How Asia Works Paperback – May 20, 2014

How Asia Works by Joe Studwell is an account of economic developement and history in Asia. It focuses on a several key economies including Japan, Taiwan, Korea, Malaysia, the Philippines, Indonesia and finally to China. It discusses economic history and the sequencing of events that led to the success and failurs of different countries in Asia. The author draws conclusions about the right ingredients for economic growth in the modern era given the various lessons one can learn from Asian examples. The author breaks the book into 4 categories- Land, Manufacturing, Finance and finally China.The author starts by discussing Land and agriculture. He starts out by making the observation that the highest efficiency in produce per square meter for agriculture occurs through home farming and that economies of scale might exist from a cost perspective given the cost of labour but does not mean that aggregate produce would be highest if we all farmed. He then discusses how farming in history has been dominated by landlords and the business of farming within a landlord system by rent seeking behaviour that does not sufficiently invest in land improvement. He finally concludes that when human capital is cheap gaining productivity by eradicating rents and equalizing ownership of farm land increases productivity and moves people up the income curve allowing for the first stage of economic growth. Studwell then goes on to discuss how this general idea was understood and implemented in Japan, Korean and Taiwan and in particular how their experiences led to yield improvements. It also discusses how these principles were not followed in Philippines and other parts of south east asia and how the differences in land policy were the first fundamental hurdle for economic developement to take off.The author then moves on to manufacturing and discusses the concept of infant industries. He discusses the origin of the idea and how creating barriers to entry was understood to be a necessary part of fostering domestic industry. The need to create a system of carrots for successful ventures and sticks to punish failures was shown to be an integral part of successful development policy and the differences between Korean and Malaysia is used as an example to show how competition was needed to keep entrepreneurs more honest. Focusing on exports is shown to be a key to forcing companies up technology curves and putting them in a competetive landscape to perfect the growth process and that preferential credit was a means to facilitate projects like this. Having industrial policy is shown to be more effective when looking at the differences between Korean and Taiwan as an example.The author then goes on to finance. Having finance controlled by industrial policy rather than nepotistic interests is quite obviously shown to have major impacts on the quality of investment. Southeast asia and crony capitalism are given as examples of how credit was funelled into asset gathering instead of broadening productive capacities. The differences in experience between Indonesia and Korea are given as examples to think about. The liberalization of finance is also discussed and the merits of liberal capital flows vs closed capital accounts are detailed and the author argues that in developement having control over the flow of capital in and out of the country can have massive benefits especially when those flows are hot money.The author finally discusses China and where it fits in. Its similarity on industrial policy to north asia and taiwan is shown and its history of encouraging state upstream industries to continue to compete and stay competitive is discussed. The author also discusses the failure to reform the agricultural side of the economy and how that is a long run problem that needs to be solved for China to be able to escape the middle income trap. The limits of supporting upstream and midstream activities is discussed and the need for capital allocation to start flowing towards creating consumer brands is considered. The author covers the successful parts of China's growth model as well as the limits of it and considers other asian countries lessons to be heeded.This is a combination of history and economic policy lessons as a function of that history. It is coherent, interesting and insightful. One finishes it believing that free market capitalism too is dependent on institutional arrangement and market structure. The need to adapt developement strategy to the stage of economic developement is currently in is given to be of critical importance. This reads well and illuminates developent in Asia to the reader. It contains anecdotal stories and economic interpretation. It caters to a wide audience and can be appreciated on many levels.

'How Asia Works' passes the sniff test in that it actually helps to explain current events in Asia - for example the current fun and games with the Thai government's guaranteed rice purchases, which post-date the publication of the book.The most important premise in the book is the need for land reform to fund industrialisation.By 'land reform' he means distributing land equally among farming families, by taking it off the big landowners.Land reform does not come easily:In Japan the first (and initially successful) reform was after the Meiji Restoration, and the second immediately after the Second World War.In Taiwan it followed the defeat of the Kuomintang (KMT) by the Communists in China. Initially Communist land reform in China was popular with the people, and the KMT were forced to copy it in Taiwan to achieve some popularity with the locals.In South Korea Syngman Rhee's government resisted land reform until it was nearly swept into the sea by Kim Il Sung's invasion. When the South Koreans retook Korea, they found Communist land reform was very popular with the farmers, and were forced to accept it.The ensuing agricultural boom gave these governments the cash to fund industrialisation. Studwell shows how they largely got it right, by copying the 19th Century Prussian model.(In China and North Korea the agricultural boom ended when the Communists collectivised the farms.)In South East Asia land reform never took place, probably because events were not dramatic enough to force it to happen. Consequently large landowners live very well, while ordinary farmers are very poor, and agricultural productivity is low.In describing industrialisation, Studwell compares the successful Japan/South Korea/Taiwan model of competition between state supported companies (with the creative destruction of the failure of some) and the discipline of serving export markets versus the failure to introduce competition and export discipline in South East Asia. The outcome is exemplified by Toyota/Honda/Hyundai versus Proton.The failings in South East Asia described in this book are pretty much as described in Studwell's earlier "Asian Godfathers".'How Asia Works' attracted a fair amount of criticism here in Hong Kong for appearing to advocate financial repression (paying derisory interest rates on household savings, enforced by exchange controls) and state planning - we have a very good vantage point of this process in China, and worry about the effects - for example an uncontrolled shadow banking system and misallocation of easy credit by State Owned Enterprises.Studwell does not advocate this as a universal panacea - he points out the problems that South Korea had, and that they were lucky to get away with it - and that the system gets a country to a certain level of development, after which it is necessary to modernise - which may not always work - as in Japan.His conclusion is that South East Asia will probably never fulfil its potential, and that China might.This book offers a helpful political-economic model for those attempting to understand Asia generally, and, most importantly, China.