highlights from how asia works

Two key data sources I have used are the International Monetary Fund’s World Economic Outlook database, which starts from 1980, and the World Bank’s World Development Indicators database, which starts from 1960.
According to the World Bank, there is no methodological difference between the two. The methodological difference that readers should take note of is that between GNI, which covers a country’s income from both domestic and international sources, and GDP, which reflects income in the domestic economy alone.
This is a book about how rapid economic transformation is, or is not, achieved. It argues that there are three critical interventions that governments can use to speed up economic development.
The first intervention – and the most overlooked – is to maximise output from agriculture, which employs the vast majority of people in poor countries.
The second intervention – in many respects, a second ‘stage’ – is to direct investment and entrepreneurs towards manufacturing.
Finally, interventions in the financial sector to focus capital on intensive, small-scale agriculture and on manufacturing development provide the third key to accelerated economic transformation.
After widespread academic criticism of the report, the World Bank followed up with another one in 1993, The East Asian Miracle, which admitted the existence of industrial policy and infant industry protection in some states. But it downplayed the significance of such policies, avoided discussion of agriculture altogether, and added Hong Kong and Singapore to Malaysia, Indonesia and Thailand, thereby leaving Japan, Korea and Taiwan as the statistical minority among its ‘High Performing Asian Economies’.
The vitriol of the debate was such that academic rigour was frequently a victim, as with the World Bank reports.
In the early 1980s, however, Brazil – the outstanding fast growth story of 1960s’ and 1970s’ Latin America – had shown how dangerous it is to judge economic progress by growth rates alone. Brazil is the only major economy outside east Asia which has managed to grow by more than 7 per cent a year for more than a quarter of a century.
It turned out that too much of Brazil’s earlier growth had been generated by debt that did not translate into a more genuinely productive and competitive economy.
the south-east Asian states – despite their long periods of impressive growth – governments did not fundamentally reorganise agriculture, did not create globally competitive manufacturing firms, and did accept bad advice from already rich countries to open up financial sectors at an early stage.
In order to fund development, interest on bank deposits in north-east Asia and China was set well below market rates, a form of stealth taxation that helped pay for subsidies to agriculture and industry.
As noted, much pointless and deeply misleading debate has been promoted over the years by comparing the development of, say, Hong Kong with that of China, or that of Singapore with Indonesia’s. The World Bank has been the prime offender and I aim not to add to the detritus. Offshore centres are not normal states. Around the world, they compete by specialising in trade and financial services while enjoying lower structural overheads than other countries, which have larger, more dispersed populations, and agricultural sectors that drag on productivity.9 Offshore centres’ lower overheads mean that they also have a built-in fiscal advantage. Yet they can never exist in isolation – they are in a strict sense parasitic, because they have to have their host or hosts to feed on.10
With its population of 23 million, Taiwan has a developmental story that is both distinct from that of mainland China, and one which exhibits some striking and underreported policy similarities
The size and age profile of a country’s population has a huge impact on its developmental potential.
Rapidly declining death rates – particularly for children – and rapidly rising working-age populations have been a big part of the east Asian developmental story since the Second World War. These demographic trends, largely the result of advances in medicine and sanitation, have facilitated unprecedented growth. The phenomenon is sometimes referred to as the ‘demographic dividend’.
the size of your working-age population is still less important to your developmental progress than what you do with that population.
the reason is that the evidence of a positive correlation between total years of education and GDP growth is much weaker than most people imagine.
There are two, related explanations for the patchy connection between education and economic growth.
In east Asia there exists a marked contrast between the emphasis on vocational training of secondary and tertiary level students in Japan, Korea, Taiwan and China, versus the less trades-focused education systems of former European and US colonial states in south-east Asia.
By the late 1980s, vocational training (mostly focused on manufacturing) constituted 55 per cent of tertiary education in Taiwan, while less than 10 per cent of students were taking humanities subjects.
Like Korea and Japan, which established the model in east Asia, the Taiwanese education system came to resemble those of the manufacturing-based economies of Germany and Italy in Europe.
All this points to the second, and almost certainly more important, reason why data about formal education and development do not jibe well. It is that a lot of critical learning in the most successful developing countries takes place outside the formal education sector. It occurs, instead, inside firms.
In Japan, Korea, Taiwan and post-1978 China, by contrast, a lot of highly effective educational investment and research has been concentrated not in the formal education sector but within companies, and by definition – unlike the Soviet situation – within companies that are competing internationally.
Technology policy, not science policy, is the key to the early stages of industrial development.
If a state does not force the creation of firms that can be the vehicles for industrial learning – and then nurture them – all efforts at formal education may go to waste. The only caveat is that once a country reaches the ‘technological frontier’ in manufacturing, its optimal educational mix –and the relationship between institutions of formal education and learning within firms – changes.
Democracy and institutional development are part of development and so are not to be judged as drivers of it.
Despite a very real tendency of countries to copy their neighbours, geography fits sufficiently poorly with economic success and failure in east Asia that it has had to be treated with considerable licence in this book.
Why should land policy be so important to development? The simple answer is that in a country in the early stages of development, typically three-quarters of the population is employed in agriculture and lives on the land.
With most resources concentrated in agriculture, the sector offers poor countries the most immediate opportunity to increase their economic output.
The problem with agriculture in pre-industrial states with rising populations, however, is that when market forces are left to themselves agricultural yields tend to stagnate or even fall. This happens because demand for land increases faster than supply, and so landlords lease out land at increasing rents. They also act as money lenders at high rates of interest. Tenants, facing stiff rents and expensive debts and with little security of tenure, are unable to make the investments – for instance, in improving irrigation or buying fertiliser – that will increase yields on the land they farm. Landlords could make the investments to increase yields, but they make money more easily by exacting the highest possible rents and by usury, which adds to their land holdings when debts cannot be paid and they take over plots that have been pledged as collateral. A situation arises where ‘the market’ fails to maximise output.
concentration of ownership trumps improvement of yields as the easiest source of income for land owners.
It was, roughly speaking, to take available agricultural land and to divide it up on an equal basis (once variation in land quality was allowed for) among the farming population.
It was a market in which owners of small household farms were incentivised to invest their labour and the surplus they generated towards maximising production.
Big capitalist farms may produce the highest return on cash invested. But that is not the agricultural ‘efficiency’ that is appropriate to a developing state.
After the Second World War, China and the north-east Asian states were countries in which agricultural labour was far more abundant than in nineteenth-century America, and about to become more abundant because of rapidly rising populations. These countries were ready-made for high-output gardening.
In colonial Malaysia, surveys of natural rubber production revealed in the 1920s that the yields of smallholders were far higher than those of plantations.
Without adequate supporting infrastructure, small farms struggle anywhere, as has been the case after failed land reform attempts in places like the Philippines.
Increases in agricultural output are traditionally represented as important by economists because they lead to increased surplus, which implies more savings which can then be used to finance industrial investment.
Latin America was undone in the 1950s, 1960s and 1970s by a developmental strategy characterised by what the economist Michael Lipton dubbed ‘urban bias’, or the tendency of the urban elites that run poor countries to undervalue farmers.
