The Manufacturing Imperative | Why India's Development Path Diverges from East Asian Success

Introduction

Joe Studwell’s “How Asia Works” presents a compelling case study of how Japan, South Korea, Taiwan, and China achieved rapid economic development through a three-step formula: land reform, export-oriented manufacturing, and financial system control. However, when examined against India’s trajectory, the book reveals not just what worked elsewhere, but what India fundamentally missed—and continues to miss—in its development strategy.

After decades of economic liberalization beginning in 1991, India has pursued a unique path, leapfrogging directly into services while bypassing the manufacturing stage that characterized every other successful developing economy. This deviation from the proven East Asian model raises critical questions about India’s long-term development prospects and whether alternative pathways to prosperity are viable for large, diverse nations.

The East Asian Formula: Land, Manufacturing, Finance

Land Reform as Foundation

The East Asian success story begins with radical land redistribution. In Japan, American occupation forces mandated comprehensive land reforms in 1946, breaking up feudal estates and distributing small plots (typically 3 hectares) to tenant farmers. This wasn’t merely about social justice—it was about creating the agricultural productivity foundation necessary for industrial takeoff.

Taiwan followed an identical model under American pressure, while South Korea implemented similar reforms. China’s story was more violent, resulting in millions of deaths during land redistribution, but ultimately achieved the same structural transformation. The key insight from Studwell’s analysis is that small-scale farming, when properly supported with infrastructure, credit, and markets, proved more productive than large estates worked by tenant labor.

The economic logic is straightforward: when farmers own their land, they have incentives to maximize productivity from every square meter. Combined with state investment in irrigation, fertilizers, and agricultural extension services, this created the agricultural surplus necessary to feed growing urban populations and fund industrial development.

Export-Oriented Manufacturing: The Heart of Development

The second pillar involved forcing domestic entrepreneurs into global competition through export requirements. This wasn’t the free-market capitalism that Western economists typically advocate, but rather state-directed capitalism where governments picked winners, subsidized their development, and then demanded they compete internationally.

Japan’s Ministry of International Trade and Industry (MITI) exemplified this approach. When IBM wanted to enter the Japanese market in the 1950s, MITI head Sahashi Shigeru demanded technology transfer at maximum 5% royalty rates and acceptance of government guidance on sales volumes. The message was clear: access to Japan’s domestic market came with strings attached.

South Korea’s approach was even more aggressive. Park Chung-hee’s military government arrested major chaebol leaders and forced them to sign agreements pledging their assets until they met export targets. The government provided negative interest rates for export-oriented industries while maintaining high domestic interest rates. Companies had no choice but to compete internationally if they wanted to survive and grow.

This forced competition created rapid learning effects. Companies had to improve quality, reduce costs, and innovate to succeed in demanding export markets. The domestic market remained protected, providing revenue cushions, but export success became the ultimate measure of industrial competence.

Financial System Control: Directing Capital Flows

The third pillar involved tight government control over financial systems to direct capital toward productive manufacturing rather than speculative activities. East Asian governments maintained control over central banks, regulated foreign investment, and often operated with negative real interest rates for savers to subsidize industrial borrowers.

This approach contradicted standard Washington Consensus prescriptions for financial liberalization, but it worked. Capital flowed toward manufacturing and infrastructure rather than real estate speculation or financial engineering. The result was rapid industrial development and technological upgrading.

India’s Alternative Path: The Service Sector Gambit

The IT Services Success and Its Limitations

India’s development trajectory since 1991 has been markedly different. Rather than building manufacturing capacity, India leveraged its English-speaking, technically trained workforce to become a global hub for IT services and business process outsourcing. Companies like Infosys and Tata Consultancy Services became world leaders in their sectors.

However, as Studwell notes, this success story has severe limitations. Despite twenty years of IT sector growth since 1991, only 3 million people out of India’s 1.2 billion population work in IT—less than 1% of the labor force. Compare this to South Korea, where 30% of the working population had moved into manufacturing after twenty years of industry-focused development.

The employment mathematics are stark. Even India’s most successful IT companies create far fewer jobs per unit of capital than manufacturing operations would. A semiconductor fabrication plant or automobile assembly line employs thousands of workers directly and creates ripple effects throughout the supply chain. A software services company, no matter how profitable, employs primarily high-skilled workers and generates limited downstream employment.

The Missing Manufacturing Base

India’s manufacturing sector employs only 14% of the labor force, compared to 30% in South Korea during its high-growth phase. This represents a fundamental structural weakness. Manufacturing remains the only proven pathway for absorbing large numbers of semi-skilled workers and generating the productivity improvements necessary for middle-income status.

