Non-Western Economic Development Requires Risk-Taking

A guest post by Karl Muth

Above: The foot of D’Aguilar Street burns with invading Japanese soldiers in the foreground; the occupation (known in Hong Kong as 三年零八個月) would last until V-J Day. Photo taken by Japanese soldiers and released by the postwar Japanese government; public domain.

Karl T. Muth, who co-authored the first guest blog on this Substack, is back with some thoughts on risk-taking in development. As you all know, I’m quite interested in national development and industrial policy, and also in the country of Japan, where I lived for several years. So when Karl proposed to write about how Japan’s big risky bets on particular technologies (such as bullet trains) ended up paying off big, I was naturally excited to see his thoughts! The core idea here is that countries that can’t develop as offshoots of the U.S./Europe economic agglomeration, because they’re located far away or have weaker ties with that economic nexus, need to bet on new technologies in order to have something different to specialize in.

Anyway, a little about Karl: After over a decade teaching at Northwestern, including his popular Economics of Developing Countries course, Karl now teaches at the University of Chicago. He’s spent years intermittently living in the developing world and is currently working on the manuscript for his forthcoming book on life-or-death decision-making from a climate-change-threatened Indian Ocean atoll just 3° north of the equator. He also tweets at @karlmuth.

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Recent generations of my family witnessed one of the great economic miracles of the past century, namely Hong Kong’s journey from the malaria-infested least-desirable assignment in the Royal Navy to becoming one of the great cities of the world. That is now at risk, but fear not: this is not a blog about contemporary Hong Kong politics.

I find many are uncomfortable discussing that the Hong Kong economic miracle happened while Hong Kong was a British colony. In a moment where it is at a minimum unfashionable, and certainly politically unwise, to admit that anything that looks even vaguely like progress happened in a Western-centric, much less Western colonial context, how do we have these conversations?

And what does “non-Western” economic development even look like? How should we define and explore it? What strategies, paths, and risks are prerequisite to achieving it?

Development studies or development economics as a Western tradition is inextricably intertwined with the history of European colonialism and, specifically, with the Anglophone colonial diaspora. No, this isn’t some half-baked shuttlecock critique, it’s frankly a prerequisite to understanding how the field emerged and evolved.

Much of the writing in the field, especially pre-1980, sees the Western cities as not only a development ideal, but a development destination. What, after all, could Nairobi aspire to be if not London? You’ll notice this is as far from a “Wakanda-endorsing” lens as one could imagine. And this is before we’ve discussed the problematic nomenclature of economic development, with the work often taking place in Peasant Studies (a cringe-inducing phrase in 2022) departments or journals, and with key debates occurring in rivalries like Scott’s Moral Economy of the Peasant (1976) versus Popkin’s The Rational Peasant (1979), with the latter offering a more “Chicago” interpretation of what was going on in Vietnam.

I mention Wakanda not to reboot the many debates on development paths or paths not typically within the ambit of Western urban planning, or to cross-examine the robust observation that development in unexpected places generally comes from adopting orthodox Western policies, but to highlight that non-Western development is exceedingly rare. Rare in ways and to a degree that is hard to grasp until one thinks about what “non-Western” development might actually look like.

Yet, the kinds of development that get branded “miracles” in the development literature (and I’m not talking about Botswana, I’m talking about places like Hong Kong and Singapore) tend to not result from incremental and orthodox policy adjustments. At least some of this faster-paced progress tends to be related to taking policy risks that would not have been then-recommended or -endorsed by most development agencies or even development scholars. In some cases, successful countries disregard advice (I’ll discuss the classic example of Japanese rail later in this post).

When I’m on campus and our schedules align, I always enjoy having lunch in the Senior Dining Room at the London School of Economics with my friend and mentor Robert Wade. Robert and I often disagree, and I suspect our worldviews have in many ways diverged more than converged over the past decade of these lunches. But Robert is exceedingly well-read and relentlessly inquisitive about international development case studies; I almost never leave lunch without a book recommendation or question that I take to heart and ponder seriously before our next rendezvous.

Some will already have cringed at my “non-Western” phrasing above, but it is carefully chosen. This cultural Occidentalism taxonomy may be less stout (or less politically-correct) than some might prefer, but still provides utility here. Is non-Western development something we’re good at or bad at encouraging? I’d argue we’re bad at it.

Let me ask you a very simple question: How many non-Western countries have developed in the last 100 years? This is what Robert asked me at one of our aforementioned lunches in London and it’s troubled me for years since, as it’s such a simple-yet-provocative way to pose the question.

