How Asia Works: Success and Failure in the World’s Most Dynamic Region by Joe Studwell

“How Asia Works…” (“The book”) comes highly recommended, garnering rave reviews from the likes of Bill Gates etc. The book more than merely lives up to the hype generated. Joe Studwell is more of a surgeon than an economist/journalist as he diagnoses the stumbling blocks, flexes out stimulants and prescribes suggestions that constitute the preserve of a select breed of North and South East Asian nations. Although not a policy prescription in the strictest and narrowest interpretations of the term, the book is certainly an eye opener for policy mavens, ‘the know-it-all’ economist and the eager entrepreneur trying to embellish the prospects of a developing economy.

The title of Studwell’s book is however a compelling misnomer. The most appropriate and relevant substitute could have been “How North East Asia Works” or even, “How South East Asia refrains from working”, for the book is a revealing and powerful insight into the play of contradictions and a dichotomy of contrasts. As powerfully demonstrated by Studwell, since procuring their independence, the North East Asian states of China, Korea, Japan and Taiwan have transformed into global economic heavyweights, their South East Asian counterparts such as Thailand, Malaysia, Indonesia and the Philippines have found themselves trapped in a rut of misguided economic policies, myopic developmental visions and misplaced policy prescriptions. While the North East Asian countries scale one improbable developmental height after another, the South East Asian nations always seem to be teetering on the brink of an economic catastrophe perpetually lurking around an unseen corner. 

For any country in its development stage (based on the empirical evidence that is the state of the East Asian economies identified in the book), Studwell emphasizes the need for three basic, quintessential and deliberate policies. These are:

• Household farming and land reforms such as targeted redistribution;
• Export oriented manufacturing with embedded strict disciplinary targets; and 
• Closely controlled finance that supports both the agriculture and manufacturing sectors

Studwell argues that booms in output occurred under conditions where farming took on the visage of “large scale gardening” instead of enormous collectives which struggle to lend sustenance and yield. A classic case in point being Mao’s “Great Leap” and the disastrous famine which decimated millions of starving farmers in its devious wake. Hence according to Studwell, what occurred in China, Japan, Korea and Taiwan and did not materialize in Thailand, Malaysia, Indonesia and the Philippines was a “good land policy, centred on egalitarian household farming that set up the world’s most impressive post war development stories”
The second peculiar and divergent policy advocated by Studwell is one which is a nightmare for free market evangelists and neo-liberal economists. Instead of suggesting a full-fledged and massive financial and industrial deregulation, Studwell painstakingly demonstrates that an initially protectionist policy that grants subsidies to manufacturers, makes available finance at low or even negative interest rates, but (and this is a capital BUT) indispensable and incontrovertible export targets would lead to a rise in the manufacturing sector as was the stellar case with South Korea and the former General Park Chung Hee. Creating a regime of cheap loans, tax and tariff exemptions, and liberal subsidies, Park even encouraged the formation of cartels but with a strict and uncompromising mandate to achieve targeted exports. Inefficient chaebols were either culled or merged into more profitable ones or even bankrupted. In stark contrast, Malaysia after obtaining its liberation from colonial rule employed state entities to buy out various mining and plantation interests, but made no effort to shift to an export manufacturing strategy for domestic firms. Banking on equity Joint Ventures and foreign collaborations, whether in attempting to manufacture Malaysia’s first indigenous car “Proton” or trying to be an ambitious integrated steel manufacturer of repute, Malaysia succumbed to the lure of premature deregulation thereby attracting foreign investment but failing to achieve technological capability. The contrasting policies adopted by the two nations is chillingly captured by Studwell in the following paragraph:

“In Korea POSCO started production in 1973 with a 1 million tonne a year operation at Pohang, ramping up to 9 million tonnes of world class output by 1983, and involving an investment of US$20 billion at today’s prices. In Malaysia, Perwaja started out with 1.5 million tonnes of output and got stuck, both in volume and quality terms. With no export discipline, a succession of carpet-baggers filled their boots as the taxpayer shelled out the equivalent of US$ 6 – 8 billion in today’s money for the country to learn next to nothing”. If this isn’t Dickensian, then there are not many instances that actually could be!

The final pathway to joining the big league of the rich man’s club lies in financial support. Studwell deems it appropriate to “keep the financial system on a short leash for a considerable period of time and make it serve developmental purposes” rather than resorting to a premature deregulation which seeks out the immediately profitable avenues of investment. The Asian Financial Crisis of 1997 that lopped off the market capitalizations of companies, not to mention decapitating financial institutions in Indonesia, Thailand and Malaysia are desultory and dangerous testimonies to unchecked liberalization and deregulation. In contrast China follows a clearly delineated structure of finance whereby lending and borrowing parameters are rigidly fixed and not allowed to cross boundaries of indiscretion.

Concluding this fantastic book, Joe Studwell poignantly states “However I repeat what others concluded after the Second World War: that to turn away from such policies indicates that the world is acceptable to us as it is. Take a look at South Asia, the Middle East and Africa, and ask yourself if it is”

It definitely isn’t!

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