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Joe Studwell is the founder of the China Economic Quarterly.

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United Kingdom



The title makes a bold claim, but overall Studwell does an excellent job of condensing, comparing, and commenting on the development paths of almost all of the major northeast and southeast Asian economies from an elevated yet rigorous level. While space prevents him from discussing some of the most unique countries - I'm thinking mostly of North Korea and Vietnam as well as Singapore and Hong Kong, though surely Laos, Cambodia, Myanmar, and Papua New Guinea have their own interesting stories - the room freed up thereby lets him pack in a remarkable amount of high-level analysis in about the remaining countries: Japan, South Korea, and Taiwan; Thailand, Malaysia, Indonesia, and the Philippines; and of course China, which appropriately gets the entire fourth section of the book all to itself. The remainder of the book is split amongst the other seven nations (or six plus whatever you want to call Taiwan), divided into three different stages of development: agriculture, manufacturing, and finance.

Successful development strategies begin with agriculture, the sector that has contained the majority of the workforce in every undeveloped country in history. Farming's relationship to political structure is complex, but most underdeveloped societies seem to be stuck a sort of feudal pattern, with a few large landowners controlling vastly disproportionate shares of each country's land and hence political system (note that this harmful pattern may have been encouraged in former first-world colonies). Since the most efficient way to get food is to have many small farmers working many small plots of land (it will come as no surprise to sustainable-food advocates that this "garden-style" method is typically more effective than US-style agribusiness), the first task of every forward-thinking leader is to break up large estates and redistribute the land to the people. Some countries like Japan managed this well, raising their food production as well as increasing economic mobility, while oligarchies in others like the Philippines made sure that redistribution never disrupted their control of local markets. While land redistribution and the instigation of widespread household farming does not by itself guarantee success, failure to bring the masses into the formal economy means both that fewer people make the jump from "starving miserably" to "just getting by" and that power remains concentrated among very few hands.

Once land redistribution has succeeded, industrialization can proceed. In Europe, the Industrial Revolution began first with the textile industry, which is a path many countries still take (e.g. Malaysia's garment industry). Light industry is well-suited for developing countries, since there will frequently be many small factories requiring large amounts of not-especially-skilled labor. Additionally, the increased number of household farmers looking to sell crops will need things like pickup trucks, motorcycles, or motorized bicycles, spurring the growth of companies like Honda who got their start by building just such vehicles. There's a persistent debate among economists: should developing countries raise tariffs and provide subsidies to infant industries, risking corruption and inefficiencies; or should they pursue neoclassical free trade policies, following the theoretically maximally efficient orthodox neoclassical model at the risk of having infant industries crushed by superior foreign competition? Studwell convincingly demonstrates that the former is the correct path, citing the arguments of Friedrich List and Alexander Hamilton among others. The common metaphor is that tariffs and subsidies are like a ladder used to climb up, to be kicked away when done, but the examples of rich countries that used mercantilist policies to get rich and then later mostly or partially deregulated (i.e., all of them) shows that early state support for industry is vital. South Korea's support for Hyundai, Daewoo, and others had many positive spillover effects for related heavy industries like shipbuilding.

However, it's important not to gloss over the failures of heavy state involvement in industry. Even in the US, development projects like railroad construction after the Civil War were notoriously corrupt, and all of the same risks of cronyism, rent-seeking, and regulatory capture are present in Asia. The most important thing for countries to do, as shown by the examples of Japan and South Korea, are to focus on exporting manufactured goods which can be traded as opposed to cultivating service industries which can't, and then promote export discipline by not allowing domestic firms to get lazy. Japanese cars were laughed at when they first hit American markets, but they quickly improved and seriously challenged the Big Three because Japan would not allow their manufacturers to rest on their laurels; Malaysia was not nearly so stringent with its auto industry, and as a consequence Proton never achieved the same reputation for quality. A common pitfall for countries is to simply ask foreign companies to set up shop with some branch plants in their country and raise their living standards that way. Trying to skip ahead in that method doesn't work for a few reasons: first, incentives or subsidies to the foreign companies are often expensive, representing an export of capital desperately needed at home; second, much less knowledge is transmitted to the local economy than if native entrepreneurs had been given the support to figure things out for themselves and create their own supply chains; third, fewer jobs are created, with those that do being generally of lower quality; fourth, interactions with the foreign companies are rife with potential for corruption.