To put this on the whiteboard as I would with my students, there are four elements and all four elements must be met for a potential answer to qualify. Specifically, each answer must be:

• Non-western (meaning not culturally European)

• A country (meaning sovereign during the period of development)

• Developed (meaning reaching OECD or near-OECD levels of income and standard of living)

• Developed during the 1922-2022 period (embracing the definition within bullet #3)

Readers will immediately notice there is some latitude here where reasonable minds could differ. Is Israel non-Western? I would argue it is not; it is in my view quite Western. Hong Kong was a colony during its key period of development, and hence not sovereign by definition. And I won’t even venture to touch the stickiest definitional political issues (is Taiwan a country?).

While there has been enormous progress in many countries, economic and otherwise, many of the success stories that come to mind do not reach the level of near-OECD levels of development (for instance, Botswana or Ethiopia in the mid-2010s). This is not to be dismissive of increases in household income or typical life expectancy or decreases in maternal or infant mortality, for instance. These are important achievements, but simply not what I’m talking about today.

I believe even the most liberal interpretation of this list of bullet points results in a single-digit list of countries. The rarity of non-Western development, if defined in this manner, is stunning: it is less common in the last 100 years than governments being toppled in violent coups, less common than populations electing heads of state not born in the country in question, and less common than governments launching satellites into space (all of which are already relatively uncommon).

We, the developed world, know a bit about how to make incremental progress in development, know some of the daring things that have been tried and failed, but know very little about how to make or choose superstars. Yes, turbocharged Japan-style development happens, but we aren’t sure why and certainly don’t have the ability to fertilize a mediocre seedling with the methods, resources, or advice needed to turn it into a Japan. What I find most interesting is that many superstars, like Japan, Taiwan, and Singapore, got there at least in part doing things that were not recommended (or explicitly discouraged) by development organizations or development scholars at the time.

I published a piece in 2020 in the Harvard Kennedy School Africa Policy Journal on the topic of rail development in Africa, a topic closely linked to colonialism (in part because many African rail projects attempt to salvage already-laid track from the colonial era). These rail projects are often panned by Western critics, dismissed as epicenters of incompetence and graft, and generally seen as poor prioritizations of development funds. I’m myself a critic of many rail projects in Africa, for reasons I won’t detail here, but I also must admit I sound a lot like Japan’s post-war rail critics.

Above: A postwar U.S. Army observation photo of Tokyo shows the comprehensive destruction of the city, much of it achieved with 500-pound cluster bombs utilizing M69 napalm incendiary bomblets. Photo created by the U.S. government and in the public domain.

These critics were astounded and dismayed by Japan’s spending in the wake of WWII, when Japan prioritized the building of a bullet train (新幹線, which means new major train line, not “bullet train”) over other infrastructure projects. If you’ve never seen the Kurosawa masterpiece Tengoku to Jigoku (天国と地獄), distributed in the U.S. as “High and Low,” you should; it’s such an interesting on-the-scene view into what postwar, about-to-meteorically-develop Japan looked like that it's appeared on my course syllabi for both my undergraduate and masters development courses. Shot on location in postwar Tokyo, people live in corrugated tin shacks with newsprint for windows – yes, once a big chunk of central Tokyo was an urban slum, not unlike areas of Rio or Nairobi today.

Yet, the bullet train (which plays a role in the film’s plot and is not merely technological scenery) zooms by, providing two things: 1) a contrast between the tin shack slum’s poverty and the train’s sophistication and 2) a foreshadowing of Japan’s miraculous ascension from destroyed and demoralized belligerent in WWII to being a technological innovator and prime example of non-Western development.

In the early sixties, however, the West’s appraisal of Japan’s supertrain project was cynical.

At the World Bank in 1961, the bullet train project was characterized as wasteful and silly (a somewhat revisionist 2003 report from the World Bank imagines away Western contemporary skepticism and wraps up with a barrage of World-Bank-praising quotes). There were so many problems in postwar Japan, many Western critics (including economists) argued, and the World Bank was foolish to lend $80M (eventually $862M in total by October of 1966) at low interest rates to a developing, post-conflict country that might squander it, move it to elites (the Easterly “76%” corruption number might be among the most misused stats in this area), or experiment with likely-to-fail ideas rather than proven development paths.

Yes, risky development bets sometimes result in losses. But there are wins, too.

Above: The official ribbon-cutting ceremony launches a new era in rail travel. In 1964, President Johnson was invited by the Japanese government to ride the bullet train during an official visit to the Tokyo Olympics. Johnson declined wholesale, neither visiting the Olympics nor riding on the bullet train. Photo released by Japanese national government press agency; public domain.

