Book summary “How Asia Works”: summary

Introduction

You live in a world where some developing nations achieve miraculous economic transformation while others remain trapped in poverty despite decades of foreign aid and market reforms. You look at Asia and see a stark divide between the booming export powerhouses of the north-east and the stagnant economies of the south-east.

Rapid economic development in East Asia is driven by three essential policy interventions: land reform for small farmers, export discipline for manufacturing firms, and strict government control over the financial sector.

Joe Studwell demonstrates that successful development depends on state intervention rather than pure free-market capitalism. The book is structured around four core parts that explain this thesis.

• How does egalitarian smallholder farming generate the wealth needed for industrialization?
• Why do some countries build globally competitive manufacturing while others fail behind tariff walls?
• How must governments manage banks to prevent financial panics and direct capital effectively?
• Does China represent a unique economic model or a continuation of the north-east Asian formula?

1. Agricultural Foundations

Egalitarian land distribution combined with state support incentivizes small household farmers to maximize crop yields through intensive labor, creating the foundation for rapid national development.

In pre-industrial states, unconstrained markets lead landlords to concentrate ownership and exact high rents or usury, causing yields to stagnate. When governments divide agricultural land equally among farming families and provide rural credit, marketing, and agronomic training, households treat farming like large-scale gardening, investing massive labor to achieve maximum crop output per hectare.

2.47 acres - equivalent to one hectare or 10,000 square metres. 135,000 dollars - total retail value per hectare produced by a well-managed US kitchen garden in 2009. 2,500 dollars - wholesale price per hectare of the US's most common large-scale corn crop in 2010.

In post-war Taiwan, the shift to equalised household farms led to an increase of more than 50 per cent in work days invested per hectare, and the island successfully launched labor-intensive boom crops like asparagus and mushrooms.

You can apply the gardening approach using specific practices:

• Start seeds in trays indoors for rapid maturation.
• Regulate soil-bed temperature using raised beds or pits.
• Apply compost and fertilizer on a plant-by-plant basis.
• Use targeted watering and constant weeding.
• Maximize yields through vertical gardening using trellises, nets, strings, and poles.
• Inter-grow plants with different maturities and raise shade-tolerant vegetables in the shadows of taller plants.

Increased agricultural output creates a consumption shock by raising rural incomes, allowing local manufacturing firms to learn critical marketing lessons and sell robust consumer goods to cash-limited rural markets. Furthermore, it prevents foreign exchange from being wasted on unnecessary food imports, preserving funds for industrial machinery and providing a social welfare safety net during economic downturns.

After the Second World War, Japanese automakers like Toyota and Nissan built robust cars on small truck chassis for unpaved rural roads, while Honda used early 50cc engines to convert bicycles into motorcycles.

200,000 factory workers - number who returned to farming in Taiwan during the mid-1970s oil crisis. 140 million tonnes to close to 200 million tonnes - grain output increase in China during the early years of land reform.

Historical Case Studies

Beginning in 1868, the Meiji administration pensioned off daimyo, gave small farmers title to their lands, fixed taxes in cash terms rather than crop shares, and built a national network of agricultural extension and fertilizer distribution. This gave farmers a strong incentive to invest in land improvement, doubling rice production and fueling Japan's early industrialization and military modernization.

109 million certificates of ownership - issued by the Meiji administration in three years. 4 out of 5 parts - peak of government revenues obtained from the land tax in the late nineteenth century.

The Meiji administration issued 109 million certificates of ownership in three years, enabling farmers to legally mortgage and sell land while fueling exports with silk produced from mulberry trees on marginal hilly land.

In areas controlled by the Communists, peasants organized violent struggle sessions against landlords and redistributed land, draft animals, and housing. This policy provided the People's Liberation Army with vital inspiration, recruits, and logistical support during the civil war, though it was later tragically undermined by Mao Zedong's drive to create agricultural collectives.

30 to 40 million people - estimated deaths during the Chinese famine of 1959-61 caused by agricultural collectivization. 70 to 80 per cent - share of land held by landlords and rich peasants who made up less than 10 per cent of the rural population in pre-revolutionary China.

