ECONOMIC DEVELOPMENT for Beginners

General Concepts & terminology

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Classification of Nations 

Economic development can be achieved through industrialization route or non-industrialization route. It is helpful to familiarize with specific terms used in the book in reference to a set of countries. Thus far we have come across in the Introduction the terms ‘developed’ and ‘less developed’ to refer to those nations that are commonly understood to be of high-income and low-income (per capita) respectively. We will lay down the nomenclature in some detail here. Western Europe (excluding Finland, Spain, Portugal and Italy), the four offshoot countries—the USA, Canada, Australia and New Zealand, and the only Asian country—Japan, are all classified as Early-developed countries. Except for New Zealand, all of the above-identified countries are industrialized (their industrialization going back to before the beginning of the Second World War). Therefore, those set of countries are referenced alternatively as Early-industrialized countries. New Zealand, the only non-industrialized early-developed country in the pack, has an economy characterized by commodity-exports; its economic development took the non-industrial route.

 

We shall refer to the set of countries that have seriously begun their economic development efforts after the end of Second World war as Late-developing countries, and in the same vein, to the subset of those that have since successfully industrialized as Late-industrialized countries. There are those that are late developers who developed through non-industrial route; we shall refer to the set of those countries as Commodity-exporting countries—New Zealand’s counterparts in the late-developer pack. Taiwan, South Korea, China, etc. are late industrialized countries, whereas Chile, Botswana, etc. fall under the pack of commodities-exporters.

 

And to those countries that were late-developing but have since had not fully developed based on either route, reference to the set of those countries remains Late-developing countries. Examples of late-developing countries include all those the World Bank classified(s) among the Low-Income & Lower middle-income country sets, and most of them in the Global South, including India, Bangladesh, Africa, Middle East and Latin America countries.

 

Japan’s case is quite distinct and interesting because its industrialization transcended the Second World War. The country began industrialization in 1925 and went on to accumulate heavy industry before the onset of the War. After the end of US occupation, beginning in 1950 the country had begun to restore the capital destroyed during the war and had fully industrialized by 1973. Despite Japan’s unusual timeline, we shall stick to the above style of grouping of countries. Hong Kong and Singapore are also industrialized. Only one among the two—that being Singapore—is a country and the other is not. But both are port-financial hubs and are referenced together as thus.  

 

 

 

What is Wealth Composed of?

 

What is wealth composed of in any modern country? Apart from housing and buildings, land and industrial plants, what else constitutes wealth and to what extent (size) different forms of wealth make up the overall aggregate wealth stock? It is imperative to understand income and wealth before more is said and analyzed, particularly regarding the sources of earning income and accumulating wealth. In a preliminary sense let’s see what constitutes wealth by taking up the national wealth of a prototypical industrial country.  

 

 

 

 

 

 

 

 

 

 

 

 

Source: Alvaredo Facundo, Anthony B Atkinson, Thomas Piketty, Emmanuel Saez, & Gabriel Zucman, The World Wealth and Income Database 2016, data retrieved from <http://www.wid.world>

To understand the metamorphosis of wealth and to appreciate the relative sizes of different types that make up the total wealth stock of a modern industrial economy, we will consider the case of United States. Consider Fig. 1.3 showing the composition of the national wealth of the US all the way from 1770 to 2010. Wealth is measured and depicted here in terms of wealth-to-income ratio. For example, the US had a national wealth of USD 85.9 trillion in 2015—measured in market prices at the end of the year, which enabled the production of an aggregate national income of USD 15.38 trillion; the wealth-income ratio for the US at the end of the year comes to 5.58 (or, 558%). 

 

In the beginning, as Fig. 1.3 shows, national wealth of the US equivalent to roughly 310% of national income was dominated by agricultural land, which constituted roughly 50% of the wealth. Housing wealth and other domestic capital, which includes all business capital and public capital, together made up the other 50% of the US wealth stock. The net wealth of the country with respect to rest of the world—net of wealth owned by US residents in foreign countries and that of foreigners in the US—was negative at that time, roughly 12% of national income. As the United States industrialized, agricultural land’s share in the overall stock gradually declined and now make up only about 10% of national income; the share of business capital and public capital became dominant as they made up about 260% and 180% of national income respectively in 2010.

 

The wealth of the US represented here is the net wealth of the country owned by its citizens. The value of liabilities has been deducted from the value of assets to arrive at net wealth of the country, which in physical form take the shape of housing units, office buildings, public infrastructure, industrial plants, and factories, developed agricultural land, etc. Valuation of a nation’s wealth, as in this case, does not take into account the value of unexplored and undeveloped natural resources of the country, including undeveloped land. In other words, the wealth stock of the US today represents aggregate funds invested through annual savings accumulated by the country over a very long period, all the way from 1640 (or time immemorial, theoretically) to present. Wealth lost due to ravages, natural calamities, pillaging have all been take into account. Thereby the figures in a given year discount all lost wealth up to that point and aggregate all remaining wealth to be measured for at the end of the year in terms of times of annual national income for the year. That aggregate wealth is the basis and the source of all income earned by the citizens of the country.

