June 17, 2015

Bill Gates believes Studwell has the answer to Asian Economic Miracle and What to do for Africa

Joe Studwell’s book How Asia Works is a great look at the factors that drove the rapid economic growth in several Asian countries. The Wealhiest man in the world, Bill Gates, recommends it for anyone who’s doing business in Asia.

Studwell’s answers to the multi-trillion-dollar question of why some Asian countries developed rapidly and others (Philippines, Indonesia, Thailand) did not? He offers a simple, three-part formula:

1. Create conditions for small farmers to thrive.
2. Use the proceeds from agricultural surpluses to build a manufacturing base that is tooled from the start to produce exports.
3. Nurture both these sectors (small farming and export-oriented manufacturing) with financial institutions closely controlled by the government.
Agriculture

Studwell’s book articulates the key role of agriculture in development. He explains that the one thing that all poor countries have in abundance is farm labor—typically three quarters of their population. Unfortunately, most poor countries have feudal land policies that favor wealthy landowners, with masses of poor farmers working for them. Studwell argues that these policies not only produce huge inequities; they also guarantee lousy crop yields. Conversely, he says, when you give farmers ownership of modest plots and allow them to profit from the fruits of their labor, farm yields are much higher per hectare. And rising yields help countries generate the surpluses and savings they need to power up their manufacturing engine.





Manufacturing: Studwell argues that once countries are producing steady agricultural surpluses, they should start moving to the manufacturing phase of development. He makes a strong historical case that the successful countries do not simply rely on the invisible hand of market forces; they supplement market forces with the heavy hand of state-driven industrial policy. These countries engage in a combination of protectionism (coddling infant industries to give them time to become globally competitive) and then culling losers (cutting off resources to firms that don’t succeed in export markets).

Finances: Studwell shows that rapidly developing countries usually give lip service to free-market principles while actually keeping their financial institutions “on a short leash.” In other words, they enact policies to protect themselves against the shocks and whiplash of global-capital flows, and they make sure their financial institutions serve the country’s long-term development ends rather than the short-term interests of financiers.

The big question for Bill Gates is: Can African countries become successful export-oriented manufacturing hubs?

Bill Gates does see this potential in countries like Ethiopia and Djibouti. They already have a strong connection with China and ambitious, long-term economic plans. Unfortunately, many other countries on the continent don’t have those same success factors, especially landlocked ones with very poor infrastructure. Helping farmers in those countries grow more food and earn more money would be a big help on its own.

More information from a top Amazon reviewer Loyd E. Eskildson:

Studwell excludes east Asia's failed states - North Korea, Laos, Cambodia, Myanmar, and New Guinea. Their one common characteristic is a failure to trade and interact with the world. He also ignores Asia's two main offshore financial centers - Hong Kong and Singapore because of their lack of an agricultural sector. Micro oil state Brunei and east Asia's gambling center, Macau, are also omitted.

Another key finding is that a large working-age population and proportion increase the possibilities for fast growth. Rapidly declining death rates, especially for children and a rapidly rising work-age population have been a big part of east Asian development success since WWII. Mao boosted population growth in China, telling people there was strength in numbers, while Deng Xiaoping and successors put a stop to that.

The evidence of a positive correlation between total years of education and GDP growth is much weaker than most imagine. The Philippines have the highest levels of tertiary-educated students in southeast Asia, but because more important policy choices were flunked, the country is on the verge of becoming a failed state. Cuba has the world's second-highest literacy rate for children over age 15, and the 6th highest rate of school enrollment. It has inadequate employment opportunities for university graduates, however - one reason 25,000 Cuban physicians take state-subsidized work overseas. Another problem with education - there is too much of the wrong kind - eg. liberal arts. Asian education not only creates a much higher proportion of engineers than most, it also includes a considerable vocational component conducted inside firms and not elite universities.

Michael Pettis also has a review at Amazon of this book:

This book argues among other things that that protectionism and industry policy are important policy tools for countries at an early stage of development, and that Asian governments have adopted this model with varying degrees of success. Heretical as this claim may be to some, in my opinion it is not even worth debating whether or not the most advanced economies achieved success under "Smithian" conditions.With the possible exception of a few, small trading entrepots, there is not a single example of a country that did. There are rich countries that were "Smithian" (like, laissez-faire Haiti -- if you don't count slaves of course -- in the late 18th Century), but their wealth was unsustainable and they were in no way "advanced" economies.

You can find it all in the works of the brilliant Alexander Hamilton. The "American System" of the early 19th Century was the basis of the economic writings of the German Freidrich List and which went on to influence Germany, Japan (in 1872 one of the leading proponents of the American System, E. Pechine Smith, moved to Tokyo and became the leading adviser to the Mikado on Japan's economic restructuring), and a host of other countries. The three pillars of the American System were infant industry tariffs and subsidies, internal improvements (i.e. infrastructure provided by state and local governments) and a sound system of national finance, with the state playing a leading role.

These are the same pillars that supported the growth of every country that has developed rapidly, and the fact that this is even debated in economic circles suggests to me how unreal academic economics has become and how divorced from historical understanding. I agree with the authors that to debate whether or not industrial policy can work is silly. Of course it can. The real interesting question is to figure out under what conditions it is wealth enhancing and under what conditions it is wealth destroying. This is why the debate is so important for China. The Chinese growth model clearly "worked", I would argue, in the 1980s and 1990s, although in part simply because it involved a rejection of the insanely inefficient polices of the 1950s, 1960s and 1970s. Today, in my opinion, it clearly no longer "works". So why did it sometimes help and sometimes hinder Chinese development?

Unfortunately it is very hard to debate this question because most economists are either ideologically committed to the idea that it is almost always a bad idea (the consensus in economics) or to the idea that it is always the right approach (perhaps the consensus in political economy or economic history). The truth, however,may be that sometimes it works and sometimes it doesn't. Although I don't always agree with Joe Studwell's conclusions. this book does a great job of teasing out the important and relevant issues.

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