East Asia vs African Development (Part 2): Differences in Finance, Industry, & Farming Policy
See the Differences in Food, Manufacturing and Finance Policy
If you would like to read part one click here:
In this series, we'll continue to dive into how the East Asian Tigers raced ahead, contrasting East Asia with Sub-Saharan Africa. It all began with Japan's rags-to-riches story, and how it became the 'big sibling' for its neighbors. Taiwan and South Korea even borrowed some of Japan's nifty economic tricks. A great book on this is “How Asia Works”, although it doesn’t talk much about Hong Kong or Singapore.
Japan had its industrial capacity and infrastructure completely obliterated, including Tokyo, Hiroshima and Nagasaki. 90% of Japan’s steel production was eradicated. Living standards were sliced in half compared to pre-WW2. Right after Japan surrendered Japanese people were about to die of famine which was prevented mainly due to America providing food and occupying the nation until 1952.
America pressured Japan to end its fascist rule during occupation. America rewrote Japan’s constitution after WW2, forced it to give up its army and allow military bases, and America forced Japan to break up its big corporations. Japan used to have one of the largest military-industrial-complexes in human history. But since they were banned from having a military and had American protection, its resources went into building up its manufacturing.
The Korean War was like a jumpstart for Japan's economy. Japan at that point was essentially an American colony that was the place of procurement and and supplies. Instead of America shipping goods to American soldiers from California & Texas, Japan was where American soldiers received goods from. Japanese ports where loaded with American destroyers and American ammunition. Japan rebuilt factories to create iron, steel, ships, and machines for America and its Western allies to end communism in Korea. This allowed Japan to grow quickly. In return for Japan’s loyalty, America granted Japan Most Favored Nation trade status in 1953 and helped bring Japan into the General Agreements on Tariffs and Trade(GATT) in 1955.
By 1960s, Japan quickly experienced a labor shortage and decided to scout for affordable help to conquer the global stage in electronics & car manufacturing. Taiwan, South Korea, Hong Kong and Singapore at the time were much poorer than Japan and offered tax breaks, bargin land, and sweet subsidies to bring in foreign investment, technology and manufacturing know-how.
While Japan was playing economic matchmaker, Africa was busy finding its independence. There were essentially four approaches to foreign industry there:
Retention of foreign firms & Nationalization: In Western aligned Francophone countries, they retained French firms operating in the country and tried to benefit from their expertise and resources. However, some firms bought out by the government. Countries like Gabon and Ivory Coast were benefiting from this arrangement before the commodity crash.
Indigenization & Nationalization: Some African countries like Nigeria, Kenya and Democratic Republic of Congo bought out foreign firms and “Africanized” or “Indigenized” the workplace by replacing foreigners with home-grown Africans. In these countries, some industry would be owned by private entrepreneurs and some were government owned enterprises.
Full Scale Nationalization: Countries like Ghana, Libya, Guinea, Algeria, Benin, and Tanzania took it a step further and not only bought out most of the industry and indigenized the industry, but made those industries owned directly by the government in an African socialist model.
Negotiation: Countries like Botswana made profit sharing arrangements with the company De-Beers and made a joint venture with the company, allowing both the government and enterprise to benefit.
The indigenization and nationalization schemes scared private industry from investment. Companies did not like the idea that they could set up a factory and that factory could be bought out at prices the firm may not like. After Mobutu indigenized the car and mining industries in the mid 1970s, foreign direct investment dropped from 2.5% of GDP to companies taking their money out of DRC.
Singapore & Hong Kong were receiving huge amounts of FDI, especially from Japan, receiving up to 6% and 2% of their GDP in foreign direct investment on average between 1970-1980. Meanwhile, African nations, whether they were a French aligned country (Cameroon & Chad), a relatively capitalist country (Kenya), or socialist regime (Benin) foreign direct investment averaged around 1% of GDP for these nations at the same period.
Japan, after getting its groove back, set its sights on South Korea, Taiwan, Hong Kong, and Thailand for cost-effective labor. Then, like a proud parent, watched them grow up, gain smarts, and start investing in their own set of neighbors - China, Vietnam, Indonesia, and the gang. It was like a hand-me-down industrial revolution in East Asia.
If Africa's going to follow suit, it's likely one big player needs to step up, create the blueprint, and spread the industrial love. The closest country who could have done this were the Apartheid state of South Africa. But instead of South Africa investing in its neighbors. Apartheid South Africa worked to destabilize the regimes of their neighbors. Today South Africa has industrial capacity, but South Africa is mainly the low-cost labor shop for European companies and Japanese firms.
South Africa has a few globally competitive firms. South Africa has billion dollar multinational, manufacturing firms like drug maker, Aspen Pharmacare and aluminum cans maker Nampak.
Japan, South Korea, and Taiwan
These three nations are like the rockstars of economic history. Japan defied the odds as the only non-white pre-WW2 industrial champ, while Taiwan and South Korea shot up from rags to riches faster than a lottery winner's bank account..
