By Joe Cheung

Jul 31, 2021

Why are Japan, South Korea, Taiwan, and post-Mao China rich, while Thailand, the Philippines, Indonesia, Malaysia are poor?

How Asia Works: Success and Failure in the World’s Most Dynamic Region is a bland and sweeping title, but it is the best single treatment on the greatest anti-poverty program in history that proved economists and the World Bank wrong and wrong again with decades of unprecedented growth.

Joe Studwell is confident that there is only one Way to go from Third World to First:

  • Thou shalt enact real land redistribution.
  • Thou shalt protect infant industries and enforce export discipline.
  • Thou shalt repress and direct thine financial system.


  1. The First Commandment: Land Reform
  2. The Second Commandment: Export-oriented Manufacturing Policy
  3. The Third Commandment: Financial Suppression
  4. Where China Fits In
  5. Conclusion and Further Readings

The First Commandment: Land Reform

Say you’re a peasant in the feudal Philippines. Your corrupt leaders left vast haciendas to absentee landlords. 40% of your output is taxed by the landlord, and you can’t sell the remaining crop for much money because the landlord also happens to be the monopsony buyer. You don’t have any money to buy the right tools and fertilisers, and the landlord is the only guy who can lend you money but at more than 100% interest rate. Worse: maybe you’re a peasant in Maoist China and your beloved Chairman decided to collectivise land into large-scale co-operatives, so now they’re our crops. Should’ve recognised the red flags – agricultural productivity is low by default because poor peasants have no incentive to maximise yield on farms that they don’t own.

The solution is land reform – egalitarian land redistribution. Meiji Japan began parcelling out land in 1868, which continued under the oversight of the US occupation after WWII. Meanwhile, Kim Il-sung was introducing generous land reform in North Korea and becoming very popular among the peasants. That is exactly the opposite of defeating the Commies so the occupying American Military Government in South Korea reluctantly began selling previously Japanese-owned land in 1946. But then during the Korean War, the Communists redistributed yet more land – more than half a million hectares, and this time in the South for free to more than 1 million families. After the US-UN forces reoccupied the South in 1949, Uncle Sam made sure that Syngman Rhee, the corrupt first President in the newly sovereign South Korea, implemented the new parliament’s land reform bill. In Taiwan, the American-sponsored JCRR persuaded Chiang Kai-shek’s Kuomintang to win the genuine support of the island’s rural population by passing land reform legislation in 1953 after decades of avoiding land reform on the mainland. The American government’s support for land reform in the East Asian countries was lambasted in the US as “socialism by the back door”, but in actuality these land reforms had the side-effect of killing support for communist revolutions!

in Southeast Asia, land reform didn’t fail because of the lack of US intervention, but because their own leaders didn’t try. Massive financial aid was also given to the Philippines and Thailand, and to Indonesia after Sukarno’s fall, but their corrupt governments didn’t spend it on rural development. Meanwhile, Meiji Japan instituted a first land reform without any external political direction or funding. In South Korea, Cho Pong-am, the Minister of Agriculture, drafted the first land reform bill in 1948 and confronted the anti-reform Rhee so aggressively that he was denounced by Rhee as a North Korean spy and was executed. The political excuse for inaction on land reform is pernicious because it suggests countries don’t have an agency over their own developmental destinies.

An equal distribution of land – society’s most basic non-human asset – creates high levels of social mobility. For the first time in history, everyone competed on equal terms and could realistically believe they could win. The most successful leaders and entrepreneurs who arose in East Asia like Park Chung-hee were overwhelmingly sons of farmers, a type of social mobility in business and politics that is almost unheard of in Southeast Asia where elites rule from one generation to the next.

Land reform by itself is not enough though, because the rich will try to cheat the poor farmers in every way possible to make them sell their land back to them. In Meiji Japan, land was redistributed from quasi-feudal lords to defacto serf tenants, but the lords still controlled the grain-trading system, so by World War II the lords got back most of the land.

