‘Home-Grown Economics: The Asian Example

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GUEST COLUMNIST: Sam Amadi

President Buhari while inaugurating the Economic Advisory Council (ECA) a couple of weeks ago, charged them to focus on developing what he called ‘home-grown economic policies’ for Nigeria. He repeated this charge while speaking at the Nigerian Economic Summit a few days after. This is a wise and urgent charge. The problem is: do we understand what ‘home-grown economics’ looks like? Or better still, do we have the pedigree to go this contrarian policy track? Helpfully, we can look towards China and other Asian countries for example of how focused and smart leaders have transformed economies under more difficult contexts than Nigeria finds herself. Asian is not a uniform success story. There are massive successes and major failures. We need to know what worked and what did not work in Asia.

The Trinity of Export-oriented Agriculture, Manufacturing and development Financing:
First, the success of China and the rest is not about geographic determinism. Some scholars have pointed out that Africa’s parlous economic story is because it is a malaria infested tropic. Of course, a lot can be said about the impact of environment in economic development. But the impact of environment can be superseded. The fact that no Africa countries has superseded that impact is not a proof of environmental determinism, but rather a proof that African economic policymakers have made notoriously bad choices, especially at the beginning of independence. There are not many significant geographical variations between China, South Korea and Taiwan on one hand and Malaysia, Thailand, Vietnam and Hong Kong on the other hand. They share similar past of poor, rural and agrarian economies with massive social injustice in terms of land barons who excruciatingly pauperized tenants and peasants who worked on their land. Each of them tried some form of agrarian reform. But the successful North East Asian countries were the ones that included redistribution of land and fiscal and policy support to ensure higher productivity and increased rural prosperity for former tenants.

Second, redistribution is critical to economic development in rural and poor economies. Nigeria cannot become a real economic powerhouse unless it unleashes the potentials of its rural communities. Here, the divergent results from Asia tell a good story. The unsuccessful South Asian countries like Thailand pretended to execute a land reform that reinforced rural inequality and reduced farm yield. Their agrarian policy did not boost rural economy and therefore cut off the oxygen for industrialization, which is enhanced domestic consumption. Whereas, North East Asian countries provided credits to poor farm owners in order to stave off repossession by the land grabbers, the unsuccessful South Asian countries allowed, and in some cases reinforced cultural, social and economic institutions of rural inequality.

It is therefore no magic that in North East Asia we saw high economic growth resulting in lower inequality. In South East Asia, lower economic growth produced more inequality. In Latin America, even lower economic growth produced even higher inequality. Contrast with the United States which made its transition to industrial economy in the late 19th century with sets of progressive policies by Alexander Hamilton, the Secretary of Treasure, including land purchase and distribution to poor families. These policies resulted in equitable economic development. This is another proof that economic equality is good for economic growth.

Nigeria’s agro-industrial policy should focus on rural industrialization, or at least pay enough attention to agro reform in the rural communities. This is supported by the Asian experience. It is policy choice that made the difference in Asia, not geography, and not political context. All these countries passed through hash and predatory colonialism. But each of those that succeeded as industrial economies were hardnosed in selecting the right economic policies that reformed rural agriculture, ruthlessly promoted industrialization and focused financial transaction towards promoting export-oriented agriculture and manufacturing. Notably, they refused to create a financial market that bubbled wealth into the pockets of entrepreneurs but left manufacturing plants without access to finance. The unsuccessful one promoted few privately-owned plantations in the name of agrarian reform, promoted merchandise and assembling plants instead of manufacturing plants and turned their banks into financiers of skyscrapers and shopping malls that created billionaires but impoverished the country.

Beware of Ideology Masked as Economics
If Nigeria is to succeed in home-grown economic policymaking it must wisely manage economic ideologies. China and the successful Asians took note of ideology and avoided the pitfalls. Latin American and African countries closed their eyes to ideology and drowned in the pool of ideological waters. Economic policymaking has moved in ideological circles. At each epoch, especially with major social and political upheavals, economics gets trapped in an ideology which is pushed around the world like a new religion. In the world of ideological rigidity, it seems like those who succeed are contrarians, those who act contrary to precepts of the new religion.

Recognizing the role of ideology in economic policymaking, in 2003, when President Obasanjo appointed the then World Bank Vice President, Ngozi Okonjo-Iweala, the Minister of Finance, I wrote an opinion piece titled ‘Who Should Manage the Nigerian Economy”. My contention in that piece was that Nigeria needed to have a former leftist economist manage its economy. Such a person who has recognized the limits of Marxism and now understands the merits of the market as a mechanism for allocation would be a better manager of the economy than a doctrinaire free marketer who is trapped in market fundamentalism. This had nothing to do with the bona fides of Dr. Okonjo-Iweala but rather a recognition of the ideological landscape of economic policymaking. I had argued in two books on privatization and the NEEDS policy how the outbreak of market fundamentalism in the form of economic neoliberalism, later to be nicknamed ‘Washington Consensus”, constrained wise economic policymaking in the third world. We were forced to mimic what New York opinionated columnist, Thomas Friedman, called ‘the golden straitjacket’.

