Even when free trade consensus was at its most influential period during the 1990s, industrial policy involving government intervention across Asia was commonplace. For Asian beneficiaries of free trade and globalization like Malaysia, South and Taiwan, they were and are at best mixed economies.
Now that that consensus is collapsing and trade barriers are rising, industrial policy is becoming more and more important as a response to contemporary challenges. The US under the former Biden administration did it. Europe is trying to follow suit. China has doubled down its initiatives. Almost everybody else of importance has moved in the same direction as they try to capture some segments of a shifting and fraying global supply chain caused by competition between China and the US. As far as the China-US competition is concerned, Malaysia has been promoting itself as safe haven for cross-border manufacturers and service providers since at least the first Pakatan Harapan government.
It was this context that convinced me to re-read Joe Studwell’s How Asia Works that hit the book market back in 2013. The book does not touch about contemporary industrial policy concerns like how Chris Miller’s The Chip War does but it provides a historical overview of post-war economic development of selected prominent economies in the Asia Pacific while outlining a general theory of which industrial policy worked and which did not.
The overall framework itself is not controversial: an economy progresses from agriculture-based towards manufacturing and later service-based. That feels like a truism when we look back from a mainstream 2020s lens. In fact, even the leading communists of the late 19th and early 20th century understood this. So, the general idea has a very long history.
What the author proposes differently is the method which an economy carries out that shift.
For newly independent underdeveloped economies during the post-World War II era, Studwell highlights that economies needed land reforms to soak up loose labor market, boost agricultural productivity and build up national surplus. Land reforms mean redistributing land from the biggest landowners to the peasants, turning tenant-farmers into owner-farmers. This solved multiple post-war challenges: social unrest, extreme mass unemployment, production disincentives associated with rentierism, indebtedness and lack of capital surplus that is required for industrialization.
Economies that managed to commit land reforms the earliest and most comprehensively are the ones to experience robust industrialisation first. Here, Japan is the original success story going all the way back to the 19th century Meiji Restoration and again later following its defeat in the World War. Taiwan did the same after the Kuomintang government fled mainland China and implemented various reforms on the island. South Korea carried this out on the urging of the United States’s occupying authorities. China attempted land reforms and achieved successes until communist excesses led to collectivism in the 1950s. Collectivism undid earlier Chinese agricultural progress and delayed Chinese industrialisation until after the death of Mao Zedong. Thailand for the longest time was in denial about the state of its economy but belatedly (and informally) allowed new land to be opened up north. Meanwhile, Malaysia and Indonesia cheated their way out of land reforms: Malaysia by encouraging land openings through Felda (and not mentioned in the book, new villages as a response to the Communist Emergency) and Indonesia through its transmigrasi program that relocated population from Java to other Indonesian islands (the most important were Sumatra and Kalimantan). Finally, the Philippines did not bother with land reforms (as a colonial power, the US is to blame: US policy here is the direct opposite of its actions in South Korea. But it is also a story of landowning elites capturing the state), leaving the profile of the Philippine economy to that of an inefficient oligarchy.
By the 1990s, land reforms and agricultural successes had a high correlation with industrialization progress. Japan, South Korea and Taiwan were the most successful in terms of how industrialized the country had become. China came second while Malaysia and Thailand perhaps were close third and fourth before the Asian Financial Crisis knocked them off the track. Indonesia was some ways behind two these economies. And the Philippines was the Sick Man of Asia and remained so until maybe the 2010s.
Malaysia and Thailand are the odd ones here. They managed to build up surpluses to carry out industrialization despite relative failures at land reforms. The reason is that they were engaged in export-led manufacturing largely financed by foreign investment that somewhat mitigated agricultural failures (it is jarring to call these two economies as agricultural failures but failures here should be defined by the counterfactual: their agricultural output under full land reforms could have been much bigger than it was in reality, following examples from Japan, South Korea and Taiwan). The jumpstarted manufacturing sector solved some problems local agriculture did not and the most obvious of that problem was mass unemployment. In Malaysia’s case, careful natural resource management also created the surplus necessary for Malaysian industrialization.
The key concept here is exports. To be a successful economy, the country has to have export-discipline. Here, again, the most export-disciplined economies were Japan, South Korea and Taiwan (and China). In Japan and South Korea, the government forced tycoons and corporations to become involved in export-led manufacturing. Taiwan was different in that it used state-owned enterprises as its export vehicles. In places like Indonesia, Malaysia and Thailand however, the tycoons were happy to become rentiers and investing their surplus in largely less productive sector such as real estate, banking and other financial services. There were manufacturers but they were happy to confine themselves in the protected domestic economy in absence of a less-than-gentle nudge from the government. Here, the three Southeast Asian economies ran a flawed industrial policy for the longest time: import-substitution in a protectionist environment before foreign manufacturers came in to allow export-led manufacturing to flourish. What the author argues is exports-led industrialization/export discipline in a protectionist environment (but these protected exporting manufacturers competing against themselves). Again, the worst of the lot was the Philippines with its oligarchs.
The next stage of development is the shift towards service-based economy. The pitfall is to liberalize the economy before the industrialization process is complete. All Southeast Asian economies failed this test and made their economy more vulnerable to financial crisis. The most successful, again, were the three (and later four including China in the 2000s) that liberalize when their manufacturing had matured.
But the ultimate message is that a government has to intervene and try. Studwell shows that even those who tried half-baked reforms and industrialization achieved much more progress faster than those who did not try. Malaysia is a prime example of committing to half-baked reforms and industrialization and then ended up much better than most in Southeast Asia. Malaysia could have been a South Korea if the country had done it properly but then again, Malaysia is also not a bad place to be compared to a majority of economies out there in the world.
To not try at all is to be left behind. So, Yoda is wrong as far as industrialization and economic history are concerned.
