After a long hiatus, I'm back with a shiny new book summary for How Asia Works: Success and Failure in the World's Most Dynamic Region by Joe Studwell. Though published in 2014, it holds up pretty well, with some of its insights on industrial policy and central bank independence might be more relevant than ever (though one must take care not to overgeneralise from things that worked in a particular context in the past).

Anyway, as usual the key takeaways are below, and you can find the full summary by clicking the link above.

KEY TAKEAWAYS

• East Asian economies such as Japan, Korea, Taiwan and China became developmental success stories by following a 3-part formula:
  • First, improve agriculture through land reform.
  • Second, build up manufacturing using industrial policy with export discipline.
  • Third, direct the financial system towards these two aims.
• Agriculture is important because it employs the vast majority of people in poor countries:
  • Land reform ensures people have incentives to be productive and not just seek rent.
  • Smallholder farming (gardening) is surprisingly productive. It takes a lot of labour, but labour is cheap for developing countries.
  • Boosting agricultural yields reduces reliance on food imports and generates surpluses, which create a domestic customer base for industry.
• Manufacturing is key because it makes the most effective use of large but relatively low-skilled workforces and helps countries move up the value chain.
  • Industrial policy can be very costly and "inefficient" in the short-run but the goal is to produce long-term technological learning. The investments may take decades to pay off.
  • Export discipline is crucial, as it provides objective, market-based information about which firms are worth supporting. Don't just "pick winners" at the outset, and bewilling to cull losers.
• Financial system:
  • Developing states tend to lack the state capacity required for a full tax system, but can use the financial system to achieve their policy goals.
  • Banks are easier to control than bond- or stockmarkets. Cheap loans is a form of grant or subsidy, while limiting deposit interest rates is a form of stealth taxation.
  • If left alone, money will tend to flow towards real estate and stockmarket speculation and consumer spending rather than long-term technological learning.
• Unlike the East Asian countries, the Southeast Asia mostly followed the "free market" Washington Consensus:
  • Malaysia was the best of the southeast Asian countries in that it attempted industrial policy, albeit somewhat clumsily.
  • Thailand, Indonesia, and the Philippines all liberalised too early. Although they saw some strong growth initially, it didn't last, and they still haven't fully recovered from the 1997 Asian financial crisis.
• Industrial policy should not last forever. At some point, countries probably should liberalise trade and markets. When and how is unclear, and economists should focus more on this.

You can find the full detailed summary on the website. I've also drafted a short blog post that tries to set out Studwell's theory using causal diagrams, for those who are visually inclined.

Thanks for subscribing! If you found this summary useful, consider forwarding it to a friend.

Until next time,

​To Summarise​