Klaus Deininger, one of the world’s leading authorities on land policy and development, has spent decades assembling data that show how the nature of land distribution in poor countries predicts future economic performance.
In its most important early reform, the Meiji administration pensioned off the daimyo (generously), gave them seats in Japan’s new House of Peers in Tokyo, and gave small farmers title to their lands. One hundred and nine million certificates of ownership were issued in three years. For the first time, land could be mortgaged and sold legally. Taxes were also fixed in cash terms, so farmers kept more of the income from higher yields rather than splitting their physical crop with their landlords through sharecropping. As a result, farmers were incentivised to invest in their land while more liquid markets for crops came into being.
The central government hired American specialists to introduce new farming techniques, and supported the construction of a national network of training services – or what agronomists call ‘extension’.
In just three decades after the Meiji restoration, Japanese modernisation was such that the country could defeat China (1895) and Russia (1905) in wars, be welcomed into a bilateral military alliance by Great Britain (1902), and begin to export its goods around the world.
Michael Lipton’s dictum as: ‘If you wish for industrialisation, prepare to develop agriculture.’
And that is the reason why Japan has so little cultivable land – the country is covered in hills and mountains, which in turn are covered in forests.
Japan has a lower cultivable land share than any country in east Asia – just 14 per cent of its total area.
The Ito home, built around 1885 on the family’s revenues from its ever-expanding roster of tenants, is in fact a monument to the agricultural market failure that slowly asphyxiated liberal, reformist Japan and helped pave the way for the country’s military dictatorship.
In the 1920s, when 85 per cent of Chinese people lived in the countryside, life expectancy at birth for rural dwellers was 20–25 years.
An eminent Chinese official stated that in Shanxi province at the beginning of 1931, three million persons had died of hunger in the last few years, and the misery had been such that 400,000 women and children had changed hands by sale.’
bottom-up demand for land redistribution was so great that it happened anyway.
China’s agrarian system is unjust in the extreme. Speaking of general conditions, landlords and rich peasants who make up less than 10 per cent of the rural population hold approximately 70 to 80 per cent of the land, cruelly exploiting the peasantry. Farm labourers, poor peasants, middle peasants, and other people however, who make up over 90 per cent of the rural population, hold a total of approximately only 20 to 30 per cent of the land, toiling throughout the whole year, knowing neither warmth nor full stomach. These grave conditions are the root of our country’s being the victim of aggression, oppression, poverty, backwardness, and the basic obstacles to our country’s democratisation, industrialisation, independence, unity, strength and prosperity. In order to change these conditions, it is necessary, on the basis of the demands of the peasantry, to wipe out the agrarian system of feudal and semi-feudal exploitation, and realise the system of ‘land to the tillers’.28
Nationally, estimates of the death toll related to land reform in China range from hundreds of thousands of people to several million.29
There was, in the second half of the 1940s and the first half of the 1950s, a very substantial increase in agricultural output in China. The available data are of poor quality, but the increase is widely agreed to have been in the range of 40–70 per cent, taking grain output from a pre-Second World War peak of less than 140 million tonnes to close to 200 million tonnes.31
In 1956, following the Russian and North Korean examples, Mao Zedong led a drive to create agricultural collectives in which hundreds of families pooled their land, tools and labour in units of production. These changes, together with an industrialisation drive, were presented as China’s Great Leap Forward. In reality, the disruption to agricultural output in the late 1950s was such that a famine occurred in 1959–61 in which an estimated 30–40 million people (slightly less than 10 per cent of the population) died.
The political will that existed in the early 1950s came not from the US polity as a whole, but from a few clear-thinking individuals.
the Russian communists, having won popular support with a transition to household farming, then switched to forced collectivisation.
Agriculture was still the provider of two-fifths of employment and almost one-fifth of national income in 1955. The introduction of a more deep-rooted, enduring land reform – which kept the agricultural economy focused on yield gains rather than tenancy profits – set the stage for Japan’s post-war miracle.
It was in the 1960s and 1970s, when the state provided household agriculture with the kind of support seen in Japan and Taiwan in the 1950s, that yields increased appreciably.
The Korean state was less able to extract wealth from its relatively less productive agriculture in order to fund industrialisation than either Meiji Japan or post-Second World War Japan and Taiwan.
Taiwan is the most interesting agricultural story in north-east Asia, for two reasons. First, the island produced the most remarkable developmental results as a consequence of land reform. Second, with its subtropical climate Taiwan is geographically more south-east Asian than north-east Asian and hence the success of land reform there gives us a powerful reminder that geography is not destiny in development.
Under Japanese colonial occupation, which ended in 1945, considerable investment had been made in rural infrastructure, particularly in irrigation works and in land reclamation – Japan used its Taiwanese colony as a supplier of rice and cane sugar.
The government passed land reform legislation in 1953. The terms were similar to those employed in Japan and South Korea: expropriation of land in excess of approximately three hectares; landlord compensation amounting to two and a half years’ average crop (compared with three to eight years on the open market); payment to landlords mostly in low-yield bonds; purchase of the land by tenants in instalments over ten years.
Wolf Ladejinsky’s influence continued to be felt. It was he who recommended that the Kuomintang set up tenancy committees, which adjudicated thousands of land sales and purchases at the village level. The participation of tenants, as well as of owner-farmers and landlords, helped prevent widespread evasion of the rules, just as the activities of similar committees had done in Japan.
By one estimate, the transfer of wealth involved in the land reform was equivalent to 13 per cent of Taiwan’s GDP passing from one group of people to another.49
The structural effects were the creation of a textbook market environment in which everybody had a small amount of capital, and an evening out of income distribution.
By one estimate, the agency handled one-third of US aid to the island between 1951 and 1965, running 6,000 projects and accounting for a little over half of net investment in Taiwanese farming.
The JCRR was instrumental in developing high-yield varieties for existing crops and in publicising alternative high-value crops, while the Taiwanese government frequently guaranteed minimum prices for export-oriented produce to limit farmer risk.
Taiwan stands out among north-east Asian states for the extent to which agricultural goods drove and dominated exports at the beginning of the country’s development process. The experience was testament to just what a powerful catalyst labour-intensive, private household farming can be.
But, equally, no ruling elite in Asia has come up with as many ways to avoid implementing genuine land reform as the Filipino one.
However, while radical land reform was supported by the US embassy in Manila, it did not win support in Washington – unlike the reforms in Japan, South Korea and Taiwan. A Philippine Rural Reconstruction Movement was set up and funded by various US agencies, including the Central Intelligence Agency, but it did not promote compulsory land redistribution.
By one calculation, the cumulative achievement of land reform in the Philippines between 1900 and 1986 was the redistribution of 315,000 hectares, or about 4 per cent of the cultivated area.
SDO, like other loophole mechanisms in the CARL such as Voluntary Land Transfer and Voluntary Offer of Sale, broke one of the cardinal rules of successful land reform as implemented in north-east Asia: do not let landlords negotiate directly with tenants. In such circumstances, landlords almost invariably manage to negotiate arrangements that are not favourable to tenants.
To begin with, the Filipino statistics count all kinds of new land titles that have been issued, not practical and physical changes in ownership.
Land reform has been overseen not by tenant committees but by government bureaucrats, who are under-resourced and frequently bribed.
Today, an estimated 8.5 million of 11.2 million rural workers in the Philippines are landless.68 The majority of people in the countryside live in poverty. Yields are also shockingly low and not increasing. And all this in a country where cultivable land is one-third of the land mass – far more than in Japan, Korea or Taiwan – and climate and soil quality are more naturally conducive to high yields.
The only occasions on which land reform has worked in the Philippines have been when non-government organisations (NGOs) have stepped into the breach left by the state and provided lending, extension, crop processing and marketing support that household agriculture needs to prosper.
Ironically, it is bourgeois consumers made rich in Japan and Korea off the back of proper land reform who are now the most significant buyers of the premium brown mascobado sugar sold by these Filipino farmers.
Some members were political officers and medics in the NPA and so were able to hold together the kind of collective enterprise that does not occur spontaneously in a society of impoverished and cowed agricultural labourers. These farmers fought for and took the things their government failed to provide. They lobbied for and obtained a compulsory land reform order.
Charity can take the edge off, but never substitute for, the state’s developmental failure.
A tour of rural Negros Occidental takes us past estates that read like a Who’s Who of the families which helped bring the country to its knees in the post-independence era:
The traveller is constantly reminded that the greatest rural poverty in east Asia is concentrated in the areas of greatest natural abundance.
sugar extraction rates in the Philippines were higher fifty years ago.
After a trip in December 1962 he wrote that ‘I couldn’t forbear from telling Mr Perez [the acting minister of finance] that, as I listened to him, the fundamentally richly endowed Philippines reminded me of the more depressed areas of India.’
Ladejinsky observed that high-yield rice seed varieties from Los Baños changed the lives of millions in north-east Asia but could do little in the Philippines where the mechanisms to put irrigation, fertiliser, credit and marketing supports in place were absent.
Despite this, Indonesia’s minimum retention allowance for landowners was set at five hectares, and could be as high as twenty hectares because of loopholes. A widespread, kulak-type class of richer peasants – known as sikep – was left untouched by land reform.
Indonesia switched to what Michael Lipton has dubbed one of the ‘two great evasions’90 of developmental land policy – a farmer resettlement programme. (The other one, says Lipton, is when a government focuses purely on tenancy issues without any land redistribution.)
In the colonial era, Indonesia was the most profitable colony for the Dutch. For the British, Malaysia was even more profitable.
The rubber market in colonial Malaysia was a simple case of a market being rigged in such a way that higher-yield family farmers subsidised lower-yield big business.
There was no way that the government was going to be convinced by mere sampling evidence that smallholders were substantially more productive than large plantations which had general managers and London stock listings. Yet, despite all the state assistance given to the plantation sector before and during the depression, this was incontrovertibly the case.
Unlike the Philippines and Indonesia, Malaysia did not even attempt land reform,
However, most poverty reduction in rural areas in Malaysia since the 1980s has been achieved not by increasing smallholder farming incomes, but instead by farmers finding non-agricultural work related to the export processing economy.
In south-east Asia, the agricultural status quo has proven to have very high costs. In the Philippines, the state has repeatedly been confronted by peasant-based revolutionary and terrorist groups. In Indonesia in the 1960s, Suharto suppressed a rural-based communist movement with the loss of hundreds of thousands of lives. In Malaysia, the British fought a ruthless campaign in the countryside to suppress a communist insurgency in the late 1940s and early 1950s. And in Thailand, land policy failure is contributing to a state of near civil war even as this book is being written.
Thailand’s two best-known economic historians, Pasuk Phongpaichit and Chris Baker, conclude: ‘Beyond the basic drainage works, the government provided no support for development of the rice economy. With very basic technology and virtually no access to capital, the frontier evolved the most low-tech, low-intensity, and low-yield paddy regime in Asia.’
On the eve of the Asian financial crisis, government income surveys showed that more than four-fifths of agricultural household income in the north-east was coming not from farming but from wages and remittances.
As the economic environment unfolds, good policies that remain unchanged eventually turn into bad ones.
But states with good policies will find globally competitive niches that allow farmer incomes to continue to rise as labour leaves the countryside
Unfortunately, in north-east Asia, governments in Japan, Korea and, to a lesser extent, Taiwan failed to make the transition to larger farms, greater specialisation and reduced protectionism. They gradually eased legal restrictions on the leasing and sale of agricultural land to allow consolidation of farms. But they then undermined incentives to consolidate and specialise by paying increasing, world-beating subsidies to farmers. The main reason for this was that family farms in north-east Asia substituted for welfare systems. Moreover,
A combination of rising subsidies, an effective ban on agricultural imports and plentiful off-farm employment opportunities meant that by the mid 1970s the average rural family was earning more than the average urban one – a situation unthinkable in other developing countries.117
The family turned in one generation from impoverished tenant peasantry to super-intensive, frugal household farmers to subsidised – and bankrupted – stock market day traders.
Household farming produced two enormously beneficial effects that could not have been achieved through other policies. The first was the fullest possible use of labour in rural economies in order to maximise output. As Michael Lipton put it: ‘In early development, with labour plentiful and the ability to save scarce, small farming is especially promising, because it is the part of the economy in which a given amount of scarce investible resources will be supported by the most human effort.’124 Increased agricultural production then translated into rural purchasing power to buy early manufactures. Land reform created a kind of ‘consumption shock’ as waves of spending power for basic, domestically manufactured consumer goods spread through the economy. Increased farm output also helped countries to pay for the imported technology they needed to industrialise.
The second effect of land reform was separate from the output and consumption shock effect, but combined with it to produce yet more economic virtue. It was the creation of a high level of social mobility as the result of an equal initial distribution of society’s most basic non-human asset – land. People not only competed on equal terms but they could realistically believe that they had a chance of success. They did. It is emblematic that in South Korea two key historical figures who appear in the next chapter, President Park Chung Hee and Hyundai founder Chung Ju Yung, were both the sons of farmers; and that a third key character who led the struggle for democracy and institutional development, Kim Dae Jung, was also a farmer’s son. In Taiwan, the best-known industrialist, Wang Yung-ching of the Formosa Plastics Group, was a farmer’s son, as were many of his entrepreneurial peers. Chen Shui-bian, a leader of the pro-democracy movement who in 2000 became the first non-Nationalist Party president, was a peasant’s son. In mainland China, the pioneering entrepreneurs of the 1980s were overwhelmingly from farming backgrounds.125 This type of social mobility in business and political life is almost unheard of in south-east Asia, where elites still rule the roost from one generation to the next. A
Two main excuses are used by those countries in south-east Asia which have failed to institute effective land reform. Neither bears close scrutiny. The first is that the cash crops grown in south-east Asia are unsuited to household production.
The second south-east Asian excuse is the political one that successful land reform in north-east Asia was the unrepeatable product of historical circumstances, and of the intervention of the United States.
Ladejinsky wrote that in Japan the socialist Minister of Agriculture, Hiroo Wada, was the single most important person in ensuring that land reform happened.