In Long Bow village, investigated by American writer William Hinton, landlords and rich peasants had their land expropriated and redistributed to the needy after the Japanese surrender in August 1945.

Adviser Wolf Ladejinsky recognized from his experience in the Russian Revolution that communists succeed by turning land over to peasants. He successfully pushed General Douglas MacArthur to mandate radical land reform in occupied Japan by creating SCAP tenant committees with adjudicating power, but US support in other Asian countries wavered due to domestic political opposition and Cold War anxieties.

2 million families - number who stood to lose land in Japan's post-war reform compared to 4 million who stood to gain. 3.6 per cent interest - rate paid on 30-year bonds given to Japanese landlords as compensation for expropriated land during high inflation.

In 1954, US Secretary of Agriculture Ezra Taft Benson fired Wolf Ladejinsky on security grounds partly because of anti-communist paranoia and right-wing political hostility toward land reform.

Following North Korea's 1946 land reform, southern legislators forced President Syngman Rhee to sign the Land Reform Act in 1949, which was fully implemented by 1952. Despite ungenerous compensation for landlords and some subsequent re-emergence of tenancy, the reform drastically increased the share of owner-cultivators and enabled substantial increases in rice paddy yields under subsequent state investment.

Before partition in 1945, less than 4 per cent of South Korean households owned 55 per cent of agricultural land, while a quarter of a million families were landless squatters. 3 hectares - maximum retention limit for farms in South Korea's reform. 5.3 tonnes per hectare - South Korean rice paddy yields achieved in the mid-1970s, up from 3 tonnes in the mid-1950s.

Taiwan achieved the most remarkable agricultural and export development in Asia by coupling radical land reform with extensive state support and cooperative JCRR tenancy committees. Under the Kuomintang and the US-sponsored JCRR, Taiwan limited rents to 37.5 per cent of crops, sold off Japanese-owned lands, and executed a 1953 land reform with a 3-hectare limit. Tenant participation through village committees prevented evasion, while heavy government investment in agricultural extension, high-yield seed varieties, and guaranteed minimum prices turned household farming into an export powerhouse.

13 per cent of GDP - equivalent value of the wealth transfer involved in Taiwan's land reform. 0.33 - Taiwan's Gini coefficient of income inequality achieved by the mid-1960s, dropping from 0.56 in the early 1950s.

In the 1950s, raw and processed agricultural goods produced two-thirds of Taiwan's export receipts, starting with sugar and expanding into labor-intensive crops like asparagus and mushrooms.

South-East Asian Failures

Through successive administrations, Filipino elites enacted complex land reform laws riddled with loopholes, such as stock distribution options and voluntary land transfers that allowed landlords to maintain control. Because the state provided zero credit, marketing, or extension support to the few peasants who received titles, most were forced to lease their land back to landlords or fall into catastrophic usurious debt.

5 per cent - share of reformed land in the Philippines achieved through compulsory acquisition by 2006 under the CARL. 56 tonnes per hectare - average sugar yield in Negros Occidental in Sugarlandia, compared to 85-90 tonnes in family-farmed Taiwan and China.

At Hacienda Luisita, owned by the family of President Cory Aquino, the family exploited a stock distribution option to give workers equity instead of land, resulting in dismal dividends and ongoing unrest.

In Indonesia and Malaysia, authorities provided heavy infrastructure, credit, and administrative support exclusively to large estates while dismissing native smallholders as backward. British Stevenson Restriction Scheme in Malaysia deliberately penalized higher-yielding smallholders to protect inefficient European plantations, and post-independence governments relied on costly FELDA resettlement schemes rather than tackling land reform.

40 million pounds - estimated loss to Malaysian smallholder rubber growers from discriminatory British restriction schemes. 1.5 million settlers - number of people funded by the Indonesian government to move from Java to outer islands between 1979 and 1984 under resettlement schemes.

In colonial Malaysia, a 1920s committee of inquiry found that smallholder rubber yields were more than 50 per cent higher than plantation yields, yet authorities still imposed output restrictions favoring big businesses.

