Lessons from the East Asian Economic Miracle

Origins: How Did the Boom Start?

I’d like to begin by rehabilitating another long-since discredited economist: you can’t really understand the Miracle until you learn to think like a Malthusian. Malthus’s original thesis was that since population grows exponentially and food production grows linearly (with some deviations), we’ll always tend to grow the population to the point that maximum food output can just barely support it, meaning that a single bad harvest leads to famine.

  1. Invest the trade surplus from food into light industry, i.e. textiles — this is a business where 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 (at first: steel and basic chemicals; eventually heavy machinery, cars, specialty chemicals, electronics).
  3. Relentlessly push your heavy industry to export; sell products that can compete globally, even if you’re taxing your population to subsidize your exporters.
  4. On that note: use aggressive financial repression; force people to save a high proportion of their marginal product (i.e. standards of living can rise, but should rise a lot less than GDP); direct that money into industries with economies of scale.
  5. Once you are the scale leader in a scale-driven industry, you can relax. But only a little! Now you have to worry about somebody else copying you. Japan’s world-beating steel industry got copied by South Korea, and their car industry faced competition there, too; Japan also lost their lead in electronics to China.

Case Study: Japan

Postwar Japan was an economic basketcase. The country had lost over two million lives, and American bombings had wrecked their industrial capacity. Even before that, Japan’s militarist government had warped the country’s economic development through a focus on arming for conquest.

  1. Japanese legislators could introduce their own bills, but these tended to get voted down. MITI could also suggest bills, which tended to get passed with near-unanimity. That Japanese Diet in the postwar period looked less like the US Congress than it did the Supreme Soviet of the Soviet Union. Once the legislators saw the bill, it was as good as law. In MITI and the Japanese Miracle, Chalmers Johnson argues that this was an efficient system because the legislators “reigned” (they were the public face of government, and enjoyed the electoral consequences of policy decisions) while bureaucrats ruled (i.e. they made the actual decisions).
  2. A study of the family trees of prominent Japanese people showed that high-level MITI employees tended to have more socially-prominent fathers-in-law than fathers. MITI, in other words, was where ambitious and upwardly-mobile young men wanted to work. Why bother getting rich when you can get powerful instead?
  3. There are no fewer than three novels about Shigeru Sahashi, a powerful MITI vice-minister. One of them got turned into a TV show. Imagine The West Wing, but the hero works at the Department of Commerce.
  1. Bureaucrats would pressure banks to make loans and pressure companies to add capacity.
  2. They’d subsidize companies based on export volume — in other words, a company didn’t have to be profitable, but it did have to compete.
  3. As companies scaled up, the subsidies dialed down. Sometimes this was due to international pressure (although they were adept at dodging that; when Japan finally stopped directly subsidizing exports, they started allowing exporters to depreciate equipment faster, which, for a profitable company, is economically equivalent to a direct subsidy).
  4. Once the industry reached viable scale, they’d rationalize capacity — merge competing firms, shut down inefficient plants — and move on to the next.

Case Study: South Korea

South Korea’s economic growth is basically a gritty reboot of Japan’s story. Japan was a technocracy disguised as a democracy; South Korea was a poorly-run democracy until a major general decided that the votes that mattered were from the people with guns.

Would you buy millions and millions of new cars from this man?
  • Startups often sell to other startups at first. Salesforce did this in a big way; Y Combinator is a sort of Zaibatsu that gives startups instant access to a few hundred good customers.
  • Below-market salaries and big options packages make employees hard to poach, mimicking the effects that lifetime employment and government-sanctioned monopolies have on employee incentives.
  • Small group of people has no politics. Ten people working on a project is pretty apolitical. Fifty who come from the same extended social network and also share the same crazy mission will also be fairly apolitical.
  • There’s no immediate need to turn a profit, but intense need to show growth. A startup that gets valued at 30x sales in one round and 5x sales at IPO has a similar cadence of external cashflows to a steel company that starts out getting 50% of its revenues from export subsidies and matures with 95% of its revenues from real customers.

Inflation: When It’s Not So Bad

The IMF is notorious for telling countries not to let inflation get out of control, and developing markets are equally notorious for bouts of severe inflation. Korea went through years of high-CPI growth, Japan had extreme inflation early in its development, and of course other developing markets to this day go through cycles of elevated inflation.

  1. Population growth driven by agricultural reform, which helped them escape the Malthusian trap and expanded family sizes (South Korea’s population grew by 2–3% per year throughout the 60s).
  2. A set of cultural norms that strongly encouraged young people to support their parents.

Corruption: Also Not So Bad

Samuel Huntington has a very illuminating line about corruption:

IP Piracy: Great Artists Steal

One good business model is to spend a lot of money upfront to produce some fantastic new technology, and then sell a unique and high-margin product based on it.

Financial Repression

Successful industrializers use a broad array of tactics to raise the savings and investment rate in their countries.

Banks Over Bonds

James Carville liked to tell a joke: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” Markets are great at allocating resources, but they’re often quite reactive. Carville was right about that: if bond investors are mad, you’ll know about it. As a result, any business or country that relies on capital markets for funding faces immediate consequences if it doesn’t follow those markets’ conventional wisdom.

Policy Implications for the US

As a capitalist, I believe everyone has a right to try to get rich. As an American, I welcome their efforts to do so, at the expense of any country but one.

Sources

  • I started with Ha-Joon Chang’s Bad Samaritans, which is a great place to start if you’re a fan of free trade and love to argue. Chang’s book is mixed; there’s some good analysis, a little bit of “I got mine,” especially with respect to industrial espionage, and a couple dubious statistics.[10] But for an overview of the free trade skeptic’s case, it can’t be beat.
  • A less partisan but more persuasive work is Joe Studwell’s How Asia Works. This one’s a masterpiece: in-depth profiles of both successes (South Korea) and failures (Malaysia), full of great lessons. My case studies draw heavily from this book. One of my favorite details, from a chapter on how a corrupt democratic process stymied the Philippines: they once had an election in which Marcos spent so much money buying votes that it literally triggered a balance of payments crisis.
  • The Park Chung-Hee Era: I came away from this book with a lot more respect for Park, who was clearly one of the great statesmen of the twentieth century — a century that, considering the challenges it presented, was sadly lacking in greatness and statesmen.
  • MITI and the Japanese Miracle. Like no other book I’ve read. It’s like Carlyle, but instead of the Great Man theory of history it’s the Great Bureaucracy theory.
  • Alexander Hamilton’s Report on Manufactures. Sadly, there is not a hip-hop version available (“You say you fear a tariff/But the Brit is who you’ll scare if/You raise your nation’s output/and they learn too late what’s afoot.”)
  • Friedrich List’s The National System of Political Economy. An economist who set out to refute Adam Smith. Prussia implemented this, the Meiji government in Japan cribbed from it, and Park Chung-Hee cribbed from them. He couldn’t have known that the ultimate result of his work was Volkswagen and BMW losing market share to Toyota, Honda, and Hyundai.
  • Clashing Over Commerce is a wonderful history of trade policy. As is traditional in US history, there was a lively intellectual debate over the proper approach to trade policy, which had nothing whatsoever to do with how Congress ultimately behaved. In industrial policy terms, academia and the media manufactured soundbites, which were a low-margin, easily-copied product in which it’s hard to get a durable competitive advantage.

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I write about technology (more logos than techne) and economics. Newsletter: https://diff.substack.com/

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Byrne Hobart

Byrne Hobart

I write about technology (more logos than techne) and economics. Newsletter: https://diff.substack.com/