Three critical government interventions that speed up economic development

There is a new book How Asia Works; Success and Failure in the World’s Most Dynamic Region.

The policy prescription for rapid economic development was confused for a time in east Asia by the presence of other fast-growing economies that did not conform to the pattern of Japan, Korea, Taiwan and China. In the 1980s and early 1990s, the World Bank seized on the performance of the offshore financial centres of Hong Kong and Singapore, and the suddenly faster-growing south-east Asian economies of Indonesia, Malaysia and Thailand, to argue that economic development was in fact fostered by laissez-faire policies, with a minimal role for government. Despite the fact that the offshore centres, with their tiny, dense populations and absence of agricultural sectors to drag on productivity, are not really comparable to regular countries

There are three critical interventions that governments can use to speed up economic development. Where these interventions have been employed most effectively in east Asia – in Japan, South Korea, Taiwan and now China – they have produced the quickest progressions from poverty to wealth that the world has seen. When, by contrast, other east Asian states have set off with the same ambitions and equal or better endowments, but have not followed the same policies, they have achieved fast growth for a period but the progress has proved to be unsustainable.

1. The first intervention – and the most overlooked – is to maximise output from agriculture, which employs the vast majority of people in poor countries. Successful east Asian states have shown that the way to do this is to restructure agriculture as highly labour-intensive household farming – a slightly larger-scale form of gardening.

This makes use of all available labour in a poor economy and pushes up yields and output to the highest possible levels, albeit on the basis of tiny gains per person employed. The overall result is an initial productive surplus that primes demand for goods and services.

2. The second intervention – in many respects, a second ‘stage’ – is to direct investment and entrepreneurs towards manufacturing. This is because manufacturing industry makes the most effective use of the limited productive skills of the workforce of a developing economy, as workers begin to migrate out of agriculture. Relatively unskilled labourers create value in factories by working with machines that can be easily purchased on the world market. In addition, in east Asia successful governments pioneered new ways to promote accelerated technological upgrading in manufacturing through subsidies that were conditioned on export performance. This combination of subsidy and what I call ‘export discipline’ took the pace of industrialisation to a level never before seen.

3. Interventions in the financial sector focus capital on intensive, smallscale agriculture and on manufacturing development provide the third key to accelerated economic transformation. The state’s role is to keep money targeted at a development strategy that produces the fastest possible technological learning, and hence the promise of high future profits, rather than on short-term returns and individual consumption.

Economic Miracles will not spring from microintervention

Will we witness an economic transformation like Japan, Korea, Taiwan or China’s again? The answer is quite possibly not, for one simple reason. Without effective land reform it is difficult to see how sustained growth of 7–10 per cent a year – without fatal debt crises – can be achieved in poor countries. And radical land reform, combined with agronomic and marketing support for farmers, is off the political agenda. Since the 1980s, the World Bank has instead promoted microfinance, encouraging the rural poor to set up street stalls selling each other goods for which they have almost no money to pay. It is classic sticking-plaster development policy. The leading NGO promoting land reform, US-based Landesa, is today so pessimistic about the prospects for further radical reforms in the world’s poor states that it concentrates its lobbying efforts on the creation of micro plots of a few square metres. These plots supplement the diets and incomes of rural dwellers who work in otherwise unreformed agricultural sectors. From micro interventions, however, economic miracles will not spring.

Without Land Reform and big government intervention there will not be major economic success

The rich world cannot be expected to save poor countries from bad politicians. But the likes of Mahathir and Suharto were not so terrible. What seems most wrong in all this is that wealthy nations, and the economic institutions that they created like the World Bank and the International Monetary Fund, provided lousy developmental advice to poor states that had no basis in historical fact. Once again: there is no significant economy that has developed successfully through policies of free trade and deregulation from the get-go. What has always been required is proactive interventions – the most effective of them in agriculture and manufacturing – that foster early accumulation of capital and technological learning. Our unwillingness to look this historical fact in the face leaves us with a world in which scores of countries remain immiserated; and in which rural poverty nourishes terrorist groups that echo those suppressed in south-east Asian countries, but which now directly threaten the citizens of rich nations. It is not easy to implement the policies, especially land

Land reform in South Korea is described in wikipedia.

In 1945–1950, United States and South Korean authorities carried out a land reform that retained the institution of private property. They confiscated and redistributed all land held by the Japanese colonial government, Japanese companies, and individual Japanese colonists. The Korean government carried out a reform whereby Koreans with large landholdings were obliged to divest most of their land. A new class of independent, family proprietors was created.

Vietnam did have land reform (with a lot of killing, but it did happen.) By if the theory of Joe Studwell is correct, then Vietnam would potentially be the last true asian miracle country.

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