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     Dec 23, '13

Free markets aren't for everyone
How Asia Works: Success and failure in the world's most dynamic region by Joe Studwell

Reviewed by Muhammad Cohen

HONG KONG - Creating the right conditions for economic transformation of an underdeveloped country is as easy as one, two, three. First, carry our land reform to unleash the power of small farms. Second, institute manufacturing policies that emphasize competition and exports. Third, keep financial

markets on a tight leash to support steps one and two.

That's the lesson of How Asia Works, a landmark work towards understanding regional development economics. Author Joe Studwell focuses on North Asia's success stories, contrasting them with Southeast Asia's failures, though the book's prescriptions are applicable globally. The founding editor of China Economic Quarterly, Studwell also includes a compelling analysis of contemporary China's economy.

How Asia Works grows out of Studwell's 2007 book Asia Godfathers, which debunks the myth that Hong Kong and Southeast Asian tycoons succeeded because of so-called Asian values combined with rigorous free market capitalism. Asia Godfathers decisively demonstrates that these tycoons are products of government largesse and financial manipulation, rather than market economics and ethnic or cultural superiority.

His proofs include these tycoons' miniscule footprints beyond their home region, except when it comes to buying pricey real estate, and their lack of technological and manufacturing prowess. Rather than taking on the world, these tycoons' entrepreneurial talents are directed toward sucking the blood out of their impoverished countrymen, financial manipulation and other unproductive pursuits.

Why a handful of countries have avoided Southeast Asia's fate and far outstripped the rest of the region is the subject of How Asia Works. In the space of a half-century, the Philippines went from twice as wealthy as South Korea to seven times poorer. In his exhaustively researched account of Northeast Asia's development, Studwell stresses that the difference isn't due to weather, geography, ethnicity or natural resources, but rather government policies. He busts many more myths telling his tale.

Small is beautiful
When it comes to farming, bigger simply is not better. Small plots worked by owners prove far more productive than plantations, even for so-called plantation crops like sugar. Small farmers are not disadvantaged by size but by landlords and usurious lending rates. They do need help in the form of extension services and a fair price for their crops, rather than the usual public policies that favor urban dwellers over farmers.

Studwell notes that land reform is both pro-democratic and pro-free market as well as a valuable counterweight to the lure of communism, but the US failed to support it with conviction or consistency in the post-World War II era when Asia was ripe for such reform.

US adviser Wolf Ladejinski, who saw communism's triumph through land reform in his native Ukraine, successfully pushed land reform in US policies in postwar Japan, South Korea and Taiwan. (The reputation of ardent Cold Warrior the late Walt Rostow, the economist and political theorist who served as Special Assistant for National Security Affairs to president Lyndon B Johnson in the late to mid-'60s, gets a boost as Ladejinski's industrial policy counterpart, urging the US government to support its Asian allies' nascent manufacturers.) But America's Red Scare sidelined Ladejinski by the mid-1950s, and US support for land reform sputtered, leaving Southeast Asia's land issues festering to breed rural insurgencies and doom farmers to poverty.

Higher farm incomes provide capital and domestic markets for the second phase of development: manufacturing. Homegrown manufacturing is essential to generating sufficient numbers of low-skill, good-paying jobs and technological progress for a developing nation, Studwell contends. He dismisses the notion that India's information technology industry can help it leapfrog ahead because it generates insufficient employment. Assembly plants for multinationals spread across Southeast Asia keep technology in the hands of the foreign parent and don't generate progress, Studwell argues. He scoffs at the microfinance craze as poor people selling trinkets to poor people and offering no road ahead.

Hit the road, Kim
Competition and exports are the elements of successful manufacturing policy. State or private ownership is far less important, as shown in the success of China and Taiwan and South Korean steelmaker POSCO. "Public ownership is often associated with poor performance, but it does not guarantee it," Studwell writes. Public ownership in Taiwan and China has tended to starve private enterprise of capital, but that's a policy choice, not an inevitable outcome.

