• Tue
  • Sep 23, 2014
  • Updated: 3:19am
Monitor
PUBLISHED : Thursday, 13 June, 2013, 12:00am
UPDATED : Thursday, 13 June, 2013, 6:49am

To get rich, poor states must ignore the Washington rule book

A new book argues that in East Asia, there are nations that protect their industries and prosper and those that heed others' advice and fail

The line of latitude at 20 degrees north neatly bisects East Asia.

Skirting Thailand's northern border, and passing eastward between the Philippines and Taiwan, it divides the region into two distinct economic zones.

To the north, Japan, South Korea and Taiwan - three places that long ago achieved developed-country wealth levels. More recently, China has emulated their development, stunning the world with three consecutive decades of rapid growth.

South of the 20th parallel, however, economic development has lagged behind. Although in 1950 Indonesia and the Philippines boasted similar incomes per head as Korea or Taiwan, today their levels of gross domestic product per capita - even after adjusting for differences in purchasing power - are less than a quarter of those enjoyed by their northern neighbours (see chart).

Over the years commentators have suggested all sorts of possible reasons for this divergence, from cultural proclivities to climactic differences.

Joe Studwell has a different explanation. In his new book, How Asia Works, the founding editor of China Economic Quarterly argues that in the 1980s and 1990s governments in Southeast Asia made the mistake of accepting the policy recommendations of the International Monetary Fund and World Bank.

In response to advice from Washington, they distanced themselves from business, opened up their domestic markets and scrapped controls on capital flows.

In contrast, governments in northeast Asia adopted a much more interventionist, and protectionist, approach. In Japan, Korea and Taiwan post-war governments rode roughshod over property rights, redistributing farmland in order to maximise output from their underemployed rural populations.

Meanwhile, governments maintained a tight grip over their financial systems, holding domestic savings captive and directing cheap capital into favoured manufacturing industries.

The result was Japan's rapid growth of the 1960s, achieved thanks largely to the state's allocation of resources into nascent manufacturing industries which benefited handsomely from a protected home market and generous export incentives.

Similarly, in South Korea, the government directed investment into heavy industry - steel, shipbuilding and carmaking - promoting their development with subsidies and shutting out competitors with tariff barriers. Imports were restricted to raw materials and capital goods necessary for boosting productivity, with controls only relaxed once Korean industry was able to hold its own against international competition.

The lesson was well learned in Beijing. Although China never fully pushed through land reform after the disaster of collectivisation, Beijing enthusiastically embraced the other main elements of the northeast Asian model. The government retained control of the financial system, allocating cheap capital to protected state industries and promising export sectors. Growth took off.

According to Studwell, it's a model governments in newly developing economies in Africa and elsewhere would do well to study.

Throw the Washington rule book out of the window. First, equally redistribute your agricultural land to encourage small-scale intensive farming and boost output.

Next, protect your home markets from foreign competition, while picking winners in likely export sectors.

Finally, keep control of your financial system so you can lavish cheap capital on your favoured manufacturers until they can compete with all comers.

It's hardly a liberal approach, but it's worked a treat for Asia north of the 20th parallel.

tom.holland@scmp.com

Share

For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive
 
 

 

12

This article is now closed to comments

impala
A good piece, but there is really nothing new in Mr Studwell's ideas. Economists like Ha-Joon Chang (Cambridge), Robert Wade (LSE) and many others (J. Stiglitz comes to mind as well) have been making this argument for 10 years or more.

In particular the Mr Wade's "Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization," published in 2003, seems like a book from which this Mr Studwell has taken many a leaf, or at least his theme.

Mr Chang has looked far beyond East-Asia in this field, and has empirically shown that the Washington Consensus is also historical quatsch. Today's developed nations didn't get developed by practising free trade, small government and open capital markets. On the contrary. Powers like the USA, the UK, France and so on, were (by today's standards) excessively protectionist (mercantilist even), with steep government subsidies for nascent industries, and isolated, fragmented financial sectors with heavy capital controls.

Mr Chang signals the fact that these countries are at best being hypocritical by telling today's emerging economies NOT to do everything they did, but instead open up, deregulate, privatise and liberalise, which is really detrimental for the economic development and often leads to a middle income trap. He called this trend 'Kicking Away the Ladder,' also the name of a book he published in 2002.

I hope Mr Studwell acknowledges his sources of inspiration properly in his book.
impala
-duplicate, please ignore-

Pages

 
 
 
 
 

Login

SCMP.com Account

or