 

 

Classification of Capital 

Classification of capital into a number of types is essential to understand the nature of capital accumulation through industrialization and non-industrial route. The national wealth stock composition of the United States, as we just saw in Fig. 1.3, is divided into agricultural land, housing, and other domestic capital. That figure is a classic example of aggregate wealth stock classification characterized by feasibility of data collection. 

 

The classification seen in the figure involved Agricultural land, Housing capital, and other domestic capital. Agricultural land essentially is developed land—land, already inherited by man. Housing capital is built. Other domestic capital includes plant, machinery, equipment that is manufactured and installed (and the structure of plants as well). Capital such as public infrastructure and public capital (such as government buildings) is also included in Other domestic capital.

 

That kind of classification of wealth is not very helpful to understand the dynamics of economic development. For our purposes—to aid the discussion throughout the book—we will pursue a different course of understanding the wealth stock, wherein the characterization in the classification of different stock elements is not based on the ability to obtain and collect data but on the ‘type’ that can help us understand the nature of economic development.

 

National Wealth or National Capital in this book always refers to net wealth of a nation, and the two terms ‘wealth’ and ‘capital’ mean one and the same. Although on an individual level, the net worth is merely the difference between the value of assets and liabilities at any given time, on a national level focus turns to ultimate capital—the physical, that is, which underwrites all locally generated assets and liabilities in a country.

 

To reiterate, natural resources that are undeveloped do not comprise capital. Only physical body developed and that which yields an income—that is, that which can provide economic value—shall constitute capital under the standard definition.

National capital, for our purposes, is classified into these four types: 1) Housing capital, 2) Public infrastructure capital, 3) non-Industrial business capital, 4) Heavy industry business capital.  

 

The output of final goods heavy industry is primarily product machinery and equipment, which is purchased by businesses of all stripes. When bought and installed, and put to work, the product machinery and equipment becomes capital, which is of either non-Industrial business or Heavy Industry business in type.

 

A major portion of the output produced by upstream industry—such as glass, cement, steel, ceramics, etc.—when acquired for construction activity becomes capital, which is of either housing or public infrastructure in type.

 

All wealth accumulated, besides land, is the output of, and acquired from, heavy industry and construction industry activity. Heavy industry exists to create wealth, in the form of its manufacture of machines, which when installed enables the manufacture of other machines that are used by all business stripes and materials for construction activity.

 

Moving on, the output of light industry manufacturing—which comprises food manufacture industry as well, the output of farming, forestry and fishing, and the output of services industry together make up what is commonly referred to as consumer goods and services (or simply “consumer goods”).

 

Consider a new way of grouping the various classes of industry—here, based on the kind of utility the output of the many industries have. The basis is whether a "good" is readily consumable and perishable, or is the “good” a machine that can help manufacture other goods or can help in the provision of a service? Simply, the classification comes down to Capital goods and Consumer goods (and services).

 

Capital goods are goods in the primary form (ores) or processed form (steel) or final form (structures, machinery & equipment) that ultimately go into the formation of Housing capital, Public infrastructure capital, non-Industrial business capital and Heavy Industry business capital. All goods that are not capital goods and irrespective of whether they are in primary form (milk) or processed form (cheese) or final form that ultimately go into consumption and together with all services, which also is a part of consumption, comprise consumer goods.

An easy way to distinguish capital goods in the final form of any type from consumer goods is to check with these two necessary conditions: verify if the "good" in question does not perish and also whether it allows for the extraction of economic value from it repeatedly. A ‘yes’ to those two conditions shall most certainly constitute Capital of some type. As an example, a house does not perish quickly, and it can also provide repeated economic value in shelter every day.

 

An important point of note here is there exist a range of goods produced by final goods heavy industry, such as electronics and washing machines, that do not necessarily constitute capital. Specifically, electronics, electro-mechanical goods, vehicles, etc. may be accounted in practice as capital goods or consumer goods depending on the purpose of their installment. Those products all qualify for personal consumption and can also constitute a business asset. On that distinction, those products tracing the lineage to Industrial Revolution or Late Electronics Revolution, have happened to be the few remarkable ones that have found home in residential place, apart from the business setting. And most of those final industrial products do not move, except for vehicles, which in its operation, as we all know, is regulated by the state in the form of compulsory registration and licensing for operation.

 

On that note, it is clear that Capital goods industries come down to Final goods heavy industry and Construction Industry, and Consumer goods industries come down to the rest of the industries (All other industries). The same is illustrated in Fig. 1.4. Upstream industry itself can be cleaved, for the purpose of clarity, into two sectors of industries each linked to the final production of capital and consumer goods. That allows these two upstream sectors for classification in the corresponding fashion. With respect to the classification of upstream industry, we will take it up at some length in Chapter Seven.

