By Connor O’Brien
Since its publication in 2013, Joe Studwell’s, How Asia Works has quickly become one of the most influential books written about industrial policy in the 21st century. Studwell compares rapid economic growth and industrialization in Northeast Asia (Japan, South Korea, and Taiwan) with failed industrialization schemes in its neighbors to the south (Indonesia, Thailand, Malaysia, and the Philippines).
In just a few decades, Japan, South Korea, and Taiwan not only grew into wealthy modern economies but did so while often rejecting orthodox free-market recommendations from the International Monetary Fund and the United States. Today, they are home to innovative, globally competitive firms like Hyundai and TSMC which were born out of active state intervention and planning. Studwell argues that this intervention—pushing state champions to compete in global markets and culling those who failed to become competitive—was central to Northeast Asia’s economic rise.
Today, as the United States spends tens of billions on industrial policy drives in areas ranging from semiconductors to green energy technology, what lessons might Northeast Asia have to offer us today? Is industrial policy inherently more difficult for countries like the United States already operating at or near the technological frontier?
Studwell was kind enough to offer some thoughts over e-mail reflecting on these questions and others.
This Q&A has been very lightly edited for grammar and clarity.
Behind Northeast Asia’s industrial policy success stories were highly capable public agencies like MITI that were able to foresee the direction of global markets and make coordinated bets with a long-term outlook. Yet Taiwan, Korea, and Japan were all poor countries at the time with far smaller stocks of highly-trained people. It’s hard to imagine many agencies in the U.S. today pulling off something so ambitious. What accounts for these countries’ especially high state capacity?
Those countries developed state capacity, but they had the advantage they were playing catch-up so they could learn the very similar development routes that all developed countries have taken. The East Asian countries also had relatively more educated populations, and elites, at the outset than was the case on a continent like Africa. So having sufficient initial human capital, committed political leadership and a regional leader to learn from—Japan—were all important. If we then think of developed countries presently toying with the idea of renewed industrial policy—the UK or the US—the challenge is more difficult for two reasons. First, the bets you take in industrial policy are riskier the closer to the technological frontier you get. It can be done—as with the Danish wind industry—but you do risk picking the wrong technology, as has happened in a number of countries in areas like biotechnology. The second problem is that countries like the UK and the US no longer have sufficient industrial policy expertise, not to mention banking sector expertise in long-term project finance, to deliver industrial policy. Protectionist industrial policy was born in the United States in the 19th century under leaders like Hamilton, and passed from there to countries like Germany, but those days are long gone—not even known to the average American politician.
In How Asia Works, you argue that industrial policy is appropriate for developing countries, but that rich countries should ultimately phase it out. A decade later, do you still generally believe this?
As I wrote above, the risk-reward trade-off becomes less attractive as you get closer to the technological frontier. This is why it makes sense to move away from industrial policy. However, there are still moments when a government may decide the risk is acceptable in order to nurture a sector of the economy that private enterprise won’t develop unaided. Indeed, there is always some of this going on—just look at what NIH does in the US.
FDI can be a double-edged sword. Nippon Steel’s investment in POSCO helped South Korea climb the value chain, but its deal with Perwaja left Malaysia reliant on Japanese steel expertise. [Note: Perwaja was a state-led steel venture in Malaysia which Studwell argues floundered because of a failure to produce for global markets.] How big a role does company culture play here and can policy make a difference in that? Does the calculus change as a country develops further?
Company culture and leadership are everything. POSCO was established as a learning project that started with purely mechanical processes. Perwaja was a fantasy leap into an untested technology whereby the analogy would be to send your primary school child to college to see how much they learn. Not much is the answer. Effective policy makes a difference in the sense that it recognises that learning is step by step; you don’t leapfrog to knowing everything.
How important are foreign experts, immigrants, and returning diaspora in helping countries execute industrial policy effectively? It seems key to the story of Taiwan’s semiconductor industry.
All of these are vectors of knowledge. Effective developmental states learn any way that they can. Taiwan was particularly lucky because so many technical personnel had gone to work on the west coast of the US. They came back not just with technology, but with processes and in some cases with smarter ideas about how to do things than they saw in the US.
In your book, you write that Taiwan was the weakest of the three Northeast Asian success stories (on industrial policy, at least), while Malaysia was grouped with Southeast Asian failures. The former seems to have caught up with its peer group. Malaysia, taking a more open, neoliberal approach to FDI, is by no means rich, but it’s roughly now on par with Poland. Did either of these surprise you?
Taiwan did not take the classic industrial policy route, but as a small country, it just needed to get one scale business right, which it did with semiconductors. TSMC turned out to be probably the best company in the whole of Asia and that sets the tone for the most important sector in the Taiwanese economy. Malaysia failed in most areas of industrial policy for indigenous firms but really applied itself to making the country a good home for FDI-based manufacturing, especially electronics. When you compliment Malaysia for its GDP per capita, however, you have to remember they have a lot of oil and gas.
I understand you’re writing a book on African development now. Are there any recent cases you’ve seen there or elsewhere of countries doing industrial policy the right way?
Africa has one tiny country, the island of Mauritius, that ran industrial policy very effectively and became prosperous. Over the past couple of decades, the second most populous African state—Ethiopia—copied agricultural policy from East Asia and moved on to industrial policy. The results were extremely gratifying until a recent civil war. We must wait to see if Ethiopia gets back on track. I suspect it will because the foundations that have been laid are robust. More generally, however, Africa is a very different story to East Asia for reasons that will be explained in [my forthcoming] book. Perhaps the biggest difference is demographics.