The reasons for India’s manufacturing weakness are complex but include inadequate infrastructure, regulatory complexity, labor law rigidities, and—crucially—the absence of the state-directed approach that characterized East Asian success. Indian entrepreneurs have been allowed to focus on the domestic market without export pressure, while foreign investment has often been allowed without technology transfer requirements.

The Policy Architecture Problem

Institutional Knowledge and Leadership Quality

One striking observation from comparing East Asian success stories with India’s experience concerns the quality and educational background of policy leadership. South Korea’s Park Chung-hee was well-read in economic history and explicitly modeled his approach on Meiji Japan and Prussian development strategies. Japanese leaders drew on their own successful pre-war industrialization experience.

Indian policy leadership, by contrast, has often been influenced by Western-trained economists advocating standard liberalization prescriptions. The country has been receptive to advice from international financial institutions like the IMF and World Bank, organizations that Studwell argues have a poor track record of development advice for emerging economies.

This represents a deeper confidence problem. East Asian leaders were willing to ignore conventional Western economic wisdom when it conflicted with their development objectives. They maintained export subsidies despite WTO restrictions, manipulated exchange rates, and protected domestic industries while forcing them to compete internationally. Indian policymakers have generally been more deferential to international opinion and orthodox economic advice.

The Democracy Constraint

India’s democratic system, while politically valuable, creates constraints on the kind of aggressive state-directed development policies that characterized East Asian success. Korean and Chinese leaders could force major industrialists to redirect their activities, arrest non-compliant business leaders, and implement unpopular policies necessary for long-term development.

Indian leaders face electoral pressures that make such approaches politically impossible. When the Modi government attempted modest labor law reforms or agricultural market reforms, they faced massive protests and were forced to retreat. The political economy of democracy favors policies with immediate visible benefits over long-term structural transformation.

This creates a fundamental tension: the proven path to rapid development may require policy tools that democratic systems cannot deploy effectively.

Contemporary Challenges and Missed Opportunities

The Make in India Experiment

The Modi government’s “Make in India” initiative represents an attempt to address manufacturing weaknesses, but through a different approach than East Asian models. Rather than building domestic manufacturing capacity first, India has tried to attract foreign manufacturers to set up operations in India for both domestic and export markets.

This approach has achieved some success, with companies like Apple establishing iPhone assembly operations in India. However, it creates different dynamics than the East Asian model. Foreign companies bring their own supply chains, technologies, and management systems. Indian companies remain in subordinate roles as suppliers or assembly operators rather than developing independent technological capabilities.

The long-term risk is that India becomes a final assembly location without developing the engineering capabilities, component manufacturing, or brand power that characterized successful East Asian development. When these foreign companies decide to relocate operations elsewhere, India may be left with limited indigenous capabilities.

The Brain Drain Paradox

India’s education system has produced world-class engineers, managers, and entrepreneurs. However, many of the most talented individuals emigrate to developed countries where they can earn higher wages and work with better infrastructure. This creates a paradox: India’s human capital is globally competitive, but much of it is employed outside India.

Companies like Google, Microsoft, and numerous Silicon Valley startups benefit from Indian talent, but this doesn’t translate into industrial development within India. The remittances sent home by overseas Indians provide foreign exchange, but they don’t create the technological spillovers and industrial clusters that domestic manufacturing would generate.

Financial System Structure

India’s financial system has been largely liberalized since 1991, with market-determined interest rates and substantial foreign investment. While this has created more efficient capital allocation in some respects, it has also meant that the government has limited tools to direct capital toward manufacturing and infrastructure.

East Asian governments used financial system control to subsidize industrial development, often at the expense of savers and consumers. This was politically possible because these were largely authoritarian systems during their high-growth phases. Democratic India faces greater constraints on using such tools, even if they might be economically beneficial.

The Infrastructure and Geography Challenge

Physical Infrastructure Deficits

India’s infrastructure challenges go beyond simple under-investment. The country’s size, diversity, and federal structure create coordination problems that smaller East Asian economies didn’t face. Building efficient transportation networks, power systems, and industrial clusters across such a vast and diverse territory requires sustained, coordinated effort over decades.

East Asian countries could focus their infrastructure investments on relatively small geographic areas and achieve rapid results. India’s infrastructure needs are more dispersed and complex, requiring different approaches and longer timeframes.

