Politicians are given to hyperbole. Nothing will do except to talk loudly about building the nation of the future or implementing e-governments.
They will talk about securing manufacturing jobs and bringing in foreign direct investments. They usually do not talk about agriculture and when they do talk about it, it is the large scale agriculture operated by big landowners.
What they avoid talking about is the small farmers; farming and selling their produce from their own land. In How Asia Works author Joe Studwell explains that about 70% of poor nations are farm labour.
Policy makers currently focus on bringing in manufacturers to direct these farm labours to factory work or incentivising large landowners to farm using these labourers.
The issue with the first method is that it causes massive domestic migration to cities that are not equipped to deal with the influx of new residents.
The issue with the second is that the yield from large landowner operated farms are bad compared to if the small farmers are to farm a modest plot of land. Studwell argues that if governments are to put in place policies that allow small farmers to own and profit from their own plot of land, their countries would be able to generate surpluses.
In the context of South Korea, the government implemented several policies including regulating the sales and transfers of land which allowed land to be preserved as a family asset. This resulted in multiple mixed general farms operated by families which has impacted the yield of Korean agriculture in a significantly positive way.
By drawing on available data on agriculture output Studwell is able to make a strong case that equal land distribution results in much higher yield per hectare.
The country can then rely on its surplus and the resulting savings to build its own domestic manufacturing base.
Once the nation is in its manufacturing phase, the country must practice a form calculative protectionism. It must nurture and protect infant industries until they are ready for global competition while ruthlessly cutting off resources for firms that are unable to succeed in the export market.
This has been practiced in a very successful manner in Japan. In the aftermaths of the war, America made to liberate Japan’s economy through the abolishing of monopolies. However, in order to allow Japan to become more internationally competitive, the policy was not strictly enforced and Japan took full advantage.
For instance, six Japanese firm manufacturing televisions combined to form a monopoly and control the domestic price. They forced the Japanese people to pay much for television while government tariff keep the market inaccessible to foreign producers. With high profit margin and certain demand at home-ground, the firms turned to exports.
By using below-cost export, they are able to cut their competitors out of business. This built Japan into the electronic powerhouse position that it sustained for several years after.
In order, for domestic manufacturing to be successful the bankers must be on a short-leash. Governments have to put in place policies that focusses on long-term growth of the economy, not the short-term wallets on the financiers.
Ministry of International Trade and Industries (MITI) and Ministry of Finance in Japan took a heavy handed approach to direct the banks for development purposes.
It controlled capital inflow and outflow stringently. It also rationed and guide the flow of capital to industries that were adopting new technologies or were key to increasing productivity and exports.
Policy makers of the current developing nations must look at these past examples and understand that trying to rely on FDIs excessively without preparing their citizens first is like building a mansion on quicksand.
National wealth cannot be built by relying on private sector’s foreign funds. At least, not one that can be sustained.