This has implications for the third stage of development, the creation of a domestic finance industry. Studwell goes into a great amount of detail on how various countries' financial sectors either contributed to their paths of development or inhibited them, and the Asian financial crisis of course figures prominently as a warning sign to countries that were on the wrong development path. Another reason to prefer investment in manufacturing over services is that once an independent financial sector gets going, money tends to flow to lucrative but non-productive sectors like high-end real estate speculation rather than, say, new industrial infrastructure. This is especially true in the case of countries whose elites survived the process of land redistribution and the creation of a manufacturing sector, and who now maintain critical positions in agriculture, industry, and finance (thus leading to sweetheart loans, kickbacks, and all manner of related corruption). Financial crises are devastating no matter how developed your country is, but one with plenty of domestic firms is able to get back on its feet much more quickly than one with a bunch of empty factories that used to be owned by foreign companies. Countries that develop successfully engage in heavy financial repression and capital controls, which increases the savings rate and allows for the currency exchange rate to be used to favor domestic producers. This has the cost of artificially stunting consumption, as well as perennial demands from the IMF for financial deregulation and floating exchange rates, but as long as a country's leadership is not too dominated by a few families, as it was in places like the Philippines, it should be able to use the tools of modern international finance to finally compete on a level playing field with rich Western countries.

All this brings us to China, whose development path has similarities with both the richer Northeastern Asian countries and the poorer Southeastern ones, and is hence unique enough to deserve the sole focus of the final section even aside from its singularly vast scale. It's come a long way from disasters like the Great Leap Forward; China's modern rush towards development is an acknowledgment of the failures of state-lead growth, and yet even today China has immense state companies that play vital roles in its economy, alongside the countless numbers of foreign-owned companies that use its cheap labor to assemble much of the world's high technology. There's a business concept (first introduced by the CEO of Taiwan-based Acer, interestingly) called the "smile curve" - profits are highest in the early product design/R&D stage, low in the manufacturing stage, and high again in the sales stage. China's leadership is very aware of what needs to be done to get domestic businesses to climb higher and higher up the value chain and cease relying so much on its current comparative advantage in cheap labor, but frequently that's easier said than done. Studwell remarks that often Chinese businesses find it easier to compete in the business-to-business heavy-industry sectors like energy, shipbuilding, or rail compared to more consumer-focused sectors like high tech, but since China is for the most part adhering to the successful path of heavy financial repression and capital controls (though anyone who's followed the Bo Xilai story knows the vast scale of Chinese corruption), it seems that China will most likely emerge in a few decades at or near the technological frontier of the rich Western countries.

Any book that tackles such a broad subject invites criticism, but for the most part the book seems to mesh well with other books I've read. James Fallows' China Airborne had a lot to say about the development of the Chinese aviation market, which bears directly on many points raised here about the manufacturing sector and its role as a driver of acceptance of international business standards. The sections on the Asian financial crisis also seem to mesh with what I've read from other sources like Paul Krugman's The Return of Depression Economics (an earlier work of his, "The Myth of Asia's Miracle", also offers an interesting alternative perspective on Asian development). Furthermore, even though his histories of each individual country can't help but oversimplify, his general insights on pitfalls of development seem to cover the specific agonies of each individual country that for one reason or another has gotten into trouble. Overall, Studwell has done an excellent job of explaining why leaders like Park Chung-Hee, Deng Xioaping, and Meiji took their countries in such different paths than Mao Zedong, Mahathir Mohamad, and Sukarno in a brisk, well-argued volume.
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aaronarnold | May 11, 2021 |
excellent insight of Asian business community
wooiklim | Hi ha 1 ressenya més | Sep 16, 2016 |
The author disagrees with a common view of China that it is the land of great riches and prosperity for outsiders to trade with.
gmicksmith | Feb 14, 2015 |
It must have cost Joe Studwell a good deal of work to integrate his knowledge of Asian business and politics and produce this exceptional book.

