*How Asia Works*

How Asia Works is a book by Joe Studwell which contrasts the successful development of capitalist Northeast Asia(Japan, South Korea, and Taiwan) with the “paper tigers” of capitalist Southeast Asia(Thailand, Malaysia, Indonesia, and the Philippines). He doesn’t analyze India, the middle East, or the authoritarian disasters such as North Korea and Burma. Studwell mentions three key policies that Northeast Asia got right and Southeast Asia got wrong: land reform, industrial policy, and finance.

The main weakness of the book is that it does not consider HBD as an explanation for the differences between Northeast and Southeast Asia.

 

national_iq_per_country_-_estimates_by_lynn_and_vanhanen_2006

Richard Lynn’s data on global IQ. Each individual data point should be taken with a grain of salt, but the overall pattern is undeniable

Land Reform

Studwell’s argument is that land reform is essential to increase crop yields, providing the surplus that funds industrialization. Agriculture by farmers who own small plots they work intensively(“smallholders”), is more efficient than tenant agriculture. Why?

According to Studwell, it’s because farmers have an incentive to farm intensively and maximize yields. If they have to pay rent to a landowner, and especially if they have to pay a percentage of their crops to a landowner, they do not have as much of an incentive to produce. It’s the same process that dissuades someone from working if they have to pay a 50% tax rate.(In East Asia, paying fifty percent of one’s crops as rent was not rare.) High rents starve them of capital, preventing them from being able to make investments to improve their yields. With access to capital only at usurious rates of interest, farmers know that the return on any investment they make will go to paying the interest. Wage labor on plantations is also inefficient as the workers have no incentive to work hard.

In Northeast Asia, the data seems to support this, land reform in Taiwan, Japan, and Korea is associated with greatly increased yields. In Japan, yields increased under land reform in the early Meiji period, ceased increasing as land reform was slowly reversed, and then increased during the post war period when it was definitively accomplished. In communist China, yields increased during the early communist period when land was redistributed, then declined once collectivization was imposed.

But would this same process work in Southeast Asia? Studwell claims that the crops in question do not matter, pointing out that sugarcane, a tropical crop, is grown more efficiently in Taiwan than in Southeast Asia despite less favorable climactic conditions. But maybe the people differ, and would respond differently? Maybe, if freed from the burden of paying a high rate of rent to landlords, farmers would produce less? This is where HBD, or, less likely, ‘culture,’ come in.

In the Philippines, a small percentage of land has been redistributed to the tenants, and according to Studwell, the farmers who received redistributed land are no more productive than the farmers who farm rented land.[1] Studwell attributes this to a lack of the kind of governmental support for smallholders which existed in Northeast Asia. Denied capital, they can only turn to their former landlords, who will charge usurious rates of interest. About one place in the Philippines Studwell writes:

“It is hardly surprising that an emblematic image one sees in Negros is the ‘reform’ family that immediately leased its land back to the landowners and now sits around a karaoke TV set bought with the proceeds of the advance. In the absence of any real chance of household farming success, people put their capital into a KTV machine and sing in a shack.”[2]

Although Studwell points to the gradual reversal of land reform in pre-world war II Japan, showing it is not exclusive to Southeast Asia, it is hard not to imagine that there may be an IQ/time orientation explanation for the reform family’s behavior.

There’s also HBD’s effect on whether land reform will happen in the first place. In the Philippines, land reform was supposed to occur, but bribery of officials and violence against farmers often prevented it, while in other cases former landowners negotiated agreements with their former tenants which left the situation de-facto as it was before. While being a high-IQ country is no guarantee that land reform will happen, it will assure that once the government declares it as a goal, it will probably happen.

Studwell points to the higher yields of a certain group of Philippine land reform families which were supported by an NGO, but also says they are “more politicized, better educated, and more articulate than the 250 other families which do not have NGO support.”[2] The direction of causality here is unclear. He points out that across Southeast Asia farmers keep small gardens where they grow food for personal consumption, he claims these are the most productive spaces in the region, but small gardens may not scale up to big farms. The strongest evidence he has is the fact that, in British colonial times, smallholder rubber farming was more efficient than big business rubber plantations. However, many of the rubber workers were ethnic Chinese, who by 1947 were 38% of the Malaysian population, Studwell does not mention the ethnicity of the smallholders.