Aggressive critiques centered on the idea that Japan was a post-conflict developing country that was focused on snazzy, shiny vanity projects that elevated Japan’s stature internationally at the expense of the average Japanese person’s standard of living (though Japan’s rush to finish the Eastern Sea line or 東海道 section in time for the 1964 Tokyo Olympics probably didn’t help defuse these allegations) and that it should simply get its house in order and focus on back-to-basics development tasks.

Sound familiar?

We, in the West, often make these same allegations today when post-conflict non-Western developing countries announce ambitious projects or unexpected prioritizations. Disruptive, innovative, heterodox ideas of what progress looks like from a non-Western perspective are as jarring to Eurocentrists today as they always have been; that a Japanese Seiko could be more accurate than a Swiss Rolex while also being both cheaper and more reliable is somehow offensive to every Occidental concept of hierarchy.

Above: A Seiko more accurate than the legendary Rolex Daytona (Ref. 6263) woke up the Europeans to the possibility of Asian competition; a decade later, Seiko would release affordable and fashionable quartz references that would cause the “quartz crisis” in Switzerland, forcing the Swiss government to rethink and subsidize its watch industry (and leading to the creation of Swatch). Screenshot graphic edited and created by author.

Had Japan hosted, as scheduled, the Olympics in 1940, visitors would have seen a country struggling to reconcile domestic political tensions with global political ambitions, locked in a seemingly-intractable political tangle between rural areas and cities, simmering far-right ultranationalist unrest (see the March and October incidents), and decidedly behind European or American progress in technological advancement. Many of the already-outdated 1930 Far Eastern Games facilities were to be reused. Japan’s life expectancy in 1940 was 49; in 1964, 69.

Above: European auto executives mocked the Japanese and suggested a developing country less than two decades after defeat in WWII should focus on fighting poverty, not building luxury coupés. Nobody was laughing in 1967 when the gorgeous 2000GT appeared on Pall Mall and in a James Bond film. Photo of 2000GT (and the author) taken by Heather Johnston and used with permission.

But there was no 1940 Olympics.

With a delay owed to WWII and a bit of luck, visitors to the postponed Olympics held in Tokyo in 1964 were wowed by the bullet train, the New Otani Hotel (then the tallest building in Japan, where members of the international press were strategically housed), Tokyo Tower (the tallest structure in Japan in 1964 and still in 2022 the second-tallest), a special preview of the Toyota 2000GT’s voluptuous bodywork (the sports car was officially released the next year at the 1965 Tokyo Motor Show), and the still-today-incredible Seiko 5718-8000 wristwatch (sold only in the Olympic Village gift shop near Yotsuya Station).

The 1964 Olympics blasted past other technological milestones. Seiko worked closely with American partners NASA and Hughes Aircraft to provide something with many times the precision needed for its track and field stopwatches: correcting at Tokyo Tower for slight oscillations in the not-quite-perfectly-geostationary Syncom 3 satellite’s position over 22,000 miles above the International Date Line. This allowed the Tokyo Olympics to be the first major Asian event broadcast live in the United States, a feat described in an NBC space science interstitial (this series would continue, but with a focus on the Apollo program).

Today, Japan is not only a leader in bullet train technology, it is the largest exporter of this family of technologies (licensing them in some cases, but also exporting rolling stock in finished form in some cases). Taiwan’s bullet trains are built by Kawasaki while China’s bullet train designs are licensed from a Japanese intellectual property trust where contributors include Hitachi, Kawasaki, Mitsubishi, and others. The leading bidders on the high-speed lines between Mumbai and New Delhi are rumored to be Japanese firms, Japanese companies having already won the contract to build the high-speed Mumbai-Ahmedabad rail link.

And Japan’s journey to greatness through investments, technological and otherwise, that Western pundits might not have endorsed is hardly unique. It was not obvious for Israel to become a major armaments innovator rather than merely an armaments customer (and perhaps even less intuitive for it to become an armaments exporter). It was considered ill-conceived by many in the West for Taiwan to invest enormous amounts in semiconductor technology, including spending significant government funds from a “science and medical” government set-aside appropriation for an unprecedented purchase of intellectual property (sorry, a “sovereign technology transfer arrangement” for the legal scholars ready to send me critiquing emails…) from RCA in 1976 to kickstart that industry.

These turned out to be sound bets, transformative to Israel’s and Taiwan’s histories.

Finally, I want to discuss something that makes some economists–and in my experience, many economics students–very uncomfortable: the concept of luck. At least two well-regarded recent papers borderline-misuse fancy euphemisms like stochasticity throughout, so terrified are authors of colleague-perceived misuse of plebby vocab like luck. But just like people, the lives of companies and countries contain encounters with what can only be accurately described as luck. And in stories of development, luck often plays a role (whether in terms of natural resource distribution, peace or war in the region in a certain epoch, or even the presence of a particular leader at the national helm).