He has a facility for gaining access to Asia's rather secretive Chinese billionaires since they are obviously not in the habit of sitting around and sharing their fine French wine with any regular gweilo. It may be because he actually quite likes them (and this comes across in the book) which helps but at the same time it doesn't make his job of a balanced analysis any easier.

Nevertheless he succeeds, with the book being built around his statement that, “It is the politicians job to defend societies interests.” In some countries they do, such a Japan, South Korea, Taiwan and to a lesser extent China, and in some they don't such as the Philippines, Indonesia, Malaysia and Thailand with a general divide between NE Asia (successful) and SE Asia (unsuccessful).

He concludes that it is systems, not people that make a country rich, with efficient political and social institutions being the key to prosperity rather than the empty but fashionable idea of “Asian values”.

He makes it fairly clear that the traditional Chinese merchant class of SE Asia has successfully exploited weaknesses in their respective governments in classic special interest fashion to gain favours and capture spectacular excess profits. It's the people of these countries that lose as they pay higher prices and stumble from one financial crisis to the next while they are trapped in poverty.

The basic deal is that cash generating monopolies such as gambling, land development rights, mobile telephones, importing and trading foodstuffs, flour manufacturing etc. are granted by politicians to the Chinese “Godfathers” in exchange for a cut (remarkably identified as 10%) in the profits. It doesn't seem to matter in SE Asia what type of government is involved. Democracies, military dictatorships, right and left wing all fall into the same corrupt system with the 10% cut being a recognized prize of political success.

Also the system is so ingrained that the Godfather monopolies have more or less become the only viable economic organizations left standing so SE Asian governments are have to reach agreements with them.

A major and not so obvious conclusion that Studwell emphasizes is that there is no place in these setups for internationally competitive manufacturing businesses with high levels of research and development and skilled labour of the South Korean type. On the contrary, Godfather businesses are designed to avoid competition through licences and tend to concentrate on trading and raw material extraction.

The rather surprising but inescapable conclusion is that the Godfather businesses have very little to do with the Asian manufacturing success story. This success is due to large scale western outsourcing to mostly small asian manufacturers starting in the early 1980's and aided by NE Asian governments making a determined effort to educate their populations, develop technical skills and climb the value chain while providing a manufacturing environment that suits foreign corporations.

SE Asia also participates in the lowest level of outsourced manufacturing but the minimal profits are of no interest to the Godfathers although they do benefit indirectly for the generally increased Asian demand for the raw materials provided by their monopolies.

The author essentially shows the SE Asian Godfathers developing a finely tuned system for exploiting their respective countries in close alliance with corrupt politicians of the ethnic majority. This involves a high degree of artistry and Studwell shows in interesting detail for example how they manipulate their bank ownership to obtain 0% financing and play with Public/Private ownership of their corporations to capture all the upside while dumping all the risk on the public.

A central aspect is of course “Guanxi” (being plugged in/connected) whereby major efforts are made to bribe/entertain/give gifts/praise/be the best friend of those with political power or who may gain political power (Godfathers back all factions), with the interesting result that Godfathers develop a chameleon like nature, changing their names and presenting themselves for example as Thais in Thailand, Filipinos in the Philippines while simultaneously being Chinese with the Chinese.

As a relative of Henry Fok (one of the biggest Godfathers) says, “tycoon behaviour should be viewed through the prism of Eric Berne's 1960's bestseller “The Games People Play”, adding..They all want a shrink … to get it of their chest.”

In any event it is the people of SE Asia who lose as their countries stumble from one crisis to the next with a good example being the Philippines. As the 2006 World Development Report said, “15% of Filipinos were living in absolute poverty, and 47% subsisted on an income between US$1 and US$2 a day. Half of the 12 million population of Manila lives in shanty towns that line the expressways, rail tracks and waterways of the metropolis. After 25 years of repeated economic crises, the Philippines economy is now critically dependent on the overseas earnings of an estimated 10 million, mostly female workers – out of a population of 80 million – employed as child carers, nurses and more in richer states around the world.”

Studwell quotes the Philippine's best known living author, Francisco Sionil José (from an interview in the far Eastern Economic Review December 2004) quite simply saying, “We are poor because our élites have no sense of nation.”

Highly recommended.
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Miro | Hi ha 1 ressenya més | Aug 3, 2014 |



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