Industrial Policy

Most developing countries have at one time or another tried state action to help their manufacturers, but Studwell points to the crucial factor which led to East Asia’s success: what he calls “export discipline.” Subsidies and tariffs on imported goods will help industries, but may lead them to become parasites on the economy, taking in subsidies and giving the nation’s protected market expensive, inferior goods in return. But if they are forced to compete in export markets, then they must be as good as the foreign competition. In addition, Studwell emphasizes the need for multiple competing firms, and for the state to cease subsidizing those which fail. He also criticizes autarky, pointing to the necessity of importing foreign technology and production methods, which is much easier than trying to reinvent the wheel.

Finance

This is, in my opinion, where Studwell makes his strongest case.

All the Northeast and Southeast Asian countries had rates of savings between 30 and 50%, high by international standards. In Northeast Asia, the financial system was oriented to provide cheap loans to developing industries, while in Southeast Asia, banks focused on other sectors which provided higher profits but which did little for national development, such as real estate speculation and general consumer lending. Korea in particular had a policy where depositors received negative real interest on their deposits, the big manufacturers were in effect being paid to borrow. Taiwan pursued a more traditional banking policy, and as a result Korea had a lower savings rate than Taiwan, but it was not disastrously low, in part because Koreans had little elsewhere to put their money. Consumption was restricted, even in the 1980s it was illegal to take a foreign vacation, foreign investment was restricted, and so the only alternative was a quite speculative illegal but tolerated “kerb” market.

How China Fits In

This is the last chapter, China, according to Studwell, is having success in following the Northeast Asian pattern of intensive smallholder farming, government support to industry and exporters, and a financial system designed to achieve the first two objectives. It is not its rate of growth that makes it exceptional compared to the other three Northeast Asian states, but its absolute size.

Studwell notes China’s corruption, lack of democracy, lack of property rights, ect, and notes that none of that has stopped its rise so far, but he believes it will become important as China enters a new stage in its economic development. He is also concerned about age-related demographic factors, writing that “in comparison with Japan, Korea, and Taiwan, the main point of interest is that China is reaching population stabilization at a relatively lower level of GDP per capita.”[3]

Studwell concludes the chapter by stating that “[o]n its present trajectory, China is set to become a middle income per capita, but profoundly institutionally retarded state.”
I’m not so sure. Corruption is, on the net, bad, but is it enough to hold a naturally 105 IQ people in the middle income trap? I don’t think so. Italy and Taiwan are both known for corruption, but both have achieved rich-world country levels of GDP per capita, 29,867$ for Italy and 22,288$ for Taiwan. This is far above what we consider middle income countries, countries like Brazil(8,670$), South Africa(5,695$), or Mexico.(9,009$)[4]

No Viable Alternative

Back in 2004, Robert Locke wrote an article entitled “Japan, Refutation of Neoliberalism,” in which he argued that “Japan has done almost everything wrong by neoliberal standards and yet is indisputably the second-richest nation in the world.”[5] Korea has similarly done everything wrong, protectionism, government intervention, subsidization of industry, high inflation, and a high rate of government borrowing during the period of its rise. It grew at a faster rate than Japan. Even Wall Street Journal neoliberal Joseph Sternberg, in his review of Studwell’s book, admits that:

(…)The combination of import-protectionism and financial repression engineered a sustained wealth transfer from households to exporting companies, in order to facilitate investment. This undeniably leads to rapid GDP growth, at least for a spell.(…)[6]

For the HBD denier, who would claim their are no meaningful differences between East Asians and the rest of the non-European world, the East Asian model looks very convincing compared to policy failures of the Global South. Still, Studwell oversells his case. He states that there is “no alternative” to industrial policy for developing nations.[7] The East Asian model is hardly necessary for industrialization to occur. The United States pursued an economic policy that was largely classical liberal except that it had protectionism and some restrictions on foreign investment. It had no subsidies for industrialization, no emphasis on exports, banks free to do what they wanted, widespread land tenancy in the South and no government support for farmers outside the South. The industrializing West grew at a lower rate of development than did the East Asian Tigers, but unlike them it had to invent the technology itself.

Contrasting America’s bad advice to Southeast Asia, Studwell writes that “Two countries which fought wars against the US and have not trusted American development advice, China and Vietnam, are in much better shape in economic terms.”[8] But in fact IMF data on GDP per capita shows Vietnam is still substantially poorer than all the capitalist Southeast Asian countries Studwell analyzes, Vietnam having a 2,088$ per capita GDP, compare to the per capita GDP’s of Indonesia(3,362$), Malaysia(9,557$), Thailand(5,742$) and the Philippines.(2,885$) Purchasing power parity data shows the same pattern.