Although Thailand avoided formal colonization, its government taxed the rice economy through state monopolies and favored large agribusiness firms over smallholders. Un-titled farmers clearing land in the north and north-east became captive suppliers to agribusiness conglomerates for inputs and sales without access to bank credit, creating an impoverished rural underclass reliant on migrant labor and listening to phleng luk thung songs.

1,200 kilogrammes per hectare - Thailand's low rice yield in the 1930s, representing one-fifth of post-reform north-east Asian yields. Four-fifths - proportion of agricultural household income in Thailand's north-east coming from wages and remittances on the eve of the Asian financial crisis.

CP Group developed a massive business model supplying day-old chicks to peasant farmers who raised them and sold the chickens back to the company as a near-monopsonistic buyer.

Good agricultural policies eventually turned into bad ones when North-East Asian governments replaced initial market incentives with massive, welfare-driven agricultural subsidies.

As industrialization progressed and rural workers moved to cities, Japan, South Korea, and to a lesser extent Taiwan failed to transition smoothly to larger, specialized, and unsubsidized farms. Instead, to maintain income parity with urban areas and act as a substitute welfare system, governments instituted heavy import protections and above-market price supports for rice, creating a rice mountain and locking aging farmers onto tiny plots.

One-half - share of farm incomes in Japan and Korea accounted for by subsidies. 5 dollars - price a single apple could cost in Japan due to extreme agricultural protectionism.

In Japan, a farmer's son named Nishiyama inherited land from his land-reform pioneer father, but the family's fortunes collapsed after he lost 300 million yen playing the stock market against the inflated value of their agricultural land.

2. Manufacturing and Industrial Policy

Manufacturing is superior to the service sector for early economic development because it relies on machines to rapidly employ and upskill large cohorts of unskilled labor. Machines allow poor countries to bypass a shortfall in productive human skills. One-fifth is the share of services in total world trade, which has remained stuck around this level for two decades.

Export discipline and infant industry protection are the crucial policy differences that separate successful north-east Asian manufacturing states from failing south-east Asian ones.

Governments must continually test and benchmark domestic manufacturers receiving subsidies and market protection by forcing them to export and face global competition. Without this discipline, local firms focus on fooling politicians rather than achieving world-class standards, leading to real estate bubbles and financial crises. In South Korea, firms had to report export performance monthly to determine their access to bank credit, while in Taiwan everything from cash subsidies to preferential exchange rates was used to encourage exporters. South Korea's merchandise exports stood at USD56 million in 1962, reached USD170 million three years later in 1965, and climbed to USD836 million in 1970.

Export Discipline

Every economically successful society has relied on protectionism and infant industry policies during its formative industrialization stages. Measured statically, protectionism appears expensive and inefficient because it adds costs and punishes consumers. However, viewed dynamically, it is a temporary trade-off that finances the acquisition of strategically vital technological knowledge. Tudor Britain pioneered protectionism in the sixteenth century by taxing raw wool exports and clothing imports to nurture its woollen textiles industry.

Successful industrial policy relies on weeding out underperforming firms rather than trying to pick winners in advance. Instead of attempting the difficult task of picking winning firms beforehand, governments in Japan, South Korea, Taiwan, and China utilized forced mergers, capital withdrawal, and bankruptcy to eliminate businesses that failed to measure up. In South Korea, most of the top ten chaebol of the mid-1960s disappeared through forced mergers and bankruptcy by the mid-1970s, and half of the new group disappeared by the early 1980s. Since the 1970s, western talk of picking winners has contrasted with east Asian practices.

State Guidance and Scale

General Park Chung Hee transformed South Korea's economy by combining harsh coercion of business elites with strict export mandates and heavy industrialization programs. Park imprisoned top entrepreneurs after his coup on 16 May 1961, forcing them to sign agreements to serve national construction goals. Twelve days after the coup on 28 May 1961, Park began arresting businessmen, including founders like Samsung's Lee Byung Chull, forcing them to form the Promotional Committee for Economic Reconstruction to align with state manufacturing goals.