So real land reform entails state investments in rural infrastructure, agricultural extension services, and marketing support. Following the 1961 South Korean coup, General Park Chung-hee raised procurement prices and increased investment in rural infrastructure and domestic fertiliser plants. In Taiwan, the Kuomintang had a nationalised fertiliser monopoly, compulsory rice purchases, and bought sugar cane from household farmers after nationalising the formerly Japanese-owned sugar refineries. Meanwhile in the Philippines, where the most corrupt state-led land reform failed, the only occasion of land reform success have been when foreign NGOs provided peasants with lending, extension, crop processing and marketing support. (New EA cause area just dropped? They have an actual report! concluding that advocating for agricultural land redistribution is unlikely to be a cost-effective intervention and very intractable, unfortunately.)

Countries like the US have a lot of land and not a lot of labourers, so agglomeration of large US farms produce the highest return on investment because they can use tractors to grow corn on 170-acre land. For countries like Taiwan where labour is far more abundant and cheap due to rapidly rising populations, the most rapid productivity gains were in farming labour-intensive crops like mushrooms, asparagus, and bananas, on 3-acre labour-intensive household farming until the return on additional labour falls to zero. The nascent East Asian agricultural exports were able to compete by focusing on their Ricardian comparative advantage.

If you get good farm yields, you can export food to generate precious foreign capital; if you get bad yields, you need to import food, eating up the money you need to spend on industrialisation. Land reform is the only way to achieve the fullest possible use of labour in rural economies to maximise output.

The Second Commandment: Export-oriented Manufacturing Policy

For Japan, South Korea, and Taiwan, their domestic markets are too small to rely solely on their domestic market to get rich. The only way is to export more and more value-added goods, so you:

  1. Invest the trade surplus from food into light industry i.e. textiles. The main input is unskilled labor, so any poor country with a port and a smidgen of capital is, presto, the global low-cost leader.
  2. Invest the trade surplus from that into heavy industry, starting with steel and basic chemicals, and eventually heavy machinery, cars, specialty chemicals, and electronics.
  3. Relentlessly push your heavy industry to export; sell products that can compete globally, even if you’re taxing your population to subsidise your exporters.

The only way your domestic firms can learn to produce technologically complex goods is to do it the hard way like Hyundai – R&D your own car from the combustion engine to the brakes instead of just assembling premade parts from General Motors. But the cost is prohibitively high until you reach economies of scale, so you subsidise them with effectively free loans at real interest rates of -10 to -20%.

Contrary to the dogma of free trade, you must protect your infant industries with tariffs. The only countries that got rich from free trade are the offshore port financial havens of Hong Kong and Singapore. Without high tariffs, no one will buy your crappy first generation Hyundai car when they can just import Japanese ones. Every developed country will cry foul but they will begrudgingly let you when you allow them access to your domestic market, only if their advanced firms will teach yours their technologies of course.

Export discipline is the single most powerful concept behind the East Asian economic miracle. The only way to know if your Hyundai cars are up to global standards is to force them to compete globally – you only protect and subsidise exporters to the extent that they can sell internationally. If the chaebol can’t export, cut off the subsidies and they die. Indeed, most of the chaebols are long dead, only later did Hyundai emerge as the last car company standing. ‘Autarkic’ states like the Soviet Union, pre-1978 China, and pre-1991 India did not export so they never learnt to stop producing crap.

In countries like Malaysia during Mahathir Mohamad’s first term (his second term was 15 years later by the end of which he was the oldest head of state in the word at age 95), the oligarchs were given untendered government concessions to make billions in mostly monopolies, such as power generation that use General Electric and Siemens technology, real estate investment, casinos, cruise ships, racetrack betting, oil and gas franchises, mobile telephone licences, private television licences, and commodity trading operations – no manufacturing so zero technology transfer. Malaysia has it worse because its pro-bumiputera policies meant he couldn’t let the free market pick winners who were predominantly Chinese or Tamil. The biggest danger of protectionism is rent seeking – chaebols will try to get as much protection and subsidies (rents) as possible from the state without delivering the technological progress and competitiveness that economic development requires.

The solution is to make it clear to businessmen that they must work on manufacturing. Two weeks after the 1961 coup, Park imprisoned the heads of most chaebols, suspecting that they were hoarding cash from corrupt private banks during Rhee’s presidency. The imprisoned businessmen were required to sign agreements which stated: ‘I will donate all my property when the government requires it for national construction.’ After that the heads of the chaebols got the message – they were free to make as much money as they could as long as their businesses were of Vital National Interest.

The Third Commandment: Financial Suppression

To enforce export discipline, you need to give cheap loans to exporters but that isn’t profitable for banks. Banks like lending money for luxury real estate investment and other unproductive short-term speculations, thank you very much. In fact, the best banking returns in the east Asian region are produced in the region’s most backward countries – the Philippines, Indonesia and Thailand.

The solution is rediscounting, where the central bank provides loans to commercial banks against loans they have already extended, depending on the export performance and sectoral focus of the firms that they lend to. The generous availability of rediscounts meant that banks extended more credit than their deposits could justify, so these ‘overloaned’ banks depend on your rediscounted loans to stay liquid.

Financial repression in South Korea was even more aggressive – Park renationalised the banks, in effect turning the central bank into an arm of the Ministry of Finance. The Bank of Korea’s rediscounting of export loans was unlimited – any bank that lent against exports got almost as much money back from the central bank in order to further expand its loan book. So the repeating pattern was that exporters would borrow enormous amounts, over-expand, then lose lots of money and be forced to merge or go under while the government “crazed” and scrambled to get enough foreign capital to pay the bills. It was a gamble on a world-historical scale, but Park didn’t worry about inflation that averaged 15-20% annually because exports rose 40% a year in the 1960s and 25% a year in the 1970s, and the gamble paid off: when Park seized power in 1961, South Korean GDP per capita was less than $100; when he was assassinated in 1979 it was around $2,000; when his daughter Park Guen-hye was elected President in 2013, it was almost $30,000.

Capital controls are therefore vital to prevent foreign money that you can’t repress from flowing in and out. The Kuomintang, which also nationalised the main Taiwanese banks under martial law, made breaches of capital controls an offence punishable by death.

The natural enemy is the Washington Consensus; Japan, Taiwan and South Korea only succeeded by resisting the IMF and the World Bank’s pressure for liberalisation until very substantial developmental progress had occurred. The deregulation process is difficult enough to handle even once a state has developed its bureaucratic capacity – Japan, Korea and Taiwan each experienced financial crises when liberalising.

If you don’t have financial repression via controlling banks for export discipline and capital control, you get Thailand. In the 1990s, short-term foreign loans came rushing into speculative real estate investments (inflating an asset bubble) instead of manufacturing exports (resulting in an annual current account deficit between -5% to -8% of GDP). Traders began shorting the Thai currency (e.g. I borrow 100 Thai baht to buy 2 dollars at today’s exchange rate of 1 dollar to 50 baht, and tomorrow I sell my 2 dollars for 120 baht at an exchange rate of 1 dollar to 60 baht, I keep the 20 baht profit). The government depleted all its foreign exchange reserves trying to hold its peg to the dollar (by buying up a lot of baht) and was forced to let the currency float, triggering the 1997 Asian financial crisis.

Taiwan didn’t get as rich as Japan and South Korea because the Kuomintang failed to effectively discipline large firms to manufacture for export or and to support smaller manufacturers to become large. Without a highly differential preferential ‘main bank’ lending system, lending was thinly spread and short-term. While 400 South Korean companies (from 137 chaebols) consumed 70% of all South Korean bank credit, the top 333 Taiwanese firms took only 30% of Taiwan’s bank lending. As a result, the average Taiwanese manufacturer remained a supplier to more powerful multinational corporations.

Despite Taiwan’s financial policy underperformance, it did much better than the Philippines, “an authentic, technology-less Third World state with poverty rates to match”. Their dictator Ferdinand Marcos also ran up a large foreign debt, but instead of spending the money on export-oriented industrial capacity, he spent so much of it on buying votes that the Philippine economy collapsed under the weight of unserviceable debt and shrank 20%.