Multilateral financial institutions played key role in the dictatorship of no-alternatives. The World Bank’s role in economic reform in developing countries like Nigeria has been underwritten largely by the ideology of less government that took fundamentalist meanings in the Reagan-Thatcher era. During this era the cold war between capitalist west and communist west was ending in the west’s favor. Neo-liberal theorists interpreted the eventual collapse of communism as a triumph of the sets of market practices,-core values and ideology of the American Business Model (ABM) and institutions of liberal democracy -and the convergence of the world to a set of best institutions that correlates with the templates of the free market economy. This hasty and tendentious interpretation foisted on development planners in the periphery South a fait accompli on the available options for development. As Hernando Desoto wistfully puts it in his classic: Dead Capital, “there is one game in town”, and that game is mimicking the market institutions in the prosperous west. But the tragedy is that the recommended menu for these developing countries often bears little resemblance to the set of policies that guided countries of the west to its prosperity or the policies they are implementing to sustain their prosperity. Cambridge economist, Ha-Joon Chang, has assembled evidence to prove that the Now Developed Countries of the west embarked upon the opposite of the ‘free market’ policies which they prescribe for developing countries. Their periods of growth were marked by infant industry protection, expansionary public expenditure, and massive government intervention to correct market failures. But they asked those aspiring to development to do the opposite.

At the heart of neoliberal economics is an ideological view about the role of state. The philosopher-king of neoliberalism, Frederick Hayek, an Austrian who fled communist dictatorship with a beef against socialism, wrote a magisterial book, “Road to Serfdom” which branded government intervention in economic activities as ‘evil’ and glorified individualism. Professor Milton Friedman became cheerleader of the movement that grew out of ‘The Road to Serfdom”. Friedman’s book, ‘Capitalism and Freedom’, became the holy grail of the Chicago School that promoted the concept of the minimalist state. In Latin America, Chicago boys ran riot with a brand of ideological economics that built on the Hayekian distrust of the government and Friedman’s theory of opportunistic intervention. Friedman has counseled his disciples to wait for the auspicious moment of social upheaval to remake the society. The Chicago boys saw that opportunity in the economic distress of the 80s when trade deficits and commodity price crash indebted developing countries to both London and Paris clubs. To address the debt crisis, neoliberals urged countries toward deflationary economics with reduced wages, removal of subsidies and liberalization of domestic and international factor and product markets and the diminution of the public sector.

Neoliberalism succeeded largely because it cleverly masked its ideological mission. It passed off its ideological prescriptions as natural truths. Neoliberalism deplored socialism and pretended not to be an ideology. Economists like Adelman has wondered why their colleagues did not see through the error of neoliberalism. There are obvious theoretical shortcomings in neoliberal economics, yet it was religiously prescribed. The reason is that an ideology was promoted as a science by its missionaries. The unwitting swallowed everything. Latin American and African policymakers swallowed the ideology of ‘government is evil and should get out of the way’. China and the rest rejected that doctrine and accept the pragmatic idea of prudent state planning forcefully championed by Fredrick List and the German Historical School. Today, China and the rest are smiling, and we are mourning.

Recognize Ideology but Manage Pragmatically:
East Asian economies succeeded not because they embraced the whole doctrine of free market. They succeeded because they avoided ideology and embraced pragmatism. China has a long history of false steps, even up to the period of Mao Zedong and the cultural revolution. The Great Leap Forward set China back, especially with the collectivization of agriculture, resulting in mass death and failed industrialization. Deng Xiaoping changed the game. He initiated a gradual, programmatic and sensible reform that started with returning the land to dispossessed peasants with guaranteed tenure to encourage irrigation, higher seedlings and extension services. Xiaoping tracked the benefit of increased productivity in agriculture into gradual industrialization. At a point he started to open China to western technology and capital, but in a controlled and strategic manner using special economic zones.

China abhorred the rigid ideologies of communism and the laisse faire theory of neoliberalism and embraced pragmatism. This approach is exemplified by the famous saying of Deng Xiaoping that it does not matter whether my cat is red or white if it catches rat. China followed the example of Japan and South Korea where pragmatic leaders like General Park wisely implemented transformative reform of agriculture and deliberate but systematic protection and nurturing of infant industry to transition their countries to industrial economies. In these countries, pragmatic leaders enhanced efficiency not by surrendering to the free trade, but rather using export discipline to improve productivity. The secret of the success of the East Asian countries is the pragmatic insight that what will ensure industrialization is to protect and nurture infant industry through export discipline. Export promotion worked where import substitution failed in Africa.