All three of these nations were part of America’s East Asian “Anti-Communist bloc” in the region, while the Soviet Union had Vietnam, Laos, Cambodia, North Korea, and (for a while) China in its “Communist bloc”. Being in America’s anti-communist bloc gave these countries access to American technical assistance, educational exchange programs, and relatively low tariffs to the American economy. By the late 80s, America pressured the dictatorships of South Korea and Taiwan to become liberal democracies during the 1980s
These three places had easier access to upgrade their technological base in a way that no African country had. African countries would have to invite foreign companies in if they were open to foreign investment. Many African countries with the exception of a few like Ivory Coast, Kenya, Nigeria, and Democratic Republic of Congo were strategically neutral nations or Soviet-leaning. Instead many African countries from Kwame Nkrumah’s Ghana, Toure’s Guinea, and Mali sought Soviet technological aid (which was inferior to American aid but they didn’t know at the time and were ideologically more drawn to Soviet socialism than American capitalism which African Socialists branded as “imperialism”).
Things that Taiwan, South Korea and Taiwan economies did:
1) Agriculture: In the 1950s, America forced all three of these countries to do a “land to the tiller” reform. All of these countries used to be feudal societies where landlords owned huge farms with tenants. The landlords would lend land as collateral and if the peasant defaulted, they would be working the land for the rest of their life as a tenant farmer. In order to prevent communist fervor, America told all three of these economies to break up their big estates and plantations to create a class of rural landowners. When families own their own land, the small household farmers increased agricultural yield way more than huge plantations did. The governments would buy fertilizer and provide rural credit to the farmers. As a result, all three of these economies became self-sufficient in food by the late 50s, early 60s. They became food sufficient right when Africa gained independence.
Food self-sufficiency for these nations meant three things:
1. These countries didn’t use their precious foreign currency to import food
2. The nations could export food to gain foreign currency
3. Farmers were able to make surplus crops to save in a bank account, which allowed banks to have deposits to lend. This meant that the banks can lend to the government instead of borrowing from abroad like African countries.
To this day, most of Africa save South Africa, Egypt, and Mauritius have terrible food yields. See graph below:
The challenge for African countries lies in land law and tenure reform, modernizing agriculture through education and technology adoption (like tractors), and providing access to fertilizers and seeds. Many African farmers are subsistence-based, producing for their families and selling surplus local markets.
Also Western NGOs like Greenspace are persuading African governments to restrict GMOs, which is harmful for African countries when they should be adopting these technologies to increase food yield.
Insufficient storage, poor transport of foods (poor roads), and lack of food refrigeration contribute to food spoilage before getting to consumers.
Water scarcity and lack of irrigation infrastructure, particularly in regions with low rainfall like the Sahel, pose additional challenges for large-scale agriculture.
Manufacturing
Japan, Taiwan, and South Korea are big manufacturers in cars, semiconductors, and electronics respectively. One reason why poor countries are poor is that they lack “Technological Capital” - which is fancy econ-speak for “a combination of knowledge, skills, and capabilities related to technology”. This means scientific knowledge, engineering expertise, technical skills, automation, and the best intellectual property.
If you go to a Japanese car assembly for Toyota, it is almost entirely automated with robots, allowing higher output per worker (click here). If you go to a car manufacturing assembly for Kantanka in Ghana its very manual (click here).
For a poor country to get rich, they need to undergo “technological catchup” which is means the nation must pay royalties to buy foreign technology and incorporate the technology to increase productivity in their own workforce. Japan, Taiwan, and South Korea paid for expensive foreign technology with its foreign currency (US dollars).
These countries would provide cheap loans to help local firms bridge the “valley of death” between idea and commercial product.
Because of first becoming food independent, these countries were able to sell crops to gain foreign currencies to buy foreign technology to make light manufacturing (clothes, toys, etc.) and heavy industry (steel, petrochemicals, construction parts) . Then these countries sold these goods to buy foreign technology to make cars and electronics. By constantly buying foreign technology through purchasing licensing agreements, reverse engineering, or outright theft like what America used to do to Britain, these countries remained competitive.
These three countries made sure their manufacturing base was export oriented. This means that South Korea & Japan sold Kia & Mitsubishi cars on the world markets so that they can compete with the Fords and BMWs over the world. These companies had to compete and outcompete Western firms to survive. This also meant creating better processes like Japan invented Kanban, Kaizen, “Just in Time” manufacturing, and 5S. South Korea and Taiwan adapted these strategies. Now America and Europe do too!
These countries would purposely protect some industry from competition (like Korea’s Samsung, Taiwan’s TSMC, and Japan’s Hitachi). So Americans would buy Hyundai and Toyotas, but South Koreans and Japanese weren’t buying Fords and General Motors.