Cho Pong-am, organised the drafting of the first land reform law in November 1948 and confronted the anti-reform president Syngman Rhee so aggressively it cost him his life; he was denounced as a North Korean spy and executed.
In this respect, land policy is the acid test of the government of a poor country. It measures the extent to which leaders are in touch with the bulk of their population – farmers – and the extent to which they are willing to shake up society to produce positive developmental outcomes. In short, land policy tells you how much the leaders know and care about their populations.
elites in south-east Asia were sufficiently co-opted by colonial rulers (before and after independence) that they lost their ability – or perhaps their desire – to think clearly about national economic development.
Returns from land reform and other agricultural improvements begin to taper off after only a decade or so, and emerging economies have to transition into another phase of development. That phase has historically revolved around manufacturing.
There are two main reasons why this is the case. The first is that manufacturing is based on the use of machines, and so it allows poor countries to mitigate their biggest constraint at the earliest stage of development – a shortfall of productive human skills.
In manufacturing, a small number of entrepreneurs and technicians is able, through the medium of machines (imported to begin with), to have an outsized impact on economic development by focusing on mechanised production that employs large cohorts of unskilled and semi-skilled labour.
In short, productivity gains in services are inherently slower than in manufacturing because there is greater dependence in the former on people and on enhancing human skills.
The second reason why manufacturing is so important is another relative advantage that it has over the service sector. This is that manufactures are much more freely traded in the world than services.
It is not typically viable, for instance, to send bicycles to India for repairs, or to fly heart-attack patients around the world before operating on them.
Consequently, any country which bases its development policy on its service sector faces higher barriers to exports than one with a traditional manufacturing-oriented policy. It should be no surprise that the share of services in total world trade has been stuck at around one-fifth for the past two decades.
Non-trading (‘autarkic’) developing states such as the former Soviet Union, China before 1978 and India before 1991 made painfully slow technological progress; indeed, so much so that their populations lost faith in the possibilities of economic advancement.
It is difficult for people in rich countries to recognise the importance of manufacturing in development because in our economies services are now so dominant and manufacturing employs so few people. Most of us are also unaware that, because of the extraordinary productivity gains that are possible in manufacturing, even the comparatively shrunken manufacturing sectors in rich countries today produce more goods than ever.
The challenge to policymakers is therefore to direct entrepreneurial talent towards manufacturing rather than services, and in particular towards large-scale manufacturing with the heft to compete globally.
Manufacturing firms are nurtured by the state in two ways: through protection and through subsidy. These interventions create breathing space for entrepreneurs while they learn to manufacture competitively.
Unfortunately, protection and subsidy also bring with them a well-known risk – one which economists call ‘rent seeking’. In a developing country, rent seeking refers to the propensity of entrepreneurs to concentrate their efforts on obtaining protection and subsidies (rents) from the state without delivering the technological progress and competitiveness that economic development requires.
The solution to the problem is to find mechanisms that force manufacturing entrepreneurs to become globally competitive at the same time as they are allowed to make profits for themselves.
By far the most important of these was the presence – or absence – of what I call ‘export discipline’. This term refers to a policy of continually testing and benchmarking domestic manufacturers that are given subsidies and market protection by forcing them to export their goods and hence face global competition. It is their level of exports that reveals whether they merit state support or not.
In south-east Asia, the energies of entrepreneurs were directed towards fooling politicians rather than exporting.
North-east Asian politicians then improved their industrial policy returns through a second intervention – culling those firms which did not measure up. This might have meant a forced merger with a more successful firm, the withdrawal of capital by a state-directed financial system, withholding – or threatening to withhold – production licences, or even the ultimate capitalist sanction, bankruptcy.
In Japan, Korea, Taiwan and China, the state did not so much pick winners as weed out losers.
The South Korean state was still more direct in its disciplining of underachieving businesses. Most of the top ten chaebol (conglomerates) of the mid 1960s had disappeared through forced mergers and bankruptcy by the mid 1970s, and half of the new group had disappeared by the early 1980s.
Today only one purely Korean car firm survives, Hyundai (with Kia as its subsidiary). However, the last company standing is the fastest-growing and one of the most successful car firms in the world.
A third intervention in north-east Asia was to provide a great deal of bureaucratic support to manufacturers which exported successfully. In addition to domestic market protection and a supply of credit, states provided important assistance in the field of technology acquisition.
Considerable attention has been paid to these bureaucracies over the years, in part because the most famous and influential academic book about north-east Asian industrial development, Chalmers Johnson’s MITI and the Japanese Miracle, is all about bureaucrats.
Bureaucracies are only as good as the policies they implement.
Above all, developing states must force their most powerful and resourceful entrepreneurs to export, typically against their will. Firms that can make money at home in a protected environment are always reluctant to compete globally.
The shocking truth, however, is that every economically successful society has been guilty, in its formative stages, of protectionism.
The policies deployed by countries in Europe and north America when they were industrialising included heavy tariff and non-tariff restrictions on imports; controls on trading rights (such as Britain’s Navigation Acts, which from 1651 allowed only British-flagged vessels to trade in British and British colonial ports); special subsidies or ‘bounties’ for manufactured exports and processed commodities; taxes and quantitative restrictions to discourage unprocessed raw material exports; state infrastructure support for exporters through the construction of canals and railways; state projects set up to obtain foreign technology (usually by acquiring advanced machinery and wooing foreign technicians, often in contravention of the laws of other nations); state provision of subsidised raw materials; and state export-quality inspection regimes designed to build national brands and reputations for product reliability.
Historians enjoy considerable consensus on this point. Most economists, however, find it impossible to admit that protectionism could be a precondition of industrial upgrading.
protectionism makes possible the acquisition of strategically vital knowledge at a cost that is only temporary.
Moreover, learning to manufacture things like steel, petrochemicals, plastics, semiconductors and so on is like anything studied at school in that others have gone before you and there is a curriculum. Technology scholars refer to this as working and learning ‘within the technological frontier’.
North-east Asian industrial policy was not invented out of thin air. Instead it was copied from examples of successful economic modernisation in the United States and Europe. Most directly, manufacturing policy was copied from the example of Germany, which in the late nineteenth and early twentieth centuries provided Meiji Japan with a contemporaneous case study of successful industrialisation.
The group held that the history of Britain showed that a successful developing state had to deploy protectionist industrial policies in order to nurture its manufacturers.
List’s views on development had formed while he was living in the United States between 1825 and 1832, when he had studied the arguments for a protectionist industrial policy to nurture ‘infant industries’ set out by Alexander Hamilton in his Report on the Subject of Manufactures submitted to Congress in 1791. From the early nineteenth century onwards, many of the report’s recommendations – including selective high tariffs – were adopted in America.
The diaries and other papers of leading Japanese statesmen contain repeated references to the suitability of Prussian ideas and institutions for their country.
The historian Kenneth Pyle called the notion of copying the development trajectories of advanced states the ‘idée fixe’ of Meiji development.
Meiji Japanese knock-offs were typically low-cost, low-tech product adaptations which were mocked as cheap and tacky by foreigners.