Efficient steel production acts as a gateway to broader industrial success and requires massive scale, step-by-step learning, and strict export requirements. Steel making relies on organizing limited inputs and continuous incremental improvements. Despite initial resistance from global financiers, South Korea successfully built POSCO by using Japanese war reparations, adopting huge initial scale with phased expansion, and maintaining a strict export requirement. Despite World Bank warnings based on failures in other developing nations, POSCO grew to become the world's third biggest and most profitable steel producer, featuring a Pohang compound with a 9 million square metre size, 320 kilometres of internal roads, and a yearly output of 16 million tonnes.

Hyundai achieved global scale in automotive manufacturing by avoiding equity joint ventures, licensing foreign technology in pieces, and enduring severe export pressures. To maintain technological independence, Hyundai avoided equity partnerships with global multinationals. Instead, they licensed specific designs from weaker makers like Mitsubishi, hired independent European consultants to plan production, and relied on export pressure to force technological upgrades. Hyundai hired former British Leyland boss George Turnbull, who brought in European engineers to design the Pony while rejecting unsuitable engines proposed by Mitsubishi. The Ulsan compound of Hyundai Motor Company spans 1,225 acres and contains five separate factories, contributing to 5.7 million vehicles sold globally by Hyundai and Kia in 2010, tying with Ford as the fourth biggest global auto group.

The Failure of Malaysia

Malaysia's industrialization under Mahathir Mohamad failed because it lacked export discipline, relied on equity joint ventures, and rewarded political cronies with domestic rents. Mahathir attempted to emulate north-east Asian heavy industrialization through projects like Perwaja steel and the Proton car, but omitted export discipline, failed to cull underperforming firms, and mixed industrial policy with ethnic affirmative action. Consequently, established oligarchs continued to gorge on passive service sector monopolies, such as Ananda Krishnan with an estimated net worth of USD15 billion as of 2011. Mahathir appointed Eric Chia to run the failing Perwaja steel plant, which ultimately soaked up RM10 billion of public money without producing high-grade industrial steel or meeting global export standards.

Macroeconomic stability and low inflation are not prerequisites for industrial development, whereas technological learning through state intervention is paramount. While international financial institutions like the IMF and World Bank champion low deficits, low debt, and low inflation, historical evidence shows these are not determinants of industrialization. Developing countries must prioritize technological learning and may require state-directed credit and borrowing regardless of inflation rates. South Korea's central bank took direct instructions from the government, lending to favored projects while ignoring typical domestic inflation rates running between 15 and 20 per cent a year.

3. Financial Policy and Control

Financial policy in a developing economy must direct limited capital toward agricultural and manufacturing objectives through a short leash rather than premature deregulation.

Governments should accept low near-term returns on industrial investments to build long-term capabilities. Deregulating finance too early leads banks to pursue immediate profits in consumer lending and property, leaving industry technologically backward.

In south-east Asia and Latin America, deregulated banking systems generate high profits while industry remains backward. The best banking returns are found in backward countries like the Philippines, Indonesia, and Thailand.

By depressing interest rates on bank deposits and passive investments, governments generate a surplus that can fund development policy. Citizens accept negative real interest rates when they see their nation rapidly overtaking competitors.

South Koreans tolerated negative real interest rates on bank deposits as they watched their economy outpace North Korea, south-east Asia, and Taiwan within three decades.

The Merits of a Short Leash

Banks are the most effective conduit for state financial control in developing economies. They are easier to manage and steer through central bank rediscounting than stock or bond markets.

Stock and bond markets allow instantaneous selling during panics, lack transparency, and make it difficult to oversee how funds are used. Entrepreneurs lobby for stock markets precisely to escape government control over capital.

Malaysia's stock market capitalisation grew to four times GDP in 1993, with trading volume exceeding the New York Stock Exchange. Manufacturing loans were crowded out by speculative share and real estate trading.

Premature financial sector liberalisation promoted by the Washington Consensus leads to banking crises rather than efficient capital allocation. When emerging states privatise banks, lift capital controls, and expand stock markets prematurely, private entrepreneurs capture banks for non-productive, speculative investments like luxury real estate rather than manufacturing.

Financial liberalisation in south-east Asia led to the 1997 financial catastrophe, echoing Latin America's crisis after 1982 when privatized banks were run amok by conglomerates stacking loan portfolios with affiliated firms.