In the West, and in America in particular, people have a very fraught and difficult relationship with luck and where it is appropriate to recognize or amplify luck. But there is something to be harvested and repurposed here: Westerners also have a tendency to reward and not begrudge what they perceive as success from luck or “good gambles” whilst being at least suspicious (America’s embrace of Puzo’s “behind every great fortune there is a crime” epigraph being but one example), and even actively hostile, toward success that results from preparation, rule-following, and high performance within certain constraints.

I believe Americans are peculiarly willing to accept that luck plays a role in success and even that chance operates in its own mysterious meritocracy–the fallacy of randomly-allocated, yet deserved, windfalls.

I don’t know how else to explain American pecuniary and nonpecuniary attitudes around luck. Americans spend a great deal of time and energy debating how much CEOs should earn, while distributing far more than the median Fortune 500 CEO’s annual salary ($16M) to Powerball winners largely without controversy; Americans have tens of thousands of pages of immigration law governing who can and cannot stay in the country, but at the same time operate a green card lottery to distribute immigration privileges. Americans encourage children unlikely to achieve a height of six feet to dream of laughably unlikely careers in the NBA rather than, for instance, encouraging them to work on their Mandarin or learn calculus one year earlier (things far more closely associated with future success than mediocre teenaged basketball aptitude).

Perhaps Americans are simply willing to reward risk-taking, to create dividends to drama, to respect things that are thrilling; perhaps cheap reality show dynamics dominate… even in things as life-changing as multi-million-dollar windfalls or the green card privilege to stay and work in the United States.

But if we’re so comfortable and familiar with these dynamics, let’s not fight them!

Let’s instead transport them to the development sphere and agree that boring countries that take no risks will not win; at least, they will not win the development economics Powerball jackpots. Developing countries need to take risks and make big bets. They should be allowed to place high-denomination chips on the casino felt without babysitting, commandeering, or endless second-guessing of their decisions! Some of the bets they place may seem unorthodox, unfamiliar, or unwise, but we should afford great deference to the decision-maker positioned to appraise the options, make the decisions, and endure the consequences: the country itself.

If there were an internationally-applicable, culturally-agnostic, decade-to-decade-portable, low-risk-and-high-reward recipe for development, the West certainly has not discovered it. If it had, economic development would be a Newtonian physics of basic rules and formulas. We’re nowhere close to that. The apocryphal apple is still in mid-air and we’ve yet to feel it bonk us on the head, let alone recognize, formalize, and proof the importance of that incident.

If we want to encourage experimentation with different approaches to development, we must not punish the experimenters; we should be more tolerant of risk-taking and heterodox policymaking, including and especially in industrial policy (where advantages in certain areas may be opaque to international observers, especially when these areas are not extractive industries) and political prioritization (which may require domestic calculus that is difficult, or impossible, for foreigners to fully appreciate or similarly compute).

When the next developing post-conflict Japan proposes building whatever that country’s bullet train is, we should listen rather than chuckle. Because it just might work out. The World Bank isn't a development pharmacy where Western prescriptions get filled and we need to stop treating developing countries spending development loans on unusual things like a person who poured the proceeds of a home equity loan onto the roulette table. In case you’re wondering, Japan paid back that $862M plus interest and included a classy bilingual thank-you note still in the archives of the World Bank’s H Street building in Washington, D.C.

We must with real humility congratulate wins among developing countries as quickly and perennially as we mistake the rewards from our own luck for the dividends of skill.

Because if there’s a truly crazy approach, it’s to expect radical, path-breaking, unpredictable results from orthodoxy and incrementalism… and for risk-taking and luck to play no role at all.

I’m all for giving advice to borrowers (which borrowers may or may not adopt) to de-risk loans to developing countries, and I understand the risk-taker/risk-bearer dichotomous concern that those who pay the price for risk-taking in developing world policy may not be the elites who selected the policy, but the alternative is to ring-fence the choice set of developing nations in ways that almost certainly sacrifice real upside at the altar of abstract prudence.

Jackpot returns from coin flip risk is the dream. Unrealizable, foolish, childish.

Tell me you’re interested in taking measured risks and that’s fine. Tell me Japan-level huge successes in international development are exceedingly-rare and still-poorly-understood and not-easily-reproduceable and I’ll agree. But don’t use the phrase “the next Singapore,” yell at me in consultantese, and tell me everybody who listens to you is going to get three points for sinking a free throw. That insults my intelligence and raises questions about yours.

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