In Germany, there had been little real industrial innovation until the final stages of the country’s ascent to modernity,
the Gilchrist–Thomas system for producing phosphorous-free pig iron,
Shibusawa next convinced government to lift import duties on raw cotton and moved Japan on to the German-style approach of scale processing of imported raw materials. He saw that scale producers ideally seek protection at home but also free access to the cheapest, highest-quality raw materials on the world market.
Despite Japanese success, however, there was a latent problem with the development model, and one that Germany had also experienced. This was that Japan’s biggest companies managed to avoid doing much exporting, leaving it up to smaller firms.
As the recession endured, government was eventually driven to discover the final, essential modification to its industrialisation policy: a subsidy system that forced big business to behave in the interests of national development, and to export.
The solution suggested by the cartel groups was a rebate system that gave raw material and component cost reductions only to production that was destined, directly or indirectly, for export. In effect this meant that German domestic prices – kept artificially high by tariffs – subsidised the development of manufacturing export markets.
The term sangyō gōrika – ‘industrial rationalisation’ – came into use to signify the need for the state to cull weaker industrial firms within the context of a protectionist environment that nurtured industrial development.
MITI ran a protectionist pro-manufacturing policy built around rigorous export discipline. The big industrial firms of post-war Japan were beholden not to zaibatsu bosses, but to MITI bureaucrats who focused them on exports by exempting up to 80 per cent of their export revenues from taxation.
In the 1950s MITI officials, still working far inside the global technological frontier, systematically researched and built the foundations of a world-class manufacturing economy. They moved year by year through steel, shipping, fertilisers, synthetic textiles, plastics, petrochemicals, automobiles and electronics.
General Park therefore had Japanese ideas about how to run his country. However, he was also an amateur historian who specialised in the histories of rising powers. He was well read on German development, and followed closely that country’s swift, state-led re-industrialisation after the Second World War.
Nine months after taking power in Korea, the peasant-born Park published a book of his own, Our Nation’s Path: Ideology for Social Reconstruction, which contained a road map for what Park described as ‘co-ordination and supervisory guidance, by the state, of mammoth economic strength’.
The next year Park published The Country, the Revolution and I, with chapters on ‘The Miracle on the Rhine’ and ‘Various Forms of Revolution’ in which he discussed different historical revolutions from an economic and developmental perspective.
He was a very well informed peasant.
Indeed, Korea became the most export-dependent developmental state the world had seen, with the government giving subsidised credit to any firm that sold abroad.
Korea thereby avoided the problem of export-shy big business that had for a long time constrained both Japan and Germany. The country went straight to a more effective form of infant industry promotion.
Most professional economists said the HCI plan was lunacy.
By 1987 the World Bank was writing that the vast, integrated Korean steel plant, Pohang Iron and Steel (now known as POSCO), was ‘arguably the world’s most efficient producer’;54 the Bank had refused to finance the plant.
The vehicle for state ownership in China before 1949 was an industrial planning bureaucracy that was far bigger, and more sophisticated, than almost anyone, including Chinese people, realises.
Where Korea targeted mass-production memory chips, Taiwan went after application-specific integrated circuits (ASICs), which are developed with specific consumer electronic products in mind.
Export discipline in Taiwan was ostensibly highly effective. In 1952, the value of Taiwan’s exports was equivalent to only 9 per cent of GDP; by 1979, the figure was 50 per cent.
in Taiwan there was a failure to impose rigorous export discipline on big state firms.
Compared with Korean firms, Taiwan’s exporters do more low-margin manufacturing as suppliers to American and European multinationals – making, for instance, all of the world’s iPhones and iPads – and less higher-margin manufacturing under their own brands, whereas Korea has Samsung selling its own smart phones and leading the world by sales, and Hyundai among the top five global auto makers.
Taiwan may be structurally ‘stuck’ one level below the branded, high-margin top layer of economic activity where the richest countries exist.
At the industrial policy-making level, what stands out with the benefit of hindsight is that there was almost no role played in Japan, Korea or Taiwan by economists.
There was a strong prejudice against the theoretical approach associated with modern economics, and in favour of practical problem-solving.
Almost all Taiwan’s ministers of economic affairs, most of whom started out in the mainland’s National Resources Commission, had engineering or other science degrees.
Joseph Dodge, who was despatched to occupied Japan in 1949 to enforce fiscal austerity.80 His policies induced a deep, deflationary recession in the winter of 1949–50.
As an economic historian, Rostow brought a classic Listian perspective to Washington. His key work, The Stages of Economic Growth, is about how developing states all descend, as the Japanese phrase has it, the same stretch of the economic river; Taiwan’s chief planner, K. Y. Yin, was among the book’s fans.
In Korea, economists ‘with their newly minted US PhDs’, as Jung-En Woo disparagingly put it, wrought havoc with the financial system in the 1980s, setting the stage for Korea’s 1998 financial meltdown.
However, their entry on to the policy stage was becoming necessary at a time when Korea was already globally competitive in a number of manufacturing sectors, and needed to deregulate to progress further.
More often, the economic advice came from the World Bank and the IMF, which were ready with their free market prescriptions for development, despite the fact that these prescriptions have never produced a successful industrial state.
But there was no shift to an export manufacturing strategy for domestic firms. Instead, government invited foreign companies to set up export processing operations in Malaysia.
Yet despite sending thousands of Malaysians to Japan for training, and even taking his cabinet on a course to learn Japanese tea-drinking etiquette, Mahathir failed to understand the most basic prerequisites of infant industry policy: export discipline and sanctions for failure. He tried to make state-owned firms do more than they were capable of, and completely failed to discipline Malaysia’s leading entrepreneurs, who socked away billions of dollars without making any serious developmental contribution.
Malaysia is a manufacturing failure, but it is a reminder that it is better to fail trying than never to try at all.
Among the different industrial sectors that provide useful comparisons between developing states, the most fundamental one is steel making. Steel has been an important part of the early industrialisation process of all rich states bar financial havens and low-population agricultural specialists.
It continues to be an essential input into all manufacturing economies. The capability to make steel efficiently has, historically, signalled that a country will go on to make other things efficiently – a sort of entry-level test for the economic big time.
In Korea, government achieved this by attracting half a dozen hungry businessmen with the subsidies, only to whittle them down over thirty years to a single, world-beating Hyundai–Kia colossus.
in most large-scale businesses the critical variable is the relationship between the state and private entrepreneurs.
Rather than plead with them to move voluntarily to some higher moral plane, it is better to accept the existence of the entrepreneur’s ‘animal spirits’,89 and use his desire to make as much money as possible to control him.
The term originates in the Philippines, where the political class has been the most selfish and culpable among all the major states in east Asia.
Chung had never made or exported anything. He was just a politically astute entrepreneur with a reputation for getting construction jobs done. In post-independence south-east Asia, he would have carried on doing construction work and added more domestic business concessions to his portfolio as the state offered them up. But under Park Chung Hee in Korea, Chung was to become a global force in manufacturing and a major exporter, first of his construction services, and later of manufactured goods from cars to semiconductors.
Park had no more success than any other dictator in cowing those fighting for transparency and institutional development – including democracy. But he discovered that entrepreneurs, so long as they were still allowed to make money, could be bent to his will quite easily.
Once he established the basic rules of the game, Park informed Korea’s businessmen that they were free to make as much money as they could so long as they stuck by the rules.
