How Economic Development Happens - Synthesis of Competition and Command

I wondered about economic development since I was a kid, but the answers in economics were always unsatisfying. 18 year old me went to economics class to discover the mysteries of the world but was confronted with the Solow growth model. This happened repeatedly, until I realized I wouldn’t learn anything about unions, macroeconomics or monetary policy in an economics class. About a year ago I read a book called How Asia Works by Joe Studwell and I’m back trying to discover the mysteries of the economy.

It synthesized two conflicting views I’ve held about development, that free market is useful to force competition in industries, but also that many nations get stuck exporting commodities or low value added manufacturing using the free market. This book explains how Japan, Korea, Taiwan, and China managed to sustain such high growth rates for so many years, rising from broken states after world war 2 to developed nations today.

Small Scale Farming and Land Redistribution

Extensive land redistribution enables small scale farming, which is both more productive than large scale farming, and reduces income inequality. This was a surprise to me, I had always assumed that centralized farming would be more productive, but this isn’t the case. Small scale farmers can better tend to crops, increasing the amount of food produced per square mile. While the country is still poor, maximizing food production is the most effective way to raise standards of living enough to get to the next stage of development.

Manufacturing: High Value Added and Export Discipline

With the profits of the agriculture sector, the economy should modernize by investing in manufacturing.

The allure of luxury condos and casinos is too much for the capitalist, the state must encourage growth in more socially beneficial industries to promote economic development. Rather than let the free market guide development, governments should force people to invest in riskier industries, like automotive manufacturing, and force companies to export to the world market. Without the pressure to export, manufactures may not create products that are globally competitive, so growth will be limited.

These policies need a relatively strong government (dictatorship), and this was the case in Japan, Korea, and Taiwan. Afterwards, the economy can be somewhat opened up politically and economically, with less trade barriers needed to protect the new industry, and less political coercion needed to force development.

China took a different route than the others, with a first attempt ruined from excess central control under Mao. Later China went for round 2, and using the directed capitalist policies of other countries, achieved the massive development we see today. Instead of increased political freedom Xi chose another approach, deciding that nationalism was better for the Chinese people.

Takeaway

Competition (capitalism) is necessary to promote development, but frequently it can be ineffective when capitalists go for gain short run returns, rather than investing in industries that will benefit the nation in the long run. Government policies can be used to direct the economy at a high level, but the profit motive must be used to ensure competitiveness. In addition, redistribution can increase productivity if used effectively, as was the case with land redistribution.