How Asia Works

""How Asia Works" rejects the neoliberal Washington consensus on free trade and deregulated financial markets. Studwell looks at Asian countries that have done well over the last fifty years (Japan, South Korea, Taiwan, China) and those that have done poorly (Indonesia, Malaysia, the Philippines, Thailand) and asks what explains their divergent outcomes. He contends that the clear winners were countries that rejected the USA/WTO/IMF's advice about free markets / financial deregulation and instead implemented protectionist trade policies to develop their domestic economies. Studwell shows how free trade and financial deregulation have stunted the growth of countries like the Philippines (and oh does he dump on the Philippines) and caused their populations to be perpetually stuck performing low value labor with no real hope of escape.<br/><br/>Besides the IMF-bashing, Studwell includes a few other nuggets of wisdom that were new to me. The first is the importance of agricultural development in the industrialization process. Agriculture is one of those things where the more unskilled work you put in, the more you get out. (I was shocked to hear that Chinese peasants were getting 2x the yield of American large-scale industrialized agriculture!) As such, it's a great base to start from and helps build up a base of semi-prosperous farmers whose savings can be used to fund further industrialization.<br/><br/>The second was the "stealth taxation" that countries use to fund their development. Basically, the farmers put money in the bank, the bank pays them way less than a market rate of interest, and then the state forces the banks to use the profit on the float to fund industrialization. Countries can only get away with this if they have strict capital controls and money can't leave the country to seek higher returns elsewhere. You can't play this game forever (the peasants begin to get rowdy!), but it can really boost your progress as long as you don't squander it.<br/><br/>The final surprising takeaway was Studwell's distinction between "efficiency economics" (what we read about in economics textbooks) and "development economics" which should be focused on industrial learning. While you're reinvesting the float from agricultural savings, you have to make sure that you're developing domestic expertise and understanding. You want to avoid just letting rent-seeking domestic businessmen suckle at the teat of "development" state support without doing the hard work of actually learning how to build things. The key is to only have state support for companies that are able to sell their product in world markets - a policy Studwell calls "export discipline". This is a metric that is very difficult to game and forces domestic companies to develop world-class capabilities while they're getting state support. I was also fascinated by the Japanese model of factories that essentially double as training schools - and by Studwell's observation that Japan's industrialization involved very few university-trained engineers.<br/><br/>Before this book, I hadn't thought much about development economics. I had always assumed that the free trade mantra that I had endlessly read about in my economics classes was the one true way. Studwell has made me seriously question that assumption - and that alone makes this book worth reading. As Studwell repeatedly (and forcefully!) points out, no major industrialized country has ever industrialized without highly protectionist measures. He also seems to have a personal vendetta against economists (in favor of historians) which provides some comic relief throughout.<br/><br/>Full review and highlights at <a href="http://books.max-nova.com/how-asia-works">http://books.max-nova.com/how-asia-works</a>"