What ‘How Asia works’ taught me?

Beijing — image credit — https://www.whitecase.com/locations/asia/beijing

Can other countries around the world replicate the economic success of China & South Korea?

The economic growth of countries like Japan, South Korea and more remarkably China has confounded us all. How did some countries in Asia manage to grow and industrialize so rapidly while a lot of others including India, Indonesia have struggled?

Joe Studwell in his book ‘How Asia works’ tries to answer this question. It was on the Gates reading list and it does not disappoint. It’s a bit of a long read but those with an interest in economics should enjoy it. On Independence day, livemint did a good article on the progress of Asian economies comparing the economic & social progress since 1960.

A comparison of GDP of Asian Countries — 1960 vs 2016. Source: World Bank & Livemint.

The GDP data is a bit off but it demonstrates the stark difference between the GDP growth of India vs China.

Studwell studies 4 countries — Japan, South Korea, Taiwan and China and contrasts them with Indonesia, Malaysia, Phillipines, Thailand and India to a certain extent . To give you some perspective Japan before the Meiji Restoration Japan was behind on industrialization and Commodore Perry had came with huge warships and made them open trade and sign unfair treaties. It then went on to become a military power.

Studwell’s analysis breaks down the development process into 3 key steps-

  1. Reform agriculture with land reform & labour intensive farming
  2. Use agricultural profits to rapidly industrialize with export discipline
  3. Keep financial institutions on a tight leash & fund industrialization

I’m a noob when it comes to economics but state funded corporations and banks run counter to our experience here in India. Air India is a disaster. BSNL is no longer relevant. Most of us believe in private enterprise and globalization. But can we get more economic growth and better per capita income with the more state led initiatives? Studwell certainly thinks so. He argues that a mix of poor political leadership & bad policy advice(open markets & banking) have led to the downfall of some Asian countries.

So the first prescription is land reform. In most countries the lands are owned by wealthy landowners with scores of poor farmers working for them. Since in most poor countries there is an abundance of labour — if farmers focused on small plots and interview frequently they could get higher yields. Japan did massive land redistribution where they gave back plots to smaller farmers from the landlords. Higher yields are great but agriculture still has a lot of other variables — rain, fertilizers, seeds. I felt Studwell didn’t delve deeper into this. I could be wrong.

The next part is fascinating — Manufacturing growth.

Chaebols — a South Korean form of business conglomerate.

Samsung, Hyundai, LG — some of the top known brands in the world are from South Korea.

Studwell argues for protectionism(taxing exports, providing funds), dropping losers & export discipline(tying funds & support with exports) to drive industrialization. While Hyundai, Samsung, Posco — all have their own technology begged/developed over years — in India we import the tech for our cars(Maruti Suzuki), our power plants(Reliance) and our phones(oh, we just import them from China :)).

One key piece of the industrialization puzzle is exports. If companies aren’t forced to be globally competitive — they’re just happy selling an inferior product to the local market & guzzling tax payer money. On the other hand — if companies have to compete globally — it creates a global brand, like Samsung or LG.

The third piece is state controlled banking. Infrastructure, manufacturing are capital intensive sectors. If banks are too worried about NPAs — they would be wary to support these sectors. We’re seeing some of that in the current NPA problem with banks — banks with a higher infrastructure exposure are not doing well. In South Korea for several years the state supported companies like Hyundai, Samsung to become competitive and acquire technology. But for this to work — the govt & the political class plays a big role in my opinion.

For someone interested in history, the books a must read. One understands the political history of Japan, China, Malaysia among others. The rulers and the roles they played. I learned a lot. It gave me perspective to understand our economy and policies with the rest of Asia.

China’s growth has been impressive — it’s become a world power in about 30 years from one of the poorest countries in the world. India is often compared to China because of the huge population and size of both countries. We have a lot to learn from the success of their policies.

Out of the 3 point Studwell formula — land reform is out of question. It’ll take a lot of political will. The PM has launched a manufacturing initiative — ‘Make for India’ but it’s success so far is debatable. I guess it’s still early days. Corruption is a major issue for us and for years our politicians have being open to making a quick buck(Bofors :() rather than investing in the country(HAL). Our banking is already less state controlled — so going back is difficult. Better regulatory policies and stronger institutions(RBI) are the way ahead. Our record with state corporations is patchy though there are a few stars(ISRO). Our small and medium businesses hold a lot of promise & enabling them will go a long way.

I guess we’ll never be a China but the elephant trudges along.

How Asia works — book cover.

If you liked this article you’ll like — https://growthbug.com/building-for-india-a-billion-opportunities-becfa0572183 ‘Building for India’ — my article on the opportunities in India’s tech sector.

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