Japan and Korea

Post-war Japan successfully enforced industrial policy by using central bank rediscounts tied to export performance and maintaining a main bank system. The Bank of Japan used rediscounts to expand commercial banks' loan books on condition that borrowers met export and sectoral criteria. Commercial banks held equity in industrial borrowers, placed officers on their boards, and managed failing firms.

In the 1960s and 1970s, Japanese corporations relied on the banking system for 40 to 50 percent of their total funding needs. German firms relied on less than 30 percent, while British and American firms relied on less than 20 percent.

Park Chung Hee's regime used aggressive, unlimited central bank rediscounting and negative real interest rates to fund heavy and chemical industrialisation, backed by strict export discipline. The state nationalised banks and used unlimited rediscounting for export loans, creating a two-tier system where favoured exporters received extremely cheap loans, while un-favoured businesses relied on the informal kerb market.

From 1974 to 1980, the average real borrowing rate in the banking system was minus 6.7 percent, while the kerb market rate averaged 18.5 percent. Exports grew 40 percent annually in the 1960s and over 25 percent in the 1970s.

Taiwan combined conservative financial management and high savings rates with an undervalued currency, but failed to build an industrial policy around large export-disciplined firms. Taiwan kept state-owned banks, maintained strict capital controls, and experienced low inflation and few non-performing loans. However, because lending was thinly spread and short-term, smaller manufacturers struggled to scale up or upgrade technologically.

The New Taiwan dollar was pegged to the US dollar at 40 to 1 from 1961 to 1985. By 1987, the Bank of Taiwan accumulated foreign exchange reserves of USD60 billion, second only to Japan.

Financial Plunder in South-East Asia

The Philippines demonstrated financial disaster by privatising banks to oligarchs without enforcing export discipline, turning the banking system into a vehicle for elite plunder. Without export discipline to provide an information feedback loop, state-backed development banks and private commercial banks engaged in related-party lending, using central bank rediscounts for non-productive ventures.

The Philippine National Bank went bankrupt in 1921, only five years after its creation. Under Ferdinand Marcos, cronies like Danding Cojuangco and Roberto Benedicto used state-mandated levies and central bank rediscounts to enrich themselves, supported by a 50 percent inflation rate in 1984 and crony banks funding 25 percent to half of their assets with central bank money.

Indonesia's financial crises under Sukarno and Suharto stemmed from the state's failure to control the financial system and direct it toward manufacturing exports, culminating in deregulatory disaster. Under Sukarno, state banks funded luxury imports and hoarding. Under Suharto, the Berkeley Mafia technocrats introduced radical financial deregulation in the late 1980s, sparking an unhedged foreign borrowing and real estate boom that collapsed in 1997.

Liem Sioe Liong's Bank Central Asia lent 60 percent of its funds to Liem's businesses and 30 percent to Suharto's, while Eddy Tansil embezzled USD520 million from state bank Bapindo using fake pre-shipment advance letters. Private banks jumped from 66 in 1988 to 160 in 1993.

4. Where China Fits In

China achieved massive economic growth by combining household farming and mid-stream export-disciplined manufacturing with state control over upstream oligopolies and finance.

Restoring Household Farming

In the mid-1950s, China collectivized farming based on the false premise that scale worked for agriculture just like manufacturing. In agriculture, however, the product never changes, and yields are maximized by labor and fertilizer, not premature mechanization. Autarky severely throttled manufacturing by preventing firms from buying, borrowing, or stealing existing technologies from the rest of the world, forcing them to constantly reinvent the wheel.

Restoring household farming in the late 1970s rapidly boosted agricultural output.

Peasants themselves invented the household contract responsibility system where they sold a fixed crop share to the state and the rest on the open market. This policy unleashed rural labor and fertilizer use, skyrocketing grain production without requiring large-scale commercial farms. Grain production rose from 305 million tonnes in 1978 under collective production to 407 million tonnes in 1984, and exceeded 500 million tonnes by the late 1990s.

Unlike north-east Asian states, China's political elite maintained an urban bias and denied farmers land ownership. Chinese peasants do not own their land; they only hold use rights originating from old collective divisions. Because local governments face funding responsibilities without adequate central tax grants, they aggressively tax peasants, restrict services, and seize farmland to sell for commercial development and agribusiness leasing at massive mark-ups. Nearly two-fifths of villages experienced land conversions in the past decade, with one in ten villages losing land every year by 2010, usually against the wishes of farmers.

State Rationalisation and Upstream Oligopolies

Zhu Rongji's 1990s rationalization program successfully restructured China's state-owned manufacturing sector by culling loss-making small firms and introducing fierce oligopolistic competition among big state enterprises. Under the strategy of Grasp the Big, Let Go the Small, loss-making smaller state enterprises were pushed onto local governments to be closed or sold, while upstream monopoly sectors were forced into oligopolistic competition among a small number of firms to maximize efficiency and returns. Some 40 million state workers were laid off between 1995 and 2004 as local governments slashed loss-making operations.

China's government retains control of upstream resources and services through profitable state-owned oligopolies.

Upstream giants in oil, petrochemicals, coal, electricity, and telecommunications are subjected to bureaucratic price settings. While they generate massive long-run profits, they are forced to absorb losses during global price spikes rather than passing high costs to downstream firms. When global crude oil prices reached USD140 a barrel before the 2008 financial crisis, Chinese oil companies were required to take losses on refining operations to protect manufacturers. SASAC-controlled groups delivered RMB1.35 trillion or USD200 billion in annual profits in 2010, equivalent to 3-4 per cent of GDP.

China's mid-stream producers' goods manufacturers successfully reached the global technological frontier by combining domestic infant industry protection with intense export discipline enforced by policy banks. The state nurtured mid-stream manufacturers through local content requirements and domestic competition, then pushed them into international markets via concessionary financing from policy banks like the China Development Bank, forcing them to upgrade product quality to global standards. Shanghai Electric signed a 5-year deal in 2010 to supply India's Reliance Power with equipment for thirty-six power stations in a contract worth USD10 billion.

Financial Repression

Private Chinese firms, particularly in consumer-facing and retail sectors, struggle to achieve global brand leadership because they lack the policy support, subsidies, and capital access granted to state-linked enterprises. While private firms drive a large share of net exports, their margins are thin and credit lines limited, preventing them from dominating value chain components like distribution, sales channels, or core technologies. BYD and Suntech experienced massive stock market peaks following high-profile investments or initial public offerings, only to see their valuations collapse as they lacked the cash flows and policy support to sustain long-term technological upgrading.

China successfully implements its economic policies by maintaining a state-controlled banking system and enforcing capital controls.

Nationalized and policy banks are directed to fund state development priorities rather than serving private entrepreneurs. Guaranteed banking margins generate stealth taxation revenue to support development, while capital controls give the state discretion over domestic investment and foreign capital flows. The China Development Bank had almost USD900 billion of loans outstanding at the end of 2011, representing 10 per cent of all loans and funding large-scale domestic and international infrastructure projects.

Conclusion

Economic success in the developing world is the result of deliberate state intervention rather than the passive working of free markets.

10 Key Ideas

1. Egalitarian land distribution combined with state support incentivizes small household farmers to maximize crop yields through intensive labor, creating the foundation for rapid national development.
2. Good agricultural policies eventually turned into bad ones when North-East Asian governments replaced initial market incentives with massive, welfare-driven agricultural subsidies.
3. Manufacturing is superior to the service sector for early economic development because it relies on machines to rapidly employ and upskill large cohorts of unskilled labor.
4. Export discipline and infant industry protection are the crucial policy differences that separate successful north-east Asian manufacturing states from failing south-east Asian ones.
5. Successful industrial policy relies on weeding out underperforming firms rather than trying to pick winners in advance.
6. Financial policy in a developing economy must direct limited capital toward agricultural and manufacturing objectives through a short leash rather than premature deregulation.
7. Banks are the most effective conduit for state financial control in developing economies because they are easier to manage and steer through central bank rediscounting than stock or bond markets.
8. Restoring household farming in the late 1970s rapidly boosted agricultural output.
9. China's government retains control of upstream resources and services through profitable state-owned oligopolies.
10. China successfully implements its economic policies by maintaining a state-controlled banking system and enforcing capital controls.