He lobbied for, and was given, a manufacturing project in 1962 when Hyundai Construction was allowed to build the third of three Korean cement plants financed by US concessionary loans. It was Chung’s first factory. Until this point, most cement had been imported from Japan. One year after the factory began production, Hyundai Construction was not only producing cement for Korea, it had started exporting it to Vietnam, where the US was ramping up its military involvement. It was a requirement of the US funding for Hyundai’s first cement factory that the firm buy all its equipment from American suppliers. However an even greater measure of the changes that were occurring in Korea was that, having mastered cement making, Chung then went on to master the engineering behind his cement plant. Within a few years, Hyundai was building cement plants on a turnkey basis in countries like Saudi Arabia.
The government was encouraging domestic firms to go into kit assembly of cars as a first step to building finished vehicles from scratch.
Meanwhile, GDP growth between 1962 and 1971 averaged 10 per cent a year and the manufacturing share of exports rose from one-quarter to more than four-fifths.
At one end I can see a 20-day, 2 million tonne supply of raw materials that has been offloaded from one lot of ships, and at the other the finished steel to be loaded on to another lot of ships. It is instantly clear that the place was set up as an import–export machine.
Iron ore travels round the horseshoe and becomes finished goods ready for shipping in thirteen hours;
It was not easy getting the Pohang plant financed and built. The Korean government tried three times in the 1960s to move the project ahead, presenting different, detailed plans. But equipment suppliers would not advance credit and financiers – including the World Bank – would not lend to the kind of large-scale, integrated operation that the Koreans wanted. A World Bank report published in November 1968 cited the failures of major integrated steel projects in Brazil, Mexico, Turkey and Venezuela.
At Pohang, 24-hour building contributed to a construction cost per tonne of steel capacity that was one-quarter that of Brazil.
Even though Japanese reparations financed much of Pohang, POSCO went to the Australian mining firm BHP to review all the Japanese engineering reports and to provide independent advice on equipment procurement. An ethnic Korean steel specialist who lived in Japan was then asked to review the reports of both the Japanese advisers and BHP.107 POSCO listened to everyone, and trusted no one.
During the first and second phases of its construction, POSCO management refused to employ the computerised control systems recommended by their Japanese consultants lest they did not fully understand the equipment they were buying.
By the time that POSCO wanted to build a second mega-facility at Gwangyang in the 1980s, Japanese suppliers had lost so much intellectual property to POSCO that they were unwilling to become involved.
POSCO has always shipped 30–40 per cent of its steel overseas. On paper, the firm has been profitable every year since it began production in 1973, but this should not disguise the scale of the subsidies that got it moving.
Given the role that learning plays in economic development, factories like Pohang become the schools in which successful developing nations learn. POSCO is a kind of vocational college that doubles as a steel maker.
Following the course of the river towards the sea, I know I have arrived at the headquarters of Hyundai Motor Company (HMC), not because I can see a car factory but because I can see three huge car-carrier ships moored up on the docks next to a car park the size of multiple football fields.
On top of its vehicle production capacity of 1.6 million cars and trucks, Ulsan turns out 2 million engines and 2.5 million transmissions each year. It is the biggest integrated car manufacturing facility in the world.
the Korean government told the protectionist French government that French train makers would have a better chance of supplying the Train de Grande Vitesse (TGV) for the Seoul–Pusan rail route if France bought Korean cars. After weighing the competing interests of its train and car producers, Paris eventually came up with a quota of 20,000 imports a year.
Shipbuilding, which is a less complex business than car making,
A second key to HMC’s manufacturing success was its ability to obtain foreign technology in such a way that the firm learned skills – and eventually learned how to originate its own technology – without becoming dependent on foreign multinationals.
In joint ventures, it is too easy and too comfortable for the local entrant to become dependent on drip-fed technology from a foreign partner, while multinationals have no interest in helping local firms export.
HMC’s US managers, backed by aggressive pricing and an advertising blitz, delivered a remarkable feat. They made the Excel the top imported compact model in the US in its first two years, selling more than 260,000 units per year in both 1987 and 1988.123
As of 1991, when HMC produced the first genuinely Korean engine, its productivity levels were, by its own analysis, still only half those of Toyota and Honda. But it was in control of its technological destiny. The symbols of HMC’s technology acquisition were not foreign joint ventures, but the Hyundai bungalows and the Hyundai hotel (where I stayed on my visit, known formerly as the Diamond hotel) in which temporary foreign consultants were housed while their knowledge was absorbed.
In 2010 HMC, along with Kia, sold 5.7 million vehicles around the world, meaning it tied with Ford as the fourth biggest global auto group.129 A family business with no previous industrial experience had created one of the world’s most successful car companies.
the country with the right policy mix has at least the theoretical potential to develop its economy faster than ever.
Abdul Rahman Putra Al-Haj, a rich, clubbable, Anglicised, upper-class, womanising dilettante who took a particularly long time to complete his undergraduate degree at Cambridge.
Mahathir’s judgement of developmental issues would forever be clouded by the fact that he spent too much time worrying about race and not enough time understanding the basic structural requirements of technological learning.
Mahathir’s neglect of export discipline was his first error, and had effects that were quickly apparent. To help pay for its investment programme, the Malaysian government increased its foreign debt from 10 per cent of GDP in 1980 to 38 per cent in 1986.147 But, unlike Korea, Malaysia’s export earnings from manufactured goods grew only slowly. This not only engendered an acute balance of payments problem, it left Mahathir to make critical investment decisions without the market-based information that export performance provided to Park Chung Hee. Instead of counting exports, Mahathir trusted his own judgement about the firms and managers he was backing. He tried to know more than the market.
The second divergence from Korean experience was that Mahathir rarely employed the private sector to lead his industrial investments and did not create competing ventures. He preferred one-off investments in state enterprises.
he set out to pick winners when the effective approach was to create competition and then weed out the weak.
The terms forced the state electricity monopoly to buy their power at a very high price and this and other infrastructure service deals brought them a river of cash without any manufacturing or export constraint.
Mahathir’s strategy was to learn not by doing but by giving construction projects to firms from Japan and Korea. In 1984 he awarded what was then the biggest construction deal in Malaysia’s history – for the Dayabumi complex in Kuala Lumpur – to two Japanese firms, despite the fact that local companies put in lower bids. The Malaysian taxpayer footed the bill, but Malaysians learned nothing.
The point is that, without commercial feedback from the international market, Malaysia’s most visionary leader made a series of disastrous decisions.
Korea began its automotive industrialisation drive in 1973 with an annual domestic car market of only 30,000 units, but set up three private firms to compete directly with one another. When Malaysia kicked off its national car project in 1983, it already had a domestic market of 90,000 units a year, yet government sanctioned a single state-owned manufacturer.
Proton–Mitsubishi was a classic example of how equity joint ventures with multinationals have failed to impart adequate technological learning to aspiring car makers around the world. The interests of the two parties were necessarily conflicting.
Although Proton had developed a domestic business turning over billions of dollars a year, and had much increased its technological capacity since the mid 1990s, it did little more than flirt with international markets and still lacked global competitiveness. It was, for instance, able to avoid putting airbags or anti-lock braking systems (ABS) in cars sold in the protected domestic market, even though a lack of them made the cars unexportable to many markets.
Twenty years after the 1973 Korean national car programme was announced, a report by the Boston Consulting Group (BCG) concluded that the Korean car industry might not see out the decade. In 1992 domestic firms had a production capacity of 3.5 million cars, but sold only 1.7 million; productivity was still only half the Japanese level; and Korean cars had a poor reputation for quality in overseas markets.
If anything, the story in Malaysia is that government has lacked patience and tenacity with its industrial policy.
Malaysia today is a bit like a country that went to school and college for twenty years but failed to pay sufficient attention and now finds itself ill-equipped to live at the economic level to which it aspires.
Astra has been a cash cow all its life, but has operated with total technological dependency on Toyota.
In the past fifteen years, it is probable that Indonesia’s technological capacity has actually gone backwards.
‘These industries with no exception,’ he wrote, ‘belonged to a category of import-substitution industries which exclusively depended upon the domestic market.’
When the regional recession struck in the early 1980s, the Philippine economy collapsed under the weight of unserviceable debt and shrank an astonishing 20 per cent.
Contrary to the claims of many economists, rent-seeking and crony capitalism did not inevitably undermine industrial policy so long as sufficient discipline could be wrapped around infant industry promotion.
Developing states, however, need to invest in learning before they worry too much about efficiency. They must walk before they can run.
It did not matter to most families that Japan’s large-scale manufacturing remains highly globally competitive because some 50 million out of 60 million members of the workforce are now employed outside manufacturing.
The Japanese experience begs the question as to when a country should transition away from infant industrial policy, and to what.
In South Korea, the IMF may just have done something useful. In south-east Asia, by contrast, the IMF’s almost complete undermining of national discretion over industrial policy at an early stage of development threatens to turn the region into an oasis of backwardness in the world’s emerging continent. Indeed, this is well under way.
But twenty years after India launched its current reform agenda in 1991, only 3 million people out of a population of 1.2 billion work in IT – a fraction of 1 per cent of the labour force. The service entrepreneurs, managers and technicians who graduate from the elite Indian Institutes of Technology and run firms like Infosys and TCS create far fewer jobs for others than they would had they been forced to manage factories.
Much more striking is that the world is teeming with what can be described as developmental children who have been cast out on to the street at a young age and told to get a job. It is these states, expected to industrialise with no infant industry protection, no state control of financial resources and no state discretion over international capital flows, that point to developmental logic gone haywire.
Far better to keep the financial system on a short leash for a considerable period of time and make it serve developmental purposes.
Infant industry policy required that funds be directed to industrial projects that were less immediately profitable than either other potential manufacturing investments or consumer lending. Banks were therefore kept under close control. International inflows and outflows of capital were also strictly limited so that domestic capital remained under state control and unregulated flows of foreign funds did not disrupt developmental planning. And the returns that citizens could earn on bank deposits and other passive investments were frequently crimped, increasing the surplus left at the financial system’s disposal, which could then be used to pay for development policy and infrastructure. This amounted to a hidden taxation, which was tolerated by people in these societies because they could see the economic transformation taking place all around them.
And so, in terms of financial clout, there was nothing to prevent any east Asian country – south-east Asian or north-east Asian – from joining the rich world.7 What caught some countries out was that they financed the wrong policies.
South-east Asia’s armageddon began in July 1997 when the Thai currency was forced off its US dollar peg by international demands for repayment of loans, triggering a global panic over the capacity of other Asian countries to service their debts.
The case for deregulation strengthens as an economy evolves, but the risks of premature deregulation are greater than those of tardy deregulation, especially in our world of globalised financial flows.
Indeed, the role that finance plays in economics would not be seriously explored by economists until the Great Depression and the Keynsian revolution.
The state exercised control over the banking system via a mechanism called rediscounting, whereby the central bank provides loans to commercial banks against loans they have already extended. These ‘rediscounts’ increase a commercial bank’s loan book and therefore its profit potential, but also allow a central bank to set borrowing criteria that must be met.
The difference was that in Korea the policy was much more aggressive. Rediscounting of export loans was unlimited. In other words, any bank that lent against exports – as proven by a letter of credit from a foreign customer – got almost as much money back from the central bank in order to further expand its loan book. There was also unlimited rediscounting of policy loans to other favoured, government-approved projects.
So long as exporters could raise their prices to reflect domestic inflation, they were in effect being paid to borrow.
while stringent capital controls meant that in the 1980s it was still illegal to take a holiday abroad.
In the most investment-intensive era of industrial growth, from approximately 1965 to the early 1980s, there developed a pattern in which each time Korea hit a road block in the form of an external economic shock and/or a domestic financial crisis, government did whatever was financially necessary to maintain developmental momentum.
In the late 1980s and 1990s Taiwan succumbed to intense international pressure over its currency manipulation and began to deregulate its financial system. As in Korea, the state lost a good part of its capacity to impose industrial policy via the banks.
The critical variable again here is not who owns the financial system or precisely how it is operated, but the business environment on which it is acting. In each case in south-east Asia the banking system funded an economy in which leading entrepreneurs faced little pressure to manufacture and did not operate under conditions of export discipline. This led to two outcomes: first, there was very little acquisition of technological capability in manufacturing; second, the absence of export discipline meant an absence of the information feedback from exports that enhanced banks’ loan quality in north-east Asia.
But from the early 1980s, Malaysia, Thailand and Indonesia each succumbed to the siren call of financial deregulation. This effectively meant handing over increasing control of the financial system to private entrepreneurs whose interests did not tally with those of national development.
The Philippine economy was built around what were dubbed ‘free trade’ agreements with the United States, but which were in reality protectionist deals that kept the Philippines focused on agriculture.
North-east Asian states employed interest rate ceilings throughout their core development periods because when banks are given the freedom to charge what they can, they move in the direction of consumer – as opposed to industrial – lending.
In the 1990s, only a quarter of Malaysian commercial bank loans went to manufacturing, agriculture, mining and other productive activities.
The Thai government, by contrast, remained the star pupil of the IMF and World Bank. That Thailand has fallen farther than any other country in the region since the crisis is an unfortunate comment on this status. Thailand was also the country where the Asian financial crisis began.
Uniquely among south-east Asian states, Thailand was never colonised. None the less, the country has a long history of accepting bad advice.
The real problem is that we understand so little about how and when nations should optimally move on to more open, deregulated financial systems.
However, the biggest lesson of all has long been clear to anyone who has considered history: that economic development is a complex and dynamic process of stages that requires constant and unending adjustment. There are no one-stop solutions to economic progress.
However, for a long time China was constrained because the Communist Party of China (CPC) was captive to the two great socialist fallacies that undid socialist modernisation programmes in other communist states. The first of these was that agriculture could only be efficient at scale, leading to the collectivisation of farming in the mid 1950s.
The second great communist fallacy that China laboured under was – unlike the scale agriculture prejudice, which was shared by many capitalists – a genuinely socialist one. This was that manufacturing could be developed without trade – through a policy of self-sufficiency, or autarky.