South Korea is the book's star manufacturing performer. Under General Park Chung Hee, who seized power in a 1961 coup, the state planned economic policy and, for the most part, the private sector executed it. That took a page from postwar Japan's success under the guidance of the Ministry International Trade and Industry. Government incentives and the financial system supported firms that successfully exported, in some cases underwriting years of losses as well as investment in plants and technologies that seemed outlandish at the time.

Rather than picking winners, as critics of industrial policy charge, the government culled losers. Firms that failed to acquire technologies and skills to succeed on the world stage were starved of capital and other assistance. The results today include South Korean global leaders such as Hyundai Motor Company, POSCO and Samsung Electronics.

Northeast Asian style government intervention in the economy, from capital controls to tariff barriers, flies in the face of current free-market orthodoxy. But, as Studwell points out, it precisely follows the lessons of history. England, Germany, Meiji Japan and the US all became leading industrial powers through protectionist policies to shelter infant industries from competition.

Studwell writes, "[T]here is no significant economy that has developed successfully through policies of free trade and deregulation from the get-go." Only after their industries developed did those countries advocate free trade, though they were more interested in opening other markets for their products than welcoming imports.

Rather than following Adam Smith and his intellectual disciples, Studwell recommends Friedrich List, a favorite of General Park, whose daughter Park Guen Hye was elected president in 2012. List contended that economically advanced nations that preach free markets as a means to development were ignoring their own histories and kicking away the ladder for other countries to follow them up.

Close your ears
Efficiency economics, as Studwell dubs the free market obsession gripping modern practitioners of the dismal science, is right for developed countries but not for developing ones. He blames wealthy countries and their aligned institutions, the World Bank and International Monetary Fund (IMF), for giving developing countries bad advice. South Korea consistently ignored that advice on the road to success.

The danger of dirigisme is that governments don't know when to stop, or they simply can not due to domestic political pressures. Japan's two decades of economic sclerosis and US$5 apples stem from keiretsu industrial groups and agricultural protectionism holding sway long after those policies passed their economic sell-by dates.

Studwell credits IMF reforms in the wake of the 1997-98 Asian economic crisis for reining in South Korea's powerful chaebol groups to avoid that nation becoming a second Japan. Fears that China is destined for world economic domination echo trepidation about Japan Inc in the 1980s, but the middle kingdom is fast reaching the limits of its unprecedented growth spurt, Studwell believes, with no clear plan for resolving its structural deficiencies.

If How Asia Works has a flaw it is its lack of a game plan for underdeveloped nations to follow the path blazed by Japan, Taiwan and South Korea in the World Trade Organization era. China's key reforms under Deng Xiaoping and the mid-course correction by Zhu Rongji took place before China became a WTO member.

Studwell throws up his hands for Southeast Asia's economic future, citing the virtually non-existent prospect of land reform. But the book outlines how Malaysia's industrialization effort had every chance of succeeding despite its lack of meaningful land reform. Former prime minister Mahathir Mohamad's quest for a national car industry did not stall due to inadequate rural prosperity, but rather poor government policies that failed to foster competition, acquire export discipline and harness indigenous entrepreneurial skill.

That quibble aside, How Asia Works works is an important book. Policymakers should read it as a roadmap, and general readers should join Studwell on his fabulous road trip highlighting the highs and lows of the region's economies to understand how we've arrived in these early days of the Asian century.

How Asia Works: Success and failure in the world's most dynamic region by Joe Studwell. New York, Grove Press, 2013. ISBN: 978-0-8021-1959-9. US$27; 366 pages.

Former broadcast news producer Muhammad Cohen told America's story to the world as a US diplomat and is the author of Hong Kong On Air, a novel set during the 1997 handover about television news, love, betrayal, high finance, and cheap lingerie. Find his blog, online archive and more at www.MuhammadCohen.com, and follow him on Facebook and Twitter @MuhammadCohen.

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