambitious land reform program by 1953. The redistribution effect was profound, catapulting the percentage of farmers owning land from a modest 30 percent in 1945 to an impressive 64 percent by 1960. Concurrently, economic inequality saw dramatic improvement, with the Gini coefficient shifting from a high of 0.56 at the commencement of the 1950s to 0.33 by the mid-1960s.

The aftermath of these land reforms in both Japan and Taiwan was nothing short of transformative. Japan witnessed a 50 percent increase in the gross output of foodstuffs, while Taiwan saw a staggering 75 percent surge. These reforms laid a robust economic foundation, catapulting these nations onto a trajectory of sustained growth and prosperity.

These historical examples illuminate the undeniable impact of land reform in fostering an environment where small-scale, household farming not only flourishes but also becomes a cornerstone of economic development. Through redistributing land, nations like Japan and Taiwan were able to sow the seeds of an agricultural revolution, reaping the fruits of prosperity and economic equality in the process.

Nurturing Manufacturing: The Role of Protectionist Policies

It's a common misconception that the path to a thriving modern economy solely traverses through agriculture. Indeed, a robust agricultural sector lays the groundwork, yet for a nation to truly flourish, transitioning towards manufacturing is indispensable. Why? Manufacturing industries represent the next evolution in economic development, paving the way for sustainable growth far beyond what agriculture or the service sector can offer.

Prominently, manufacturing stands out for a couple of compelling reasons. Firstly, it’s an arena where the reliance on human capital shifts towards machines, drastically reducing the necessity for a highly educated workforce. This transition allows for inclusivity and broader participation in the economy, without the immediate need for extensive training. Secondly, the global market has a voracious appetite for manufactured goods, from cars to textiles, in stark contrast to services that often stumble over the hurdles of labor mobility.

However, the journey of nurturing a fledgling manufacturing sector is not without its challenges. The bedrock of this process? Protectionist policies. These policies serve as the incubator for local industries, shielding them from the harsh climates of international competition until they're robust enough to compete on the world stage.

This strategic embrace of protectionism isn't unprecedented. Historical titans of the global economy — Germany, the United States, the United Kingdom — all leveraged these protective measures to fortify their nascent industries. By curtailing imports, they created a fertile domestic environment for innovation and adaptation, enabling local companies to dissect, assimilate, and eventually excel in foreign technologies. This iterative process of imitation and improvement is crucial for climbing the technological ladder and establishing a competitive edge.

The narrative that unfettered competition and free trade as the sole architects of prosperity is a flawed one. While the glittering examples of Hong Kong and Singapore might suggest otherwise, they're exceptions that operate as offshore financial centers, a niche not every country can, or should, aspire to fill.

For nations charting their course through the turbulent waters of economic development, protectionist policies are not just an option, but a necessity. It’s a strategic phase, a cocoon from which industries emerge stronger, ready to engage in the global marketplace. As such, while free trade remains an admirable long-term target, it's a horizon that becomes attainable only after the painstaking cultivation of a competitive manufacturing sector.

Fueling Progress: Government Investment and Entrepreneurial Support

The ascent to economic prosperity is neither swift nor straightforward. It is an odyssey that spans generations, marked by strategic decisions and pivotal actions. Where then does this intricate journey commence? At the forefront is the government's pivotal role in propelling the manufacturing sector to new heights.

Take Japan's foray into industrialization as a prime illustration. The year 1870 marked a watershed moment as the government pioneered the establishment of pilot factories across seminal manufacturing domains such as silk reeling, mining, and cement production. This strategic initiative didn't just involve setting up infrastructure; it encompassed importing both machinery and professional expertise to elevate these nascent companies to global standards.

Initially, the output from these ventures was far from revolutionary—often mere shadows of Western superiority. Yet, they were precisely what the local economy craved. With the baton handed over to private entrepreneurs in the 1880s, these fledgling companies began to taste profit, setting the stage for the profound transformation that lay ahead.

The manufacturing sector’s journey to self-sufficiency marks a critical phase, one that calls for legislative prowess in championing entrepreneurs. This may entail bold moves such as reducing import duties on select commodities—a maneuver that, although potentially detrimental to local economies by thrusting them into the unforgiving arena of international competition, is necessary for the greater good. Japan's history offers a compelling chapter on this front with the establishment of a steam-powered cotton mill by entrepreneur Shibusawa in 1882. This venture, monumental in scale, was a clarion call heralding the advent of economies of scale within Japan. The government's decision to waive import duties on raw cotton, albeit at the expense of local cotton farmers, was a calculated sacrifice. This pivotal policy shift not only fortified Japan’s cotton industry but also played a crucial role in rectifying the nation's chronic trade deficit. By 1914, cotton textiles astonishingly represented 60 percent of Japan's export portfolio.

This tale of governmental foresight and entrepreneurial zest in Japan underscores the intricate dance between public initiative and private enterprise. It highlights how strategic investment in technological advancement and the nuanced support of entrepreneurship can catalyze a nation's economic engine, ushering in an era of unparalleled growth and prosperity. The narrative lays bare the fundamental pillars upon which industrial evolution rests, signaling that the path to development is paved with collaborative innovation and adaptive policy-making.

