May 11, 2024 • 7 min read • Market News



Had Japan or South Korea followed the financial advice of its Western, developed newfound allies in the post World War II era, they too may be in the same economic distress as the Philippines today. How did some Asian countries prosper in the 20th century, while others are on the brink of failure?


In the early 1950’s, after World War II, Asia was in the process of restructuring for the “brave new world”. Western countries were looked at as global leaders in economic policy, as the West held the bulk of the world’s wealth. Whether by request or by force, Western allies provided advice to Asian countries on how to structure governance. The West, based on their own success with the following, recommended:


  • Free-market trade
  • Rapid liberalization of trade and markets
  • Deregulation
  • Privatization


The West relied on the above pillars, and felt this was the only solution to a prosperous economy. For the most part, this method proved ineffective for much of Eastern Asia. From a top-down perspective, most Eastern Asian countries faced the following problems: 


  • High population density
  • Limited natural resources
  • Lesser sophisticated population


While some countries, such as the Philippines, Indonesia, and Thailand followed Western advice, Japan, South Korea, and Taiwan walked to the beat of their own drum. The strategy for Japan, South Korea, and Taiwan was simple: focus on land reform, manufacturing, and financial control. 



Land Reform


The first ”stage” for a poor country with limited natural resources is to maximize output from agriculture while making use of all available labor. Farming allows for the most immediate opportunity to increase economic output. Laissez-Faire policies, unfortunately (for reasons explained in this article) did not work at the onset for many of these Eastern Asian countries. 


In the pre-industrial era, large-scale “free-market” farming quickly led to a decrease in crop yields. As populations rise, so does the demand for land and agriculture. As demand sharply increases with stagnant supply, landlords benefit from leasing out the land at increasing rental rates. Moreover, landlords become the “bank” for tenants — lending at high rates and using any tenant-owned land as collateral. Eventually, stifling margins from high rents and higher lender interest rates force tenants into a vicious survival cycle. Instead of making investments in improving irrigation or buying fertilizer, tenants are forced to stay the course of survival — making minimal investments to increase crop yield. While landlords could make these investments, they have very little incentive to do so. Instead, landlords focus on more land acquisitions. By offering their tenants debt at higher rates with land as collateral, landlords take over tenant land when debts are not repaid. The landlord then leases their newly acquired land at a high rental rate. This cycle eventually leads to a failing market. 


Some countries, such as China, Japan, Taiwan, and South Korea, instituted new land distribution laws and structured a different kind of agricultural market. Instead of a free-market policy, these Eastern Asian countries divided land on an equal basis among the farming population. Supported by government-backed credit and marketing institutions, these countries created a new type of market. A sort of large-scale gardening was introduced where families of five to seven people tended plots of approximately one hectare (a unit of area in the metric system equal to 10,000 square meters). While not a “scalable” model for the farmer, it is important for early-stage developing countries to maximize crop production while utilizing all available labor. This type of gardening approach led to higher yields and strong output. An abundance of output generally leads to a fiscal surplus, which allows for investments in industrial investment. 


Stage Two: Manufacturing


As developing countries develop a surplus from agriculture, it is imperative that the proceeds are reinvested with a vision of propelling economic success. Many Northeast-Asian countries found success in manufacturing. 


Instead of focusing solely on industries where they had a current comparative advantage, these nations developed policies to foster learning and growth in more complex sectors, particularly manufacturing. Governments supported the development of manufacturing through subsidies, protection from foreign competition, and significant investment in education and technology. 


Manufacturing helps boost profits from agriculture, as the investments in new machinery helped increase yields. Simultaneously, foreign trade of the newly developed machinery helped create new avenues of foreign investors purchasing the local agriculture at lower prices. Successful countries ensured that there were strong linkages between manufacturing and both the agricultural and service sectors. This created a cohesive economy where growth in manufacturing led to increased demand for agricultural products and services, thus spreading the economic benefits across different sectors.


Government subsidies and intervention helped protect local businesses from foreign competition by way of tariffs and quotas. Governments encouraged industries to start with simple manufacturing processes and gradually move up the value chain to more complex and technologically advanced products. This process was often supported by licensing agreements, foreign direct investment (FDI) that involved technology transfer, and substantial investments in research and development. The revenues from manufacturing were reinvested into infrastructure improvements such as roads, irrigation systems, and storage facilities, which directly benefited the agricultural sector.



Stage Three: Financial Control


Instead of financial deregulation, successful Asian economies maintained tight control over their financial sectors via a centralized financial system. This allowed them to direct financial resources into strategic industries and ensure that capital was used for domestic, developmental purposes rather than short-term gains or speculative investments.


  1. State-Owned Banks: In many cases, banks were state-owned or heavily regulated. This allowed governments to direct lending to priority sectors such as agriculture for land reforms and later to manufacturing industries. For instance, South Korea and Taiwan used state-controlled banks to funnel resources into specific industries that were identified as crucial for national economic advancement.
  2. Directed Credit Programs: Specific programs were established to provide low-interest loans to targeted industries and agricultural sectors. These programs were designed to encourage investment in areas that would not necessarily attract private capital due to higher risks or longer gestation periods for profitability.
  3. Capital Controls: To protect their economies from volatile short-term international capital flows, these countries implemented capital controls. These controls included restrictions on the free flow of foreign capital, which helped stabilize the domestic financial system and prevented the kind of speculative bubbles that could lead to economic crises.


In summary, these methods of financial control enabled East Asian governments to strategically steer their economies towards specific developmental goals. They provided the necessary financial infrastructure to support land reform and to catalyze industrialization, which were critical underpinnings of their rapid economic growth.


Investors can draw significant insights from the economic strategies employed by these East Asian countries. It is crucial for investors to recognize that they possess the deepest understanding of their own specific situations and needs. While guidance from experts can be invaluable, it should be carefully adapted to align with each investor's unique goals and the resources available to them. This approach underscores the importance of a tailored investment strategy, built to fit the needs and goals of the specific individual.



  1. Joe Studwell, How Asia Works
  2. Anja Manuel, Brave New World