China and the rest recognized the pitfall of crony capitalism. When they raise tariff to protect infant industries, they forced those industries to perform according to export benchmarks. Those who failed lost the fiscal and policy support. By so doing they chose winners and losses, not through political patronage, but through the discipline of international trade. This is the model of a development state; a government, as Stephen Cohen and J Bradford DeLong in their book, Concrete Economics: The Hamilton Approach to Economic Growth and Policy, “that signaled the direction, cleared the way, set up the path, and – when needed- provided the means”
Transformative Leadership Matters:

Home-grown economics thrives on effective leadership. The divergence between China and the successful East Asian country on one hand and African countries on another hand may be the quality of leadership during their transitions. We can even notice the difference that leadership makes to development in the varying outcomes in different countries of East Asian. South Korea made it. Malaysia has not. Malaysia attempted some of the policies that South Korea, China and Japan practiced. Malaysia tried to do agricultural reform. It had ambition to be an industrial power and boosts a financial high street. What went wrong? Well. selection of policies and failure to execute properly. Unlike General Park, Malaysian Prime Minister, Mahatir, did not undertake the sort of agrarian reform that freed rural households from economic misery and improved farm yield. In the place of household farming Malaysia build one-man plantations. Most of the political elites were landlords of these plantation.

On manufacturing, Malaysia did not impose the sort of export discipline that South Korea imposed on its industrialists. The lack of export discipline encouraged cronyism and ensured the thriving of assembling plants rather than manufacturing plants. Malaysia allowed politically connected persons to own banks and use them to get rich. As they say, to steal a country own a bank. Capitalist used the banks to finance skyscrapers and shopping malls whereas banks in South Korea financed manufacturing. The result is that few Malaysians became billionaires and the country lagged in industrialization whereas in South Korea, few Koreans were millionaires while they country advanced as an industrial economy.

Mahathir is a headmaster’s son whilst General Park was the son of a peasant. Mahathir admired the industrialization plans and processes in South Korea. But he lacked the focus and discipline to replicate the success story. He lost sight of the process and got caught up in the anti-neoliberal rhetoric. He also got distracted by the ethnic politics of Malaysia and instead of building meritocracy he pandered too much to affirmative action for the Malays.

The pragmatism of the successful East Asian economies was a product of both the pedigree, training and temperament of the leaders who happened on the scene after their independence. These leaders, particularly those of South Korea and China were well informed about the conditions of colonialism and the ideological basis of their underdevelopment. They came from the right side of the social divide, namely the peasants (although Deng was a grandchild of a former ruler). They also were patriotic and overwhelmed with a passion for industrial takeoff of their countries. Although they were flawed men, they were all undivided on the mission. They were not prisoners of narrow and sectional interests. One thing was very clear, they forged no strategic business or political interests with foreign or local business class so they could exercise clear-sighted and emphatic direction of the business communities. They never believed that private sector would develop their country. Rather, they believed that the public sector would develop the country using the private sectors. Theirs was entrepreneurial governance, mobilizing and incentivizing for the long-term buck, not the short-term gain.

You Need a Strong State:
Often, I hear people argue that it is the private sector that will develop Nigeria. That seems to be the message of the last NESG summit. This is a joke. The private sector has never developed a country and would not. The private sector is an important partner to be annexed to the wagon of a developmental or entrepreneurial public sector. Businessmen and women will continue to look for opportunity to make money. Wherever they see the opportunity they move in. It is not their job to create public value. The public leaders are responsible to govern the market in a manner that induces businesses to produce public value which trying to make money. This is what the China and the rest of the successful East Asians did.

Today, China’s great wealth is produced by a swath of public firms. This does not prove that public ownership is better than private firms. Rather it destroys the silly assumption that ownership is what matters. No. What matter is how we resolve the principal-agent crisis at the heart of corporate inefficiency. In matter of industrialization, export discipline and competition may be more important than type of corporate ownership.

As focus on imitating China and the rest of the Successful Asians, it is time to review our industrial policy. How much are we protecting local industry? Are there potential winners that we can nurture to global competitiveness through export discipline, R&D investment and fiscal supports? What we have leant from China and the rest of the successful East Asian economic is that the real development process is a process of ‘learning by doing”. Only leaders who secure an environment for quality ‘learning by doing’ will succeed in ushering a successful transition to industrial economy. That is the real meaning of ‘home-grown economics’

• Dr. Sam Amadi, former Chairman of the Nigerian Electricity Regulatory Commission (NERC) teaches at Baze University, Abuja and coordinates The Abuja School of Economy and Regulation