Agricultural Transformation Incomplete

Unlike East Asian countries, India never completed the agricultural transformation that creates the foundation for industrial development. Land holdings have become increasingly fragmented through inheritance, with average farm sizes well below the optimal scale for mechanization and productivity improvement.

The median farm size in India is approximately 0.63 hectares, compared to the 3-hectare plots that Japanese farmers received during land reform. This fragmentation makes it difficult to achieve the agricultural productivity improvements that historically freed up labor for industrial employment.

Political resistance to land consolidation remains strong, as demonstrated by the farmer protests against recent agricultural reforms. Without resolving the agricultural productivity challenge, India faces difficulties in creating the labor force mobility and agricultural surplus that industrial development requires.

Alternative Development Models and Their Limitations

The Singapore Exception

City-states like Singapore represent successful service-sector-led development, but their experience may not be applicable to large continental economies. Singapore’s population of 5.9 million allows it to specialize in high-value financial and business services while importing manufactured goods and agricultural products.

India’s population of over 1.4 billion requires much broader-based employment generation. Even if India’s major cities could replicate Singapore’s success, they would still need to provide employment opportunities for hundreds of millions of people in smaller cities and rural areas.

Resource-Based Development Models

Some countries have achieved middle-income status through natural resource extraction, but this approach has significant limitations. Resource-based economies often suffer from “Dutch disease” effects where resource exports strengthen the currency and make manufacturing uncompetitive. They also tend to be vulnerable to commodity price cycles and often fail to develop the technological capabilities necessary for sustained growth.

India has significant natural resources, but not at the scale that would allow resource-based development for such a large population. Manufacturing remains the only proven pathway for generating the employment and productivity growth necessary to achieve widespread prosperity.

Looking Forward: Policy Implications and Realistic Scenarios

The Feasibility of East Asian Approaches

Could India still adopt East Asian development strategies? The international context has changed significantly since the 1960s-1980s when Japan, South Korea, and Taiwan achieved their rapid growth. WTO rules make some forms of export subsidies and protectionism more difficult, though not impossible as China’s experience demonstrates.

More fundamentally, India’s democratic political system makes the kind of state-directed policies that characterized East Asian success more difficult to implement. The business community has become accustomed to a more liberal policy environment, and any move toward greater state direction would face significant resistance.

Gradualist Manufacturing Development

A more realistic scenario might involve gradual manufacturing development over a longer timeframe. This would require policies to:

• Improve infrastructure systematically to reduce manufacturing costs
• Simplify regulatory processes to reduce transaction costs
• Develop industrial clusters around specific sectors where India has potential advantages
• Create incentives for domestic companies to develop export capabilities
• Invest in technical education and skills development aligned with manufacturing needs

This approach would be slower than the East Asian model but might be more politically feasible in India’s democratic context.

Leveraging Service Sector Success

India’s service sector success, while limited in employment terms, has created financial resources and technological capabilities that could potentially support manufacturing development. IT service companies have accumulated substantial cash reserves and developed sophisticated project management capabilities.

These companies could potentially be incentivized to diversify into manufacturing, bringing their organizational capabilities and financial resources to bear on industrial development. This would require policy frameworks that encourage such diversification rather than allowing these companies to remain focused solely on service exports.

Conclusion: The Continuing Relevance of Manufacturing

The central message of “How Asia Works” remains relevant for India: there is no substitute for manufacturing-led development for large, diverse economies seeking to achieve widespread prosperity. Service sector development, while valuable, cannot provide the employment generation and productivity growth necessary to lift hundreds of millions of people out of poverty.

India’s experience over the past three decades demonstrates both the possibilities and limitations of alternative development paths. The country has achieved significant economic growth and created world-class companies in the service sector. However, this growth has been concentrated among the educated elite and has not transformed the broader economy in the way that manufacturing-led development transformed East Asian societies.

The challenge for India is whether it can still adopt manufacturing-focused development strategies three decades after beginning economic liberalization, or whether the window of opportunity has closed. The international competitive environment is more challenging now, with China dominating many manufacturing sectors and global value chains becoming more established.

However, the fundamental economics of development remain unchanged. Manufacturing continues to offer the best pathway for absorbing large numbers of workers, generating productivity improvements, and creating the technological spillovers that drive sustained economic growth. For India to achieve its development aspirations, it will need to find ways to make manufacturing-led development politically and economically feasible within its democratic framework.

The East Asian experience provides a roadmap, but India will need to adapt these lessons to its own political, social, and economic context. The stakes could not be higher: the prosperity and stability of over one billion people may depend on getting this development strategy right.