In his introduction, Studwell excludes Hong Kong and Singapore from analysis because they are city-states, not “proper countries.” They have no agricultural sectors to drag on productivity, thus should be expected to be wealthier on a per capita GDP bases than proper countries like South Korea or Taiwan. But couldn’t they be compared to cities within the larger countries? They are far richer than the big cities of Southeast Asia. As far as their manufacturing and finance policies, why can’t you make a good comparison between them and “proper countries?” Studwell refers to them as “port-offshore financial centers,”[9] implying that they are overwhelmingly reliant on shipping and finance. Singapore, however, has developed significant light industrial sectors, something they have developed without the aid of “export discipline,” protectionism, or much in the way of government subsidies. Ultimately, the East Asian model probably sped up East Asia’s growth, but was not necessary. They all would have eventually converged to the rich country level, as justified by their high IQs.

Will Studwell’s Advice be Followed?

“Neoliberalism” has been out of fashion for a while, like “neoconservatism” the term is almost always used in a negative way. Studwell’s book has received praise from the Left, most notably from Bill Gates.[10] The younger generation is increasingly critical of capitalism, and in an administration of a Sanders-like[11] Democrat, critics of neoliberalism will be brought to the fore. Even in a Clinton administration, the Wall Street wing of the party will be focused mainly on American domestic policy, allowing American advisers to give whatever advice they want to foreign countries. Alternatively, national leaders may directly read Studwell’s book or others like it.

Given their IQ levels, I don’t believe that Thailand, Malaysia, Indonesia, or the Philippines will ever reach the level of Korea, Japan, and Taiwan. Vietnam is a trickier case, we don’t know much about its genetic potential, it has no Hong Kong or Taiwan providing a natural experiment in its people’s abilities under capitalism. I believe the first bit of advice will provide a net benefit. The landlords of the Philippines seem to provide little in the way of value added to their tenants. In areas where the landowners are providing value added, such as the on the White-owned farms of South Africa and Zimbabwe, ‘land reform’ can be much more destructive. The third bit of advice would depend on the success or failure of the second.

It is the second bit of advice, on subsidized manufacturing and export discipline, which I think could prove the most destructive to a low-IQ nation which took it. This could lead to a huge waste of resources on an industry which is supposed to achieve” industrial learning” but doesn’t end up learning anything. “Export discipline” does not ensure that an industry will not become parasitic, for one, an industry will require time to build itself up and “learn,” it will have years or maybe even decades where it can give absorb subsidies and sell in its protected market while giving excuses for not yet being able to export. And once the exports start, what’s supposed to happen is that the export-discipline process is supposed to make the industries so profitable that government subsidization is no longer necessary. Government subsidization of Hyundai allowed it to compete with Japanese and American car manufacturers in American markets, effectively, poor Korea was providing an artificially cheap product to rich Americans, but this didn’t last for long, and today Hyundai ably competes with other rich-country car companies. But if the “industrial learning” process is insufficient to produce an industry that can compete internationally without subsidies, those subsidies may end up being indefinite. Another thing companies may do to change the system is ‘export’ to other countries in the same situation. Studwell recommends a common market bloc for the Southeast Asian countries, and I could easily see the subsidized corporations arguing that they are “subject to export discipline” by exporting to markets which are in fact protected from rich world competition.

Another problem with industrial policy will be what the nation will focus on developing. Subsidized industries may focus merely on assembling foreign goods so that it looks from the outside that the nation is making cars, but the engine came from Japan and the steel frame came from China, so there’s little value added if it’s put together in Indonesia. Studwell warns about this, but people can always proclaim they are following his advice and ignore certain parts. Studwell also warns against subsidizing industries which add little value, such as the export processing industries of Malaysia. South Korea succeed with steel and cars, so it would be an easy decision to develop those. At the time Japan and Korea developed automobile industries, they were somewhat of a cutting edge product, it was only in the 1960s that it stopped being rare for average people outside the USA to own automobiles. Japan and Korea’s successful car-making industries granted them accession to a small club of the most advanced countries in the world, countries like America, Britain and West Germany. But today the countries which produce the sixth and seventh largest number of automobiles are India and Mexico, respectively.[12] The most advanced countries deal in manufacturing airplanes and silicon chips. So if the Philippines does create a successful car industry, and it’s entirely possible that it will, it will not propel it to the top of the economic heap. Already, Thailand produces more cars than the United Kingdom, Indonesia produces more than Italy.

