How Asia Works by Joe Studwell is an economic history of Asia, focused particularly on China, Taiwan, Japan, and Korea, that attempts to explain how these economies grew so quickly in the second half of the 20th century. The book is organized by policy area rather than country, with sections focused on land reform, industrial policy, and finance.
One of the book’s main lessons is that one should be skeptical, if in a nuanced way, of neoliberalism and the Washington Consensus. The first two sections defend coercive redistribution of land and (well-designed) tariffs, which are both policies that are at odds with a pro-free market ideology. Nonetheless, even as a mostly pro-free market person, I found this book pretty persuasive. Studwell is generally fair and empirical rather than polemical. One meta-lesson from the book is that policy paradigms (such as neoliberalism) shouldn’t be totalizing — for example, even if you think market liberalization is usually good, there are probably specific cases where the best policy contradicts or at least is in tension with your general worldview.
Land Reform
“Land reform” means redistributing farmland from landlords to their tenants, which leads to more farmers owning their own farms. China, Taiwan, Japan, and Korea all implemented aggressive land reform after WWII, and Studwell credits these reforms with large increases in agricultural productivity and economic growth.
The story for how land reform improves productivity is that farmers who own their land have a greater incentive to make investments in their farms and to use techniques that enable them to grow more crops. Studwell argued that landlords tried to make money by extracting rent (in both senses) from farmers, and charging them high interest rates on loans, rather than by improving yields.
Studwell notes that small-scale, garden-style farming is the most productive way to farm on a per-land basis, because there are many labor-intensive techniques that farmers can use to squeeze more crop yield out of a given plot of land. Since it’s labor-intensive, garden-style farming isn’t worth the time of farmers in developed or even middle-income countries, but it yields enough per hour to be worth it for farmers with very low incomes. Studwell argues that land reform enables and encourages farmers to use these better techniques, and in poor countries where the majority of the population works in agriculture, this makes a big difference to overall growth.
China, Taiwan, Japan, and South Korea all implemented land reform after the end of WWII. In China, land reform was done on communist grounds — the communists led by Mao Zedong sided with the common farmer over landlords, and seized the land (often violently) to redistribute among farmers. Unfortunately, in the 1960s the communists then undermined land reform by replacing small farms with large collective farms that did not incentivize farmers to do garden-style farming. Crop yields then plummeted, and millions of people died from the resulting famines.
Meanwhile, in Japan, Taiwan, and Korea, land reform was an attempt to head off communism by getting farmers invested in the existing system and thus less tempted to join a potential revolution. Pressure from the US was instrumental in all three countries. After WWII, the US and other allies played a heavy role in establishing the new Japanese government, and land reform was one policy reform pushed by the US due to the US’s desire to prevent communism from spreading in Asia.
Overall, crop yields increased by around 50% in these four countries over this period. This led to a large increase in GDP and well-being, and the resulting above-subsistence incomes set the stage for further economic gains from manufacturing and industrialization.
Studwell also discusses land reform attempts in the Philippines and Indonesia, which were much less successful at redistributing land than in China, Taiwan, Japan, or Korea. Crop yields did not increase in these countries by nearly as much, providing something of a natural experiment that suggests that land reform did cause the yield increases observed in the countries that implemented it.
Why does land reform boost productivity?
Studwell’s case for land reform partially depends on misaligned incentives: Landlords don’t just take a large share of the pie, they shrink the pie by failing to improve crop yields. (Obviously, there’s also an equity case for land reform independent of crop productivity). This seemed a little counterintuitive to me at first — isn’t there a way for landlords to increase their land’s crop yields to make higher profits?
Unfortunately, Studwell doesn’t go into too much detail about why land reform works, which I think is the biggest weakness of this section. His explanations are pretty brief — for example, in the introduction to this part of the book, he says the following:
Landlords could make the investments to increase yields, but they make money more easily by exacting the highest possible rents and by usury, which adds to their land holdings when debts cannot be paid and they take over plots that have been pledged as colatteral. A situation arises where ‘the market’ fails to maximise output.
This is about as detailed as this part of the book gets as far as analyzing incentives. Studwell mostly talks about specific case studies, discussing the political history that enabled land reform and reform’s results. But given that this is a book about policy, I wish he spent more time convincing me that those productivity gains can actually be attributed to land reform and that land reform is uniquely key to achieving those gains.
I think that those gains are a result of tenant farmers’ liquidity constraints. When tenants grow more crops, landlords don’t capture all of the gains, since their money comes from the rent they charge, not directly from yields. Meanwhile, tenant farmers have severe liquidity constraints. Landless farmers in poor countries are barely above subsistence level at best. If their rent is equal to 20% of their crop yields, they have so little money left that they cannot afford to make useful investments. Maybe if rent were cut to 10% of crop farmers’ incomes, that would give farmers the resources to make those investments and improve their crop yields. But Studwell claims that land reform only increases yields by 50% overall, so the landlord loses 25% of their rental income if they do this. (I think in reality landlords usually charged a flat rent, not a percentage of the tenant’s income. But you can think of landlords charging a flat amount that happens to be equal to 20% or 10% of crop yields).
If liquidity is the limiting factor to improving yields, then land reform isn’t about land, it’s just about redistribution in general, and you could achieve the same goal by giving farmers cash. So it seems plausible that the benefits of land reform are not about land ownership per se but just a general case of economic inequality preventing the poor from making fruitful investments in themselves and their businesses (which you can see by, for example, the high returns on investment from unconditional cash transfer programs like GiveDirectly). In particular, this has implications for land reform implementation. Some land reform programs included bans or restrictions on the newly-landowning farmers selling their land and becoming tenants again. These provisions were probably meant to prevent former landowners from coercively or predatorily reclaiming their land, but absent those considerations, it’s not clear that giving farmers the fair market value of the land in cash is such a bad idea.
Additionally, I’d be interested in knowing if there are alternative tenancy agreements that can solve or mitigate this incentive problem, and if they don’t exist, why those alternatives don’t work. For example, why can’t landlords run their farms as a business and employ farmers instead of charging farmers rent? That’s how farms (and most businesses) in developed economies work, as far as I know. The vast majority of people are not self-employed business owners, but instead get paid by the owners of capital to use that capital to produce things. And the capital owners generally seem well-incentivized make investments to improve their capital and increase their employees’ productivity. If such an arrangement is feasible, the landlord makes more money as crop yields increase. The land owners are incentivized to maximize yields because farmers earn wages rather than growing their own crops and paying rent, so the landlord captures a greater share of marginal productivity gains from investment.
This is obviously worse than land reform from an equality standpoint (and accordingly I don’t actually endorse this as an alternative to land reform even if it worked), but the gains to productivity perhaps could still happen, the country’s GDP would still increase, and food prices would still fall, allowing a greater portion of the population to urbanize and continue the cycle of economic growth.
There must be a good reason that large commercial farming didn’t happen in developing Asia — maybe because the management overhead of making sure the farmer employees are working productively despite not getting to keep the crops they grow would be too expensive. In fact, this seems somewhat similar to the (very unsuccessful) collective farms in Maoist China, except with the existence of a profit motive for the person who owns the collective. I expect this would outperform the Chinese collectives, but maybe the labor-intensive “gardening” approach to agriculture just isn’t suitable for an employee-employer relationship.