Now you know The Way.

Where China Fits In

China only makes sense when you consider its scale – almost one in five people on Earth is Chinese. China is hard to analyse because capitalism only came back once the Maoists finally died, so they could just look at what worked in Japan, Taiwan, and South Korea – land reform, export-oriented manufacturing policies, financial repression – and do it at scale. The sheer size of the country also makes it hard for the central government to run effective industrial policy and curtail waste.

China learnt the importance of household farming the hard way after 30 million peasants starved to death due to collectivisation during the Great Leap Forward from 1958-1960. As Deng Xiaoping came to power in 1978, peasants declared their families to be collective units, thus restoring household farming where they had to sell a share of their crops at a fixed price to the government, and the rest they could sell on the open market. The state also provided gronomic advice and training in the villages, storage and marketing services.

Unlike farmers in Japan, Korea and Taiwan, those in China never got rich from selling their land which are, in effect, owned by the local governments, so the big rezoning profits are divided between local government fiscal coffers and local government graft, while the farmers get less compensation than they need to survive independently.

While corrupt land sales widens the urban-rural divide, it also lubricates growth. Many land purchases involve consulting fees paid to offshore companies that happen to be controlled by the immediate family members of the local bureaucrat in charge of allocating land sales. Factory owners competitively seek out the best places to build new plants, and start construction as quickly as possible, so it’s a net boon to Chinese growth. Though up to a point, additional corruption starts retarding growth when crooks are sufficiently entrenched.

Compared to America’s Cold War allies, China had to trade more access to its markets in return for joining the World Trade Organisation so small and medium-sized state enterprises were hemorrhaging more and more money. Premier Zhu Rongji’s solution is aggressive rationalisation – pushing responsibility for selling or closing smaller state enterprises onto local governments while imposing a fiscal squeeze. The State Asset Supervision and Administration Commission was created in 2003 to cull and consolidatie under-performing units.

To develop China’s mid-stream businesses, Zhu created three policy banks, chiefly the Chinese Development Bank, to finance infrastructure development and enforce aggressive export discipline. It helps that China’s banks are nationalised. The Big Four – Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China – control around half of system assets. The common pattern is that core technologies are imported and absorbed during an initial phase of operation in the (massive) domestic market. The firms then push up to the global technology frontier during a period of increased export discipline.

Among the Asian countries, China was the most willing to drag their feet on issues like IP theft and protection, which created oligopolies of a handful of firms with immense economies of scale that can compete globally. These much more efficient and profitable upstream state oligopolies serve to cushion China’s economy against international price shocks, but it also means (semi?) private firms producing downstream consumer goods tend to lack the margins, cash flows, and concentration to break through the technological frontier to emerge as global brand name businesses.

The endgame of economic development in most countries is boring – economically, most people want to live in 1950s America – but China wants their workers to be Gucci rich. Also, unlike Japan, Taiwan and South Korea which are happy to kowtow to America, the Communist Party wants to restore China’s globally hegemonic role as the Middle Kingdom after what they deem a century of humiliation. So it remains to be seen if the Communist Party can adopt nimbly to avoid a financial crisis, weather the impending demographic collapse, maintain legitimacy as economic growth slows down, all while balancing its geopolitical ambitions.

Conclusion and Further Readings

The Way is very convincing, and Studwell is confident that he comes off very convincing, but I don’t know much economic history. Maybe Studwell conveniently left out Vietnam and India to weave a prettier tale. Studwell is very heterodox in basically accusing the Washington Consensus as basically an evil that sweet talks Indonesia, Thailand, Malaysia, and the Philippines into financial crises and stagnant development. How does his warning that China’s development model can only go so far fare now, 7 years since the book’s publication? How cherry-picked are his anecdotes and figures?