Export and Competition: The Twin Pillars of Industrial Strength

The journey of nurturing local industries until they can stand tall in the face of international competition is arduous but essential. As industries mature, the role of governments transitions from mere protectors to active catalysts of growth, primarily through two avenues: fostering a culture of exports and instigating domestic competition.

Countries like Taiwan and Japan have historically accelerated their economic growth by incentivizing exports. They achieved this by offering subsidies to businesses that successfully penetrated foreign markets, establishing a direct correlation between a company's export performance and the support it received from the state.

However, South Korea's approach in this regard was even more ambitious. The country implemented a policy where companies' access to bank credit was directly contingent upon their export volumes. Those falling short faced the risk of losing governmental support, compelling them to either merge with more successful enterprises or exit the market. This rigorous stance ensured that only the most competitive and efficient businesses thrived.

Yet, export promotion alone doesn't suffice. South Korea underscored another critical aspect of industrialization: domestic competition. When it embarked on establishing its car industry in 1973, it didn't settle for creating a monolithic entity destined to monopolize the market. Instead, it introduced three private firms into the fray, a bold move considering the domestic market's modest size of merely 30,000 cars per year. This deliberate introduction of competition was intended to steel these companies for the rigors of the global market.

Contrastingly, countries that sidelined the importance of fostering competition witnessed vastly different outcomes. Malaysia’s decision to let a state monopoly dominate its considerably larger market of 90,000 cars per year serves as a glaring example. Initially, this approach seemed viable, but the long-term implications of eschewing competition were starkly revealed during Asia's financial crisis in 1997. The Northern countries that had cultivated both export-oriented and competitive industries recuperated far more swiftly than their Southern counterparts.

The disparities in recovery post-crisis laid bare the fundamental differences in economic strategies. Whereas nations like Malaysia and Thailand experienced significant setbacks, Korea and Taiwan, with their GDPs per capita standing four times higher than Thailand and Indonesia, showcased the tangible benefits of embracing both exports and competition.

As history reflects, the trajectory of economic development is charted not just by protecting fledgling industries, but by strategically propelling them onto the global stage through exports and sharpening them with the rigors of domestic competition. These twin pillars stand testament to a simple truth: for industries to truly flourish, they must learn to thrive in the crucible of global and local market pressures.

The Perils of Rushing into Financial Deregulation

The clarion calls for financial deregulation by economists often reverberate through the corridors of economic discourse. Yet, the timing and context of deregulation are pivotal — when premature, it can significantly hamstring a government's efforts to cultivate a competitive technological and industrial landscape.

Malaysia's experience serves as a cautionary tale. The country's decision to deregulate its stock exchange in 1989 bore unforeseen consequences that strayed far from bolstering economic development. Instead of fostering an environment conducive to industrial growth, deregulation steered financial resources towards speculative ventures. Banks, drawn by the allure of high returns, favored speculators over businesses in dire need of loans for technological advancement and expansion. This preference was so pronounced that a subsequent study by Malaysia's central bank highlighted the struggle of local companies to secure adequate bank financing — a dire situation that placed a stranglehold on technological progress and the evolution of a world-class manufacturing sector.

In contrast, countries like Japan, Korea, and Taiwan exhibit the merits of a more measured approach. Throughout their development trajectories, these nations retained a firm grip on their financial sectors, intentionally curbing speculative activities. Their strategies involved manipulating financial levers to channel investments into priority areas of the economy, such as export facilitation and technological enhancement. Through central bank mechanisms, discounted loans were provided to commercial banks, incentivizing them to align their lending practices with national development objectives. Despite inefficiencies and waste within their financial systems, these targeted incentives succeeded in securing crucial funding for pivotal projects.

Interestingly, early financial deregulation isn't universally detrimental. Singapore and Hong Kong stand as testament to this, their unique geographic positions and demographic characteristics birthing exceptions to the rule. As prime shipping nexus points, coupled with their small, concentrated populations, these city-states had little to gain from the labor-intensive sectors of manufacturing and agriculture. Their niche lay in the realms of finance and trade, sectors that thrived from the onset thanks to deliberate deregulatory moves.

This juxtaposition of experiences underscores a broader lesson: the path to financial deregulation is fraught with complexities that demand careful navigation. Premature liberalization can derail a nation's industrial ambitions, redirecting capital from productive investments to speculative bubbles. As history shows, when it comes to financial deregulation, timing is everything — and sometimes, restraint is the highest form of wisdom.

Revolutionizing Economic Growth: China's Leap Forward

Turning our gaze towards China, we witness a profound transformation that underscores the potency of the strategies we've explored. For years, China's economic aspirations were thwarted by two critical miscalculations rooted in communist ideology. The first was the belief in the superiority of large-scale agriculture, a conviction that tragically culminated in the collectivization efforts leading to famine and the deaths of 30 million people. The second misstep was a staunch pursuit of self-sufficiency, an approach that stymied the development of China's manufacturing industries by isolating them from crucial international trade and technology.