Studwell’s advice has no name, no label like “neoliberalism” or the “Washington consensus.” Perhaps it can be called “economic historicism”(for the historical school of economics), “neo-historicism,” or “neo-Listianism.”(After Friedrich List, a 19th century economist forgotten in the West but who served as an inspiration for the South Koreans.) If neo-Listianism becomes tried on a large scale in countries in poor countries and doesn’t work, what will the neo-Listians say? They may become as immune to evidence as today’s neoliberals, saying that whenever their ideology failed it’s because it wasn’t in its true, pure form. Sternberg, the Wall Street Journal reviewer of Studwell’s book, concludes his review by writing:

“(…)But as Mr. Studwell shows so clearly, true liberalism has never been attempted by any nation in the region. Before concluding that the tiger way, for all its costs, is the best path for Asia, it might be worth awaiting the results of an experiment in a more liberal alternative that is only now beginning.”

Yes, why try something that has actually worked when we have something that might work but has never been implemented in a “true” way.

What’s my prognosis for the capitalist countries of Southeast Asia? I think that 30 years from now, they will be significantly better off than they are today, due mainly to technology, including both the creation of future technology and the slow adoption of today’s technology. This will provide cheaper and better imported products and will probably complement, rather than replace, the low skilled workers of those countries, which are not at the level yet where automation will prove a problem. They will benefit as low-cost, labor intensive industries are moved out of China, and China provides many tourists for Southeast Asia’s resorts. With the internet, education and training in various useful skills, from computer programming to metallurgy, will become cheap and available to those with the ability and willingness to learn. If the desire is there, technology could be used to give police the ability to catch criminals much more efficiently, reducing crime, or reduce corruption in both private and public spheres by increasing transparency.

Some Predictions

A criticism of economics is that it is about “predicting the past.” From 1997-1998 Korea, in response to the Asian Financial Crisis, implemented a rash of reform measures, taking advice from the IMF. Ha-Joon Chang, (maybe this description should be taken out)a notable Korean economist who shares Studwell’s criticism of neoliberalism, predicted that the reforms would seriously harm the Chaebol.(big Korean companies) This did not happen, Studwell says it is because Korea had reached a stage in national development where freer markets are better, here, the IMF “may just have done something useful,” in contrast the IMF’s neoliberal advice to Southeast Asian economies.[13] It’s easy to wonder if the theory has been put together to fit the historical pattern, whether consciously or unconsciously. Predicting the future is a good test of how much a theory is worth, so what can I, informed by HBD, predict for Asia?

Based on current data, an HBD analysis of GDP per capita will tell you that, in rankings of countries by GDP, four factors explain most of the variation:

1. The ethno-racial composition of people.
2. Whether the nation sits atop a lake of oil or becomes a banking center/tax shelter.
3. Isolation by geography.[14]
4. Whether the nation is centrally planned.
5. Performance in the last 30 years, effected mainly by 4. Rome wasn’t built in a day.

The remaining difference is no doubt effected by public policy, taxation, exchange rate policy, the success or failure of large international firms, ect, but doesn’t account for more than 20 or 30 percent of the variation. Ethnically similar states which do not differ in factors 2-4 tend to have quite similar GDP per capita’s. Germany and Britain have followed different paths, Germany a protectionist, more manufacturing centered one and Britain a free trade, more services centered one, but both have GDPs in the same general neighborhood(43,733$ vs 41,221$, IMF 2015 value) Japan was in 1985 more than 4 times as rich as Korea, but is quite similar(Japan at $32,486 versus Korea at $27,195). GDP doesn’t account for everything, Japanese workers work fewer hours than Koreans, so are still substantially more productive. If the crime rate rises and a bunch of anti-crime gadgets are sold, that increases GDP. Nevertheless, the differences between Britain and Germany are small compared to the differences between Britain and Indonesia.(current GDP per capita: 3,362$) GDP will accurately class countries into economic “neighborhoods,” even if it may get the rankings within them wrong.

Thus, my prediction for China is that by 2045 it’s level of nominal GDP, as measured by the IMF, will be more than 80% of the value of the GDP of the poorest member of the group of countries consisting of Japan, Taiwan, and, assuming Korean reunification has not happened, South Korea. Currently, China is at 38% of the level of the GDP of the poorest member, Taiwan. None of the group of countries including Thailand, Malaysia, Indonesia, and the Philippines, will richer than China.