These countries also industrialized at the right time. Between the 1950s-1980s, most nations had national supply chains where processing and assembly was in-house. International trade was limited to commodities, food, and finished goods. It was only after 1980, when advances in transport and logistics technology (like containerization) is what lead to the creation of three main trade hubs - East Asia, North America, and Europe.
Many African countries try and still try to create manufacturing industries. However, the problem that Africa has with manufacturing is four fold:
In many African countries, there isn’t a strong domestic base of consumers to purchase manufacturing goods except for the upper class which will tend to buy foreign goods (even with high tariffs).
African countries try to fuel their manufacturing with exporting commodities instead of agricultural goods, mainly because African nations usually don’t produce enough food for mass export. The issue with commodities is that they are very volatile in price. When African countries were trying to fuel their ambitious manufacturing projects, by 1980-2000 commodity prices collapsed, leading to the African debt Crisis. A similar commodity collapse happened from 2014-2019, and the covid commodity collapse as well.
It’s very hard for African manufacturing firms to expand since banks have exorbitant interest rates. Most African banks are cash strapped due to few domestic savings. (Most people are farmers that live from hand-to-mouth). Without farmers being able to save, banks continue to charge high interest rates which limit expansion. As a result, this high lending rates partly-but-not-entirely explain why between 1980-2010, we have seen “pre-mature de-industrialization” in Sub-Saharan Africa. The manufacturing that Africa did have - food processing, aluminum smelting, cement production, glass making, wood processing, equipment production, and steel production decreased as a proportion of Sub-Saharan Africa’s economic output. It is my hypothesis that boosting manufacturing without an agricultural boost is “putting the cart before the horse”. Especially not without enough electricity generation.
Many African countries don’t have strong logistics or infrastructure. Japan literally used its development assistance and loans to build roads, bridges, ports across East Asia
Finance:
A) Force low interest rates In these three economies, their government’s central bank purposely kept interest rates very low. As a result, savers would be effectively be losing money to inflation (due to inflation rate > savings rate). This means depositors & savers received negative real interest rates by keeping money in a bank. This would meant banks effectively be paid to lend cheaply. Japan, South Korea, and Taiwan would purposely give loan quotas to direct resources to specific industries the government was interested in.B) Foreign reserves management: Japan’s central bank would purposely intervene in the central bank by selling its own currency (yen) for the dollar/euro. This way Japan purposely made its currency cheaper, allowing it to undercut competitors on price when it sold Thanks to Japan’s Sony, Panasonic, and Mitsibishi’s manufactured goods. The downside of this is that by making its currency weak, it was incredibly expensive for Japan to buy goods from abroad. In other words, these countries artificially decrease their nation’s standard of living to encourage investment.
C) Capital Controls: Japan purposely prevented firms and rich people to invest their funds abroad. If a Japanese firm or person didn’t want to put their money in a savings account for negative returns they could invest in the Japanese stock market, Japanese mutual funds, yen-bonds, or real estate.
Because African countries don’t have enough domestic savings, African banks have some of the highest interest rates in the world. This makes lending incredibly expensive effectively locking out businesses from expansion. In addition, African countries do the opposite of Japan in terms of foreign exchange policy. Most African countries overvalue their currencies to artificially increase their nation’s standard of living to make food, fuel, and medicine more affordable to buy from abroad. To make African currencies strong, African Central Banks increase interest rates. In order words, African countries artificially increase their nation’s standard of living to prevent famines and encourage consumption.
All of this comes back to food security, without food security that effects monetary policy. You cannot tell African economies to just “do what Asia did” when African nations don’t have land tenure laws that are conducive to raising farming productivity,
Conclusion:
East Asia developed from a very state directed model of capitalism. Private entrepreneurs like Masaru Ibuka made Sony and Koichiro Honda made Honda but government intervention protected domestic industries and purposely made manufactured goods cheaply priced in export markets. Japan, as an industrialized nation, played a pivotal role in the region's growth.
Japan, Taiwan, and South Korea prioritized food productivity, a challenge for many Sub-Saharan African nations today. Japan purposely weakened its currency and lowered interest rates to make it easy for banks to expand with cheap loans and sell their products abroad cheaply to dominate markets.
Sub-Saharan Africa isn’t food secure, so the nations purposely strengthen their currencies. Because farmers don’t have surpluses to save, banks don’t have much in deposits making Sub-Saharan African firms have exorbitantly high rates to borrow. Many African governments usually borrow in dollars/euro from abroad because interest rates are cheaper than borrowing domestically.
There is no “Sub-Saharan Africa should copy East Asia” when the fundamentals aren’t there. If Sub-Saharan Africa could improve food productivity, then we can start to see structural transformation of their economies. As of 2021, food yield to graduate from “Low Income Food Deficit Country” is 2.81 tonnes per hectare (the number increases each year). Ethiopia is on the brink of graduating, Ivory Coast and Ghana are above 2.0. Benin, Burkina Faso, Gambia, Eritrea, DRC, Liberia, Central African Republic, and many others are far behind… lower than 1.5.
Sources: