The Secret Asian Blueprint
How did Asia go from rice to riches?
Many western investors have totally misunderstood Asia. Even those within the area have difficulty grasping regional differences and nuances. Western ways of investing that can make billions on Wall Street often simply don't work here.
Economies in Asia have grown differently from the rest of the world, and so have their stock markets. A new world order is being created and must be taken into account in any successful investment activity here.
Whether you're an individual investor, financial services expert or government policy-maker, it’s vital to understand how Asian economies are built; how they went from poverty to prosperity so quickly. At One Road Research we have developed a proprietary model to explain the process. We call this the Asian Capital Development Model (ACD).
What our ACD model will quickly show you is that a free market system isn't the only way to stimulate growth. Northeast Asia's unprecedented rise is a testament to this.
What Is The Model And Where Did It Come From?
Technologies that originated in East Asia such as the compass, gunpowder and printing were instrumental to Europe’s success. But ideas from the West were equally vital to Northeast Asia’s spectacular economic growth.
One of the most important of these ideas is Developmentalism, which has its roots in Germany. The idea goes that the government should guide how investment goes into the public and private sectors. This can then stimulate the growth of new or strategic industries to make sure an economy becomes sustainably developed.
German manufacturing policies that focused on protecting and developing domestic industries were popular with top Japanese lecturers and bureaucrats. In Asia, Japan was the first country to study and adopt these ideas.
The Developmental Process
Before industrializing, agriculture is the backbone of every economy. A government’s agricultural policies determine whether or not economies can become manufacturing powerhouses.
Once a strong manufacturing sector is established, then, slowly, an economy can begin to move into services. This is the model: agriculture (alongside reform in land and banking policies) – manufacturing (with a focus on education) – services.
The graph below tracks China’s GDP from 1967 to 2015 by sector. In a timely shift, the Chinese government moved a majority of its investment from agriculture into the manufacturing sector. More recently, investment again shifted, from the manufacturing to the service sector. The service sector accounts for over half of China’s GDP today.
Private Property Is The Key
Before a country’s shift to manufacturing, a robust agricultural sector is required.
Small scale, household farming made the most sense in Northeast Asia. Indeed, in poor countries, it is the only employment option. This type of farming utilizes the available low skilled labor force, while large-scale farming generated fewer jobs and a lower agricultural output.
Massive land reform occurred across Asia, as land ownership was transferred from the elite to peasants. Land redistribution was key in growing the economy and transforming farmers into a ‘consumer’ class hungry for manufactured goods.
After the Second World War in Japan, the government reduced maximum land ownership to no more than three, 3-hectare farms. Wealthy landlords were required to turn in their excess land to the government, which was then redistributed among poorer farmers.
This helped to reduce economic inequality and also allowed for growth in rural output and consumption to reach above pre-war levels. Food output increased by half, as the larger yields led to surpluses. The government, naturally, was able to tax these surpluses. The revenue generated was then reinvested into infrastructure such as roads and warehouses.
Farmers began earning small profits and were able to consume manufactured goods. They were also able to invest in new businesses by using their land as collateral.
Supporting Certain Industries
Though many believe that competition through free trade is the only factor in generating productivity, this isn’t true. No country has become wealthy through it alone in a strict sense.
Northeast Asian governments encouraged development through policies that protected, invested in and supported the growing domestic industries.
Protecting local businesses creates an environment in which countries can become more competitive. One way in which they compete is by imitating and improving foreign technologies and eventually preparing them for export to the global market.
For example, in 1980, the Chinese government made a deal with American power company Westinghouse. Westinghouse shared the necessary technology to start producing basic turbines in China. The government protected the industry by keeping trade barriers up and foreign competition out. Today, the three biggest thermal turbine producers in the world are Chinese companies.
Northeast Asian governments forced fierce domestic competition. Early on, they protected local companies from international threats. Entrepreneurship was encouraged through policies and funding.
In China, during the 1990s, companies that were unproductive were let go and the ones that did well received subsidies. These companies were supported and given incentives to export in preparation for foreign competition in the future.
These tactics have paid off. China overtook the U.S. as the world's biggest manufacturer in 2011, and it is set to join the other powerhouses of Japan and South Korea as a leader in hi-tech manufacturing.
Stay tuned to One Road Research to keep up to date on how this fast-paced region cements its place in the future of the global economy.