More predictions of this type, in all cases nominal GDP will be as measured by the International Monetary Fund:

By 2045, all of the countries in the group of countries including Bulgaria, Romania, Serbia, and Macedonia will have per capita GDPs higher than 70% of Greece’s GDP value, as measured by the world bank. It is currently, 38%, 49%, 28%, and 26% for Bulgaria, Romania, Serbia, and Macedonia, respectively.

By 2045, Estonia will have a GDP higher than 80% of Finland’s GDP value.(it’s currently at 41%) Both have some non-Finnic minorities dragging them down, Finland has non-Whites and Estonia has a larger population of Russians.

By 2045, the Czech Republic will have a GDP higher than 80% of GDP of the poorest out of the group of countries including Germany and Austria.(Note that when it was part of Austria-Hungary it was the Empire’s most industrialized region.) It is currently at 42%. Partly, this prediction is due to the fact that Germany and to a lesser extent Austria have embraced suicidal immigration policies.

Notes

  1. Joe Studwell, How Asia Works: Success and Failure in the World’s Most Dynamic Region, Grove Press, 2013, pg 47
  2. Studwell, pg 44
  3. Studwell, pg 265
  4. World Economic Outlook Database-April 2016International Monetary Fundhttp://tinyurl.com/zl824eq
  5. Robert Locke, Japan, Refutation of Neoliberalism, post-autistic economics review, issue no. 23, January 5 2004 http://www.paecon.net/PAEReview/issue23/Locke23.htm
  6. Joseph Sternberg, Don’t Think of a Tiger, Wall Street Journal, July 2 2013, http://www.wsj.com/articles/SB10001424127887324183204578565934258698200
  7. Studwell, pg 163
  8. Studwell, pg 166
  9. Studwell, pg xx(Introduction)
  10. Bill Gates, Can the Asian Miracle Happen in Africa?, gatesnotes, December 8 2014
    https://www.gatesnotes.com/Books/How-Asia-Works
  11. Don’t discount this possibility. It’s tempting to think that a wall-street supported Democratic establishment will always control the Democratic Party, but I think Sanders style socialism has a future. Imagine if in 2016 Bernie Sanders had been Black. He would have gained the knee-jerk support of Black Democrats and his Blackness would probably have gained him more White Democratic votes than it cost him. He would have won.
  12. List of countries by motor vehicle production, Wikipedia, accessed August 21 2016 https://en.wikipedia.org/w/index.php?title=List_of_countries_by_motor_vehicle_production&oldid=728516327
  13. Studwell, pg 162-163
  14. There are numerous examples of isolated islands which are less productive than one would expect based on their ethnic compositions. The Faroe Islands and Iceland are Nordic nations but the Faroe Islands is much poorer than other Nordic countries, Iceland is just as wealthy by GDP per capita, but this is only due to the long hours worked by icelanders, it is much less productive on a per-hour basis. New Zealand is less productive than Britian. This type of isolation is rare, only effecting a handful of countries.
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2 Responses to *How Asia Works*

  1. Bob says:

    The American South never industrialized. It had a centralized plantation system where everything above subsistence was collected from labor i.e. slaves as rent by the plantation owners. Independent labor which owns its own land collects all the rent of land as wages. Independent labor in the South was driven off into very marginal and unproductive lands in the mountains with low rents, hence they were derided as “hillbillies”.

    British industrialization was preceded and accompanied by the opening up of vast new territories in North America and Australasia offering rent free or lower rent land to labor. The US of course also had vast territory and its frontier only closed at the end of the 19th century.

    The Wright Brothers owned their own bicycle and manufacturing shop. The rent of their business was collected by them as wages for their labor running the business and manufacturing. If they had been mere employees of a shop, the rent of the shop would have gone to the landlord and proprietors of the shop, and their wages would have been lower. Furthermore, they might have lived in a rented home, with the rent extracted from their lower wages. They would have had much less capital and leisure to fool around tinkering and developing the first plane.

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  2. Bob says:

    HBD is obviously a real factor, but there’s a tendency to view at as implying static types.

    HBD presumes natural selection, which presumes varied distributions of traits and change induced by even the tiniest of pressures. Even a small change in the incentive structure of the economy can have an impact.

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