In Asian countries, including China and India, autarky throttled technological development after the Second World War because it removed firms’ capacity to buy, borrow and steal already-developed technologies from elsewhere in the world.
In short, China – unlike south-east Asian states – has been paranoid about the advice it has been offered, and has prospered by virtue of its paranoia.
After starving to death 30 million mostly rural dwellers as a result of collectivisation and the autarkic development policy of 1958–60 known as the Great Leap Forward, the country managed in the early 1980s to increase its agricultural output by more than one-third simply by letting poor people garden.
From the early 1990s to the mid 2000s, Chinese leaders looked on as the urban economy took off and the income gap between urban and rural citizens widened dramatically. This was reflected in a national GINI coefficient that moved from something over 0.3 (in line with north-east Asia) to one around 0.45
The government also announced a ban on all school fees during the years of compulsory education. As a result of these changes, 2006–11 was probably the best period for Chinese farmers since the 1980s.
More specifically, the critical thing that separates the Chinese farmer from his or her cousins in north-east Asian states is that the Chinese peasant does not own his or her land. The historical reason for this is the essentially accidental nature of the reintroduction of household farming after 1978. Land that was divided up among households in that era belonged to collectives created in the 1950s. Since central government never intended a return to private household farming, it did not re-designate farmland as private property.
In China, this does not happen. Instead, when farmers lose their land it is typically with less compensation than they need to survive independently, while big re-zoning profits are divided between local government fiscal coffers and local government graft.
As of 2010, one in ten Chinese villages was losing land every year, usually against the wishes of its farmers. The average land taking is around 35 hectares (that is, the plots of about 100 families). There are increasing numbers of commercial farm deals running into thousands of hectares.
China’s rural–urban divide is unpleasant, unfair and socially corrosive, but it is not terminal from the perspective of economic development.
the Chinese Communist Party has a longstanding, and sensible, fear of the country being at the mercy of substantial food imports.
Now, once again, the Chinese farmer is constrained to fulfill his traditional role and, as the Chinese idiom has it, ‘eat his bitterness’.
China’s development in the 1980s has been aptly described as ‘reform without losers’.
In the 1990s, however, parts of the state sector became an increasingly heavy drag on development. The most problematic elements were smaller state firms and downstream state firms. Smaller state manufacturers faced brutal competition from an emergent private sector and from foreign companies, the latter being given much readier access to the market than they had been in Japan, Korea and, to a lesser extent, Taiwan.
In short, the government retained full control of the upstream and service businesses which in less successful developing countries fall into the hands of tycoons whose interests are not aligned with industrialization objectives. And the government still made those businesses highly profitable.
is unclear whether close government control can be maintained indefinitely over the steadily rising power of China’s upstream oligopolists. Just as Korean chaebol battled against state control, despite benefiting enormously from state largesse, so the upstream firms in China are beginning to challenge state power – even though they are state-owned.
However, Taiwan and the rest of north-east Asia had plenty of examples of state firm failure – or at least underperformance compared with private companies.
The state sector producers’ goods companies are overseen by a bureaucratic planning apparatus that has been widely underestimated, not least because it is associated with a communist government.
The combination of conservative, low-risk industrial policy making and market incentives contrasts powerfully with Malaysia’s assault on the bleeding edge of steel technology using a single, wholly state-owned firm.
The biggest enforcer of export discipline on public sector manufacturers is China Development Bank (CDB), China’s main investment bank and also the most efficient financial institution in the country. CDB is one of three ‘policy’ investment banks – zhengcexing yinhang – set up in 1994 as part of Zhu Rongji’s fiscal and financial overhaul; the policy banks are so called because they are mandated to lend in support of state agricultural and industrial policy. CDB has been run for the past thirteen years by the same highly rated manager, Chen Yuan, son of Chen Yun, the economist who rescued Mao Zedong and Deng Xiaoping from their worst policy follies.
The common pattern of the Chinese mid-stream businesses is that core technologies are imported and absorbed during an initial phase of operation in the domestic market. The firms then push up to the global technology frontier during a period of increased export discipline.
The most common weakness of publicly owned businesses is that they lack the sensibility and flexibility to succeed in consumer markets, and Chinese public companies have so far been no exception.
In the automotive sector, for instance, large state companies have failed miserably to develop indigenous products that interest Chinese buyers.
developing countries, selling to governments is frequently to China’s advantage. The Chinese government has few scruples about which regimes its firms do business with, and China’s policy banks attach no political strings to the loans they make. Partly as a result, Chinese firms have bagged major infrastructure deals in countries like Pakistan, Myanmar, Libya and Congo.
The third caveat about the mid-stream firms is that, while China seems to be making excellent technological progress, it is impossible to know precisely how real this is in what is a period of extremely aggressive investment. Put simply, China is investing so heavily to acquire technology at present that, superficially, the results are almost bound to look impressive. In some sectors, it will be a few more years before we have a clear sense of the progress that has been made versus the investment laid down. We do not yet know the extent to which China is still merely copying technology from elsewhere, as opposed to beginning to originate its own.
Private Chinese companies have to try to develop as rich countries would like them to – in open competition with more experienced, more technologically advanced and far better resourced multinational enterprises.
One of the island’s most famous entrepreneurs, Acer’s Stan Shih, dubbed the value chain problem faced by under-supported private companies the ‘smiling face’. In the computer and electronics business in which many private Taiwanese firms are active, the highest margins go to either brand-name designers, software firms and chip-makers at one end of the value chain, or to giant retailers at the other.
Taiwan made the smiling face famous in electronics. It is possible that China’s private sector will extend the smiling face to many more industries.
BYD, however, was only able to compete with cash-rich public sector auto joint ventures by cutting its prices to the bone. Margins were almost non-existent, while costs had a floor under them because BYD did not have the resources to learn the full range of car-making technologies. It bought the most value-added parts of its vehicles, like chassis and drivetrains, from international suppliers. And if resources were insufficient for conventional car making, they were wholly inadequate for a new field like electric vehicles, where complex software and engine management systems present new technological challenges.
BYD is the latest in a number of entrepreneurial private manufacturing firms in China which appear to show enormous promise, and then quickly wither.
The money that private companies can raise from initial public offerings is not nearly enough to fund their progress all the way to the technology frontier.
According to some estimates, there may now be as much credit outside the banking system in China as there is inside it.
China’s development is exceptional not because of the tried and tested land reform, infant industry and financial repression policies that made it possible, but because of its scale.
It is the size of China, not the originality of its development policies, that has shaken the world.
China has yet to create truly world-beating firms, and history suggests that a state’s size is no great advantage in this respect.
Unfortunately, however, as a country grows richer the need for difficult decisions does not decrease.
On its present trajectory, China is set to be a middle-income per capita, but profoundly institutionally retarded state.
Poor states can only be successful by lying. They have to subscribe publicly to the ‘free market’ economics touted by the rich while pursuing the kind of interventionist policies that are actually necessary to become rich in the first place.
Since the 1980s, the World Bank has instead promoted microfinance, encouraging the rural poor to set up street stalls selling each other goods for which they have almost no money to pay. It is classic sticking-plaster development policy.