How Asia Works - Review

During my UPSC preparation, I often read many expert opinions championing the cause of free trade. After the 1991 economic reforms, any talk on protectionism is censored. However, these Free Trade Champions are often caught in a fix when asked about our burgeoning trade deficit with China. If open trade is supposed to increase efficiency and make your economy more competitive, why is India still a trading colony of China? Why is there a deafening silence from these people when India chose not to join RCEP? 

Joe Studwell's How Asia Works attempts to answer these questions. Studwell doesn't shun confronting the harsh truth - That protectionism is a device to hone your industries. When you are at your nascent stage of industrialization and when you quickly open your economy, how will your domestic businessmen ever get their hands dirty? How will they learn to create/make things? 

This begs us to the next question. If protectionism is indeed the way, should we revert to pre-1991? No, Isolationism is different from protectionism. But, before we get into this part, let's digress a bit and talk about agriculture. 

The conventional wisdom we have often been told is that large-scale agricultural farming is good for the economy. Universality is for lackeys, and context is for kings. This approach does not work for developing countries because they have abundant labour. The best way to use that abundance is to put them to work. Here's where Studwell introduces the concept of gardening approach to farming. 

Ok, you have an abundant workforce but what about land? Where will they cultivate? The answer to these questions is Land reforms. Studwell explains how Japan, under the US administration, was forced to undergo land reforms. Because the US had to fight the ideological battle with the USSR, it wanted to effect desirable economic changes in Japan. The SCAP administration led by MacArthur, with the help of Ladejinsky, a Soviet-born agricultural economist, implemented deep-rooted land reforms in Japan. 

 

Because the reforms were so successful, the productivity and yield of the farmers rose and resulted in enormous household savings. The household savings funded the industrial drive in Japan.  

 

Oh, where were we? Protectionism, right? Well, if you want to create world-class industries, you need competence. Your entrepreneurs must be willing to get their hands dirty and always aspire for quality. That's why you need trade barriers so foreign firms do not kill your infant industry while allowing multiple domestic firms to compete.

Export discipline - The most crucial part of industrial policy where you are forcing your domestic firms to export and nurture them with subsidies and support based on their export performance. 

This export discipline allows the government to direct and reallocate its resources most efficiently. Assume, if a firm is unable to meet its target, then naturally the government will stop supporting it. 

Contrast it with India's Public Sector Units - the drivers of Industrial policy in India until 1991. The PSUs still are run by bureaucrats with no business acumen. And with no export requirements, they were in no hurry to streamline their businesses. Adding this woe with the isolationist policy, we ended up having a balance of payment crisis.  

Studwell could not stop praising Park Chung hee - the man who made the economic miracle happen on the Han riverbed. The book gives a lucid account of how Chaebols prospered and how underperforming industries were either merged or culled away from existence. 

This development starkly contrasts with South East Asian states like Malaysia, Thailand, Indonesia and the Philippines where there were neither Land reforms nor export-driven industrial policies. These policies will make firms globally competitive and imbibe in-depth technical know-how.  

The final part of a successful development model is having a conservative financial model. If you are a developing country, it is best to control the money flow through banks. Central banks could then provide credit guarantees to the loan lent to industries while maintaining cheap lending rates. This, in turn, nudges banks to reduce their interest on the loans they disburse to the industries.  

Pragmatic governance also means having relatively difficult currency convertibility while controlling the flow of foreign capital inside the country. Entrepreneurs, in general, are primed to mint money. Of course, it is stupid to curb these entrepreneurial spirits by suspecting and preventing them from doing business. But it is even more crucial to prevent them from investing in non-productive sectors of the economy such as real estate.  

That's why imposing the export discipline and financial leash over the industries is essential to align their business goals with nation-building.  Another interesting fact you would learn from this book is that State-run companies need not always perform poorly. An example would be China or even Taiwan. If you impose the export discipline and introduce competition, any country can produce world-class products. 

The India Story:

I think India is slowly learning these lessons. India imposed anti-dumping duties on Solar Photovoltaic cells, resulting in a 364% growth in exports compared to the previous year. The introduction of schemes like RoDTEP indicates that we also understand that incentivizing exports will supercharge our economy. Yet, we haven't imposed any export discipline to make our firms globally competitive. Since our independence, we haven't built a globally recognizable brand. (Tata came into existence before independence)

Think about this. You can easily understand that our manufacturing story is a failure from this simple example - How many Nail-cutters, safety pins and other daily-use products are manufactured in India? If we continue importing even these simple low-end technology items from China, we will become their trading colony, just like the East India Company held us for ransom.

The ultimate goal of the journey is free trade among the nations. But a mindless prescription of free trade and financial deregulation to every country and not considering their development path is an absolute folly.

How Asia works is actually about how Northeast Asia developed. And we, Southeast Asians, should take a cue from this book and learn the apt lessons.