Short of rigorous epistemic spot checks, I turn to the following: Tyler Cowen praised it as one of his favourite economic books of the year, “Too specific and analytic to be truly popular, too broad, historical, and anecdotal to count as formal economic research. That is not a complaint.” The Financial Times praised, “Studwell’s thesis is bold, his arguments persuasive, and his style pugnacious.” Byrne Hobart praised it as “a masterpiece”. Scott Alexander wrote a positive review (do see comment highlights for some actual pushback on Studwell’s thesis or perhaps his overstatement).

Buying Studwell’s thesis for now, there are a few interesting implications.

First, most economists and just about everyone in the blogosphere are libertarian, but as Byrne Hobart has noted the East Asian economic miracle involved not just a lot of capitalism, but also a ton of state intervention that seemed only possible under autocratic rule:

  • In theory, Japan is a representative democracy where legislators face the electoral consequences of policy decisions; in practice, it was a sort of technocratic dictatorship where bureaucrats at the Ministry of International Trade and Industry (MITI) made the actual decisions. To read: Chalmers Johnson’s MITI and the Japanese Miracle.
  • South Korea was ruled by a military junta with General Park Chung-hee as the de facto dictator until his assasination in 1979. When their national steel company POSCO needed money and expertise to build their first steel plant, they got both from their historical enemy, Japan, in exchange for accepting a Japanese apology over colonialism – the kind of decision unthinkable to a popularly-elected president; indeed the kind of decision that doubled South Korea’s GDP by a factor of 17. To read: The Park Chung Hee Era. Park is definitely among the greatest statesmen of the 20th century, and perhaps the most underrated one.
  • Taiwan was under the rule of Kuomintang for 38 years – the longest imposition of martial law by a regime at the time.
  • China is, of course, ruled by the increasingly authoritarian Chinese Communist Party now led by Xi, who removed the term limits in 2018. See the Chinese Economy section of my Bookshelf.

China has the GDP per capita of 1920s America in real terms, so liberalising could be a lot further down the road than you thought. But who am I to speculate on China’s liberalisation? Not that I think China’s autocratic rule can become a real challenge to Western liberal democracy anyway. Stay tuned for my review of Francis Fukuyama’s The End of History and the Last Man, The Origins of Political Order, and ​​Political Order and Political Decay.

Second, corruption can lube things along (until a point where your growth isn’t fast enough to render the rules obsolete) as Samuel Huntington wrote, “In terms of economic growth, the only thing worse than a society with a rigid, overcentralized, dishonest bureaucracy is one with a rigid, overcentralized, honest bureaucracy. A society which is relatively uncorrupt — a traditional society for instance where traditional norms are still powerful — may find a certain amount of corruption a welcome lubricant easing the path to modernization.” Stay tuned for my review of Yuen Yuen Ang’s China’s Gilded Age.

Third, you can tell whether a country got its industrial policies straight by seeing if their richest citizens are builders or rent-seekers. Singapore’s Zhang Yong founded the Hai Di Lao hot pot restaurant chain; Hong Kong’s Li Ka-shing is literally a real estate tycoon. As Studwell has argued, Singapore and Hong Kong are not useful case studies, because free market policies work unusually well for city-states that prosper through trade and finance. If you have a port, and your port is close to a growing industrial powerhouse, of course you want the least protectionism so you can get rich off the sheer volume of cargo and capital that pass through your general vicinity. Stay tuned for my review of Lee Kuan Yew’s From Third World to First. If you know any good books on Hong Kong’s economy and developmental history, let me know.

I started writing this review a month or so before Scott posted his which kinda made this obsolete, but I’m glad I wrote it anyway because I think it was the only way I could assimilate Studwell’s model well enough to rotate it in my mind. As you can tell, it has also planted enough nodes in my brain to be ready to read the many books the reviews of which await. The book has so much more detail in its in-depth profiles of each successful and failed country impossible to capture fully in a mere review. I encourage you to read it yourself, now at 2x speed as you already know The Way, to savour the excellent agrarian pre-histories of East Asian industrialisation and the details of their industrial policies.

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