The winds of change began to blow with Deng Xiaoping's ascent to leadership. Drawing inspiration from the developmental blueprints of other northeastern Asian states, Deng embarked on a trio of strategic initiatives that would pivot China's trajectory towards unprecedented growth.

The cornerstone of Deng's agricultural reform was granting peasants the autonomy lost under Mao's regime, thus breathing life into household farming. Mao's policies had capped farmers' incentives, offering no rewards for production surplus. Deng, however, ushered in the "household responsibility system," drastically reducing quotas and granting farmers the liberty to sell their excess harvest. This revitalization not only liberated agricultural productivity, catapulting Chinese rice yields to some of the highest globally, but also rekindled the spirit of entrepreneurship among farmers.

Deng's vision extended beyond revitalizing agriculture; he recognized the indispensable role of international trade and technology in fostering competitive industries. The hallmark of this approach was the landmark 1980 agreement with Westinghouse, enabling technology sharing for turbine production, a move that planted the seeds for what would become a dominating presence of Chinese companies in the thermal turbine sector.

Moreover, Deng's strategic grasp encompassed the financial domain, where he asserted governmental control over financial institutions to channel investments towards development. Almost all banking assets in China remain under state-run banks to this day, with the trinity of policy banks established in 1994 — the Export-Import Bank of China, the Agricultural Development Bank of China, and the China Development Bank — driving developmental policies. These institutions have been instrumental in promoting export discipline and boosting agricultural output, among other economic catalysts.

Through these sweeping reforms, Deng Xiaoping not only rectified the historical missteps hampering China's economic development but also charted a course that has seen China emerge as a global powerhouse. By embracing household farming, integrating with the international trade and technology ecosystem, and steering financial resources towards development, China has written a remarkable saga of resurgence and prosperity.

China's Journey Ahead: Opportunities and Challenges

China's spectacular economic transformation has captured the world's attention, positioning it on the cusp of becoming a leading industrial power. However, the road to affluence is fraught with obstacles that China must navigate to realize its full potential.

A significant concern limiting China’s trajectory towards industrial richness is its heavy reliance on state-controlled enterprises. These entities have proven their mettle in sectors where technological advancements follow a predictable pattern, such as the thermal turbine industry. However, the dynamism and flexibility demanded by contemporary consumer markets pose a different set of challenges that state enterprises, with their rigid structures, often fail to meet.

The automotive industry is a case in point. State-owned giants dominate the sector, yet their innovation and product development heavily rely on joint ventures with foreign companies. This reliance on external sources for new designs and technology stymies the growth of China’s own brands, making it difficult for private manufacturers like Geely and Chery to break through and establish themselves. For China to truly ascend as an economic powerhouse, it must pivot towards fostering and protecting domestic firms, encouraging them to innovate and compete globally.

Another critical challenge is the striking income disparity between urban and rural populations. Urban residents earn on average three times more than their rural counterparts, a gap far wider than that observed in northeastern Asia. Various measures have been undertaken to bridge this divide, including the abolition of agricultural taxes, increased subsidies for farmers, and significant investments in rural infrastructure from education to healthcare. Despite these efforts, the income gap persists, largely unchanged.

At the heart of rural China’s economic stagnation is the issue of land ownership. Unlike in Japan and Taiwan, where reforms granted farmers ownership of their land, sparking investment and development, Chinese farmers are trapped in a precarious position. Without the right to own, sell, or securely invest in their land, they're left vulnerable and hesitant to improve their plots, stifling their economic potential. Moreover, the looming threat of government repossession further undermines their security and willingness to invest.

To truly narrow the urban-rural divide and set itself on a sustainable path to prosperity, China must contemplate profound land reform. Empowering farmers with land ownership could unlock their investment potential, fostering rural development, and contributing to a more balanced and equitable economic growth. As China stands at this pivotal juncture, the choices it makes will determine whether it can overcome these hurdles and step into its role as a rich industrial country, or if these lingering issues will dampen its bright future.

Unlocking Economic Prosperity: A Guide for Developing Nations

At the heart of remarkable economic transformations in Asia lies a blueprint for growth that developing countries can emulate. This strategy revolves around three pivotal steps: fostering household farming, establishing a robust manufacturing sector, and strategically leveraging the financial sector to fuel overall economic development.

Household farming stands as the cornerstone, challenging the conventional wisdom that bigger is always better. By empowering small-scale farmers and prioritizing agricultural productivity, nations can lay a solid foundation for economic diversification and growth.

The next leap involves nurturing a competitive manufacturing industry. This step requires not just the creation of factories but the cultivation of an environment where manufacturing can flourish. Through protective measures, such as tariffs and regulations, governments can shield emerging industries from premature global competition, allowing them to mature and eventually compete on the international stage.

Finally, a judicious use of the financial sector can accelerate economic advancement. Rather than rushing into deregulation, which might divert resources towards speculative activities rather than productive investments, a carefully controlled financial landscape can channel funding into sectors that bolster the economy's real growth.

Through the lens of countries that have successfully navigated the path from agricultural economies to industrial powerhouses, this blueprint emerges not just as a theory but as a proven strategy for lifting nations into prosperity.