Poor states can become rich only

by lying, claims new book.

An important new book explains why some countries have become economic tigers in East Asia while others are relative failures or paper tigers. How Asia Works by Joe Studwell is essential reading for anyone interested in understanding the ingredients for economic success in the continent.

It challenges key tenets of the so-called Washington consensus, which prescribes free market solutions for all economies regardless of their level of development. Studwell establishes that a nation’s development destiny is shaped most decisively by government action. History, writes the author, shows that markets are created, shaped and re-shaped by political power.

Studwell presents his case unambiguously, backing it by evidence. “No significant economy has developed successfully through policies of free trade and deregulation from the get-go.” “Proactive interventions” have been essential in all cases of economic transformation as they fostered early accumulation of capital and technological learning.

The book does two important things. First, by a historical recall of the East Asian and Chinese experience it shows that for all the talk of an ‘Asian miracle’, countries in the region have followed different trajectories and policies, with sharply different outcomes. While Northeast Asian states achieved extraordinary progress and prosperity, Southeast Asian nations lagged behind, in part because they took poor advice from multilateral financial institutions and failed to heed the lessons of history. China, Japan, South Korea and Taiwan are all remarkable economic success stories. But the Philippines, Thailand and Indonesia, despite initial spurts in economic growth, slipped back and have remained relatively poor. This has created what the author calls “a tale of two East Asias”.

Second, the book draws a distinction between the ‘economics of development’ and the ‘economics of efficiency’. The first is like an education process where poor nations, lacking technological capacity and adequate human capital, acquire the skills necessary to compete globally. This requires investible funds, which in turn needs state intervention, “nurturing and protection as well as competition”. However at a later stage of development, countries have to transition to the ‘economics of efficiency’ to achieve profitability. This requires less state intervention, more deregulation and freer markets.

From this emerges the author’s central argument that economic development is a “stages game” with different policy solutions suited for different phases of development. Studwell delves into China and East Asia’s varying experiences to substantiate this thesis. This leads to a provocative conclusion: “Poor states can only become rich by lying” — publicly supporting ‘free market economics’ advocated by the developed world, while pursuing “interventionist policies that are essential to become rich in the first place”.

Studwell identifies three critical interventions that successful East Asian countries and China (after 1978) employed to achieve accelerated economic development. The first, “often ignored”, and now “off the political agenda” in developing countries, is land reform. This restructured agriculture into highly labour-intensive household farming. In the early phase of development, with the necessary institutional support, this helped to generate a surplus, create markets and unlock great social mobility.

The second intervention, as countries cannot sustain growth only on agriculture and must transition to the next phase, is to direct entrepreneurs and investment to industrial manufacturing. Manufacturing allows for trade and technology learning. Studwell then demonstrates how nurturing and protection, along with instituting “export discipline”, builds the capacity to compete globally.

The third intervention necessary for accelerated development is in the financial sector, aimed at directing capital initially to intensive, small-scale agriculture and to manufacturing rather than services. Studwell argues persuasively that it was the close alignment of finance with agriculture and industrial policy that produced Northeast Asia’s success.

For Studwell, the 1997 Asian crisis underscored that these three interventions made the difference between sustained economic success and failure. But in Southeast Asian states, there was neither any real land reform nor creation of globally competitive manufacturing firms. This caused these countries to regress when their investment funds dried up.

Finally the author emphasises that these interventions take countries only to a certain development stage. Over time, these policies create problems and have to change as countries transition to the next phase, when the ‘economics of efficiency’ has to kick in.

The writer has served as Pakistan’s ambassador to the US and United Kingdom. This article has been reproduced from Khaleej Times.