After the second world war, in the 1950s, many countries, especially Asia sank into a deep economic depression. But East Asia somehow miraculously managed to produce the quickest progressions from poverty to wealth the world has ever seen, maintaining exceptionally high growth rates of more than 7% a year. 

So how exactly did East Asian countries get so rich, so fast? and why didn't Malaysia share part of the prosperity?

How Did The Boom Start?

• Land was the biggest political issue in East Asia after the Second World War and land reform was fundamental for the economic miracle to take place
  
• In Japan and South Korea, land redistribution programmes were implemented peacefully. This was the first inflection point that set off the boom
• For a poor country, the only leverage you had was manual labour. So by leveraging the vast majority of people, countries managed to accelerate output from agriculture to the highest possible levels
• As a result, countries were starting to see a trade surplus
• What happened next was that governments decided they would focus more on the export industries, favouring those that could achieve long-term productivity growth

The Playbook 📖

1. Invest the trade surplus from food into light industry i.e. textiles - these are businesses where the main input is unskilled labour so any poor country with a port can be the global low-cost leader
2. Invest that surplus into manufacturing i.e. steel. 
3. Relentlessly drive your heavy industry to export; make exporting and competing globally your number 1 objective, even if you have to subsidize them 
4. Force the financial sector to focus their capital on manufacturing development
5. Once you're the global leader, you can relax. But only a little!

Japan and South Korea literally wrote the playbook. They both started off as steel exporters. The government gave exporters enormous loans to increase capacity and when the industry got too huge, they forced participants to merge.

This strategy worked. Their dominance in steel gave them a huge boost to expand into machinery, chemicals and cars. 

In 1950, Japan's GDP per capita was under one-fifth of the US. Today, Japan's GDP per capita is about two-thirds of the US level.

Why Couldn't Malaysia Replicate This Miracle? 😕

• Well, the only way for poor countries to produce wealth is by making something people in other countries want to buy and the only way to do that was by going into manufacturing (if you don't have oil) but Tun Mahatir obviously didn't understand this 
• Because of government policy failures, Malaysia's private entrepreneurship at the time wasn't directed in benefiting the country at large
• Most of the big-time entrepreneurs were just asset traders and not developers of technological capacity. Most of them almost never manufacture or compete internationally
• The national car project was also a disaster. Not only did he not push for exports but the car industry itself already had punishing economies of scale. If you build 1/10th of General Motors, you don't earn 1/10th of what GM does

Before you go...

• Check out issue #16 where we talked about the Skyscraper Effect 🌆
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