How to sustain our 7-percent growth rate
Teddyboy Locsin raved about the book and urged me to read it asap. When he told me what the key message was, and then gave me the gist of the author’s pithy remarks about the Philippines, I went home and did as I was told. The book is “How Asia Works,” subtitled “Success and Failure in the World’s Most Dynamic Region.” It came out sometime in the end of March, and its author is Joe Studwell, an old Asia hand, journalist (Economist, Economic Intelligence Unit, Financial Times, Asian Wall Street Journal, Far Eastern Economic Review), broadcaster and author of several other highly acclaimed books, who is currently pursuing a mid-career PhD in Cambridge.
And what is Studwell’s message? Like all effective communicators, he says it both in the introduction and in the epilogue of his work, although using different words. And that is that based on the Asian experience, there are three critical interventions that governments can use to speed up economic development: restructuring agriculture into highly intensive household farming, directing investment and entrepreneurs into export-oriented manufacturing, and intervening in the financial sector to support the two sectors. A recipe for success that is “as simple as one-two-three.”
Studwell cites Japan, Taiwan, South Korea and China as countries that have employed these interventions, resulting in “the quickest progressions from poverty to wealth that the world has seen.” These countries radically restructured agriculture (compulsory land reform) after World War II, focused their modernization efforts on manufacturing, and made sure that the financial system accommodated this development strategy. Other countries, like Malaysia, Thailand, Indonesia and the Philippines, did not follow the recipe (and also accepted bad advice from rich countries), and while these countries (excluding the Philippines—or until very recently, anyway) may have exhibited high growth for relatively long periods, the progress was not sustainable.
What is especially intriguing about Studwell’s book is his justification of the three interventions. With respect to land reform, he points to the studies of Klaus Deininger, whose research findings show that “only one significant developing country has managed a long-term growth rate of over 2.5 percent with a very unequal distribution of land. That country is Brazil, the false prophet of fast growth which collapsed in a debt crisis in the 1980s in large part because of its failure to increase agricultural output.” Deininger’s two big conclusions, he continues, are that “land inequality leads to low long-term growth,” and that “low growth reduces income for the poor but not for the rich.”
In the process of justifying his arguments, Studwell earns his reputation as a myth-buster. For example, he cites data showing that following the shift to small-scale agriculture in his success countries, gross output of foodstuffs increased by somewhere between half (in Japan) and three-quarters (Taiwan). He also shows that sugar and banana yields in Taiwan from these home farms far exceeded plantation yields (which is what the Food and Agricultural Organization also has pointed out, but the data are ignored by large landholders and their supporters in the Philippines).
His descriptions of the land reform experiences of Japan, Taiwan, Korea and China are fascinating and instructional (I did not know that the programs of the first three were in major part influenced by the fear of communism, and there was resistance, too, from the elites, but this was overcome), and he emphasizes that the land redistribution was accompanied by massive credit, infrastructure and extension programs. And then he follows up with a second set of stories that begins with Negros Occidental and broadens to the entire Philippines, providing a brief history of the land reform attempts starting from the US colonial government in 1904 (165,000 hectares of religious estates—unsuccessful because the Americans insisted on a full market price, and of course the tenants had no money; most of the land was bought by businessmen).
Studwell has this to say: “Nowhere in Asia has produced more plans for land reform than the Philippines. But equally, no ruling elite in Asia has come up with as many ways to avoid implementing genuine land reform as the Filipino one.” I have to agree.
And this is how he describes the Philippines’ Comprehensive Agrarian Reform Law: “The result was a law that was long winded, unduly complex, insufficiently radical, with many loopholes and with an absurdly extended timetable for implementation.” He then proceeds to go into the specifics of implementation failures—from the very large retention limits (five hectares + three hectares for every owner’s child over 15, compared to a maximum of three hectares in Japan and Taiwan), to the fact that the compulsory acquisition of land as of 2006 covered only 5 percent of the total “reformed” area, to the stock distribution option a la Luisita.
It is an indictment of the law and its implementation. As Studwell remarks, “In the Philippines, man’s capacity to seize failure from the jaws of opportunity is writ large.” Again, one cannot help but agree.
But why bring it up now? Well, because the message seems clear that if we want to make sure that our 7-percent growth rate can be sustained, we better focus on agriculture and land reform. Otherwise, we will end up with a Third World state, with poverty rates to match.