 

Non-Industrial business capital is the accumulated stock of capital in the form of office spaces, buildings, and skyscrapers for business, stores, warehouses, other physical structures, and product machinery and equipment (except for machine tools, and industrial ovens and furnaces) installed in those structures. This type of capital combined with Housing capital and Public infrastructure capital makes up the capital of all organizations, entities, persons, etc. doing business in all of the Traditional economic activities.

 

Heavy Industry business capital is the accumulated stock of capital in the form of machine tools, and industrial ovens and furnaces, and the plants that house those machines, warehouses and office spaces as support infrastructure to the underlying businesses. This capital broadly constitutes machinery that generally is either a machine tool, which upon installation can manufacture other product machinery and equipment; or furnace and oven, which upon installation and operation can transform raw materials into processed materials to be supplied to various industries including final goods heavy industry. The physical product that makes up Heavy Industry business capital—broadly, machine tools and furnaces—is the output of the industry that is final goods heavy industry. Upon the productive use of Heavy industry business capital, the output it churns out, which assumes the form of processed materials, product machinery, and equipment, is availed for purchase by businesses that fall under both non-Industrial business capital and heavy Industry business capital.

 

To easily distinguish non-Industrial business capital from Heavy Industry business capital, these examples are helpful. In South Korea, the top companies that provide telecommunication services are SK Telecom, KT Corporation, and LG U plus. The capital owned by those three businesses falls under non-Industrial business capital. A portion of that capital is made up of telecommunication networking equipment, which was probably supplied by South Korea’s top electronics maker Samsung Electronics whose own capital falls under Heavy industry business capital.

 

South Korea’s top construction company Samsung Construction & Trading Corporation, which built the Petronas Towers in Kuala Lumpur and Burj Khalifa in Dubai, owns capital that falls under non-Industrial business capital.  A portion of that capital is made up of construction machinery, which was probably supplied by South Korea’s construction machinery manufacturer Doosan Infracore whose own capital falls under Heavy industry business capital.

Doosan Infracore belongs to Doosan Group, which also has its own construction company called Doosan Engineering & Construction whose capital falls under non-Industrial business capital. Here, Samsung Electronics and Doosan Infracore are final goods heavy industries performing industrial activities, whereas SK Telecom, KT Corporation, LG Uplus belong to services industry, Samsung Construction & Trading Corporation and Doosan Engineering & Construction belong to construction industry, performing traditional activities—that being, communication services and construction respectively.

 

To sum up, all four forms of capital, Housing capital, Public infrastructure capital, non-Industrial business capital, and Heavy industry business capital comprise: either material structures (sourced from upstream industry businesses in the form of cement, glass, ceramics etc.), or product machinery & equipment (sourced from final goods heavy industry businesses in the way of engines, turbines, bulldozers, etc.).

 

At it is clear now, all forms and types of wealth or capital accumulation ultimately originate from either upstream industry (materials) or final goods heavy industry (product machinery & equipment), or together, from Heavy Industry. Now, where do consumer goods (and services) come into the picture? It is by using product machinery & equipment that belongs to non-Industrial business capital accumulated from the output of final goods heavy industry that allows for the manufacture of consumer goods.

 

As shown in Fig. 1.2, Capital machinery industry manufactures machinery that upon installation provides for the performance of activities under primary and secondary industry. Capital equipment industry manufactures equipment that upon installation allows for the performance of activities under tertiary industry.

 

The nexus between National Capital—as classified into four types—and Economic Activity of all stripes is illustrated in Fig. 1.4. Net National Capital forms the basis for all productive economic activities. At the beginning of a year, the net wealth accumulated up to that point (say, W0) allows for a fresh round of annual production. Income flow originating from this fresh round of output in the form of wages and profits gets split into income for consumer spending, which goes toward consumption of consumer goods, and net savings, which is the source of all new investment in capital goods (say, equivalent to Wc). Additionally, depreciation expense (say, Wd), which is nobody’s income, is set aside from the revenue to replenish the worn and torn portion of the capital stock by purchasing capital goods. It is net (new) domestic capital investment (Wc) and depreciation expenditure (Wd) that together constitute gross investment. Therefore, wealth stock at the end of the production year rises to W0 + Wc and in such fashion keeps increasing year-after-year.  

 

As we have discussed, all capital goods originate from two industries: construction industry and final goods heavy industry. Upstream industry provides all industries, including those two capital-producing industries, with processed raw materials. The “All Other Industries” class that provides consumer goods and services includes industries from Section A to Z, except for Section F (construction) and heavy industry division of Section C (manufacturing).

 

For perspective, consider the net national wealth of the United States, which as estimated by Credit Suisse for their Global Wealth Databook (2015) amounts to USD 85.9 trillion in 2015. For the same year, the national income of the US (as calculated by the author using World Bank data) runs to approximately USD 15.38 trillion. Capital-income ratio for the US at the end of 2015, therefore, is 5.58 or 558%. That means for every USD 5.58 of capital the US economy produced USD 1 of income in 2015. Most Western European countries have capital-income ratios above the higher strata (i.e., 400%). Capital-income ratio for a poor country most likely exists below 250%—a mark of a country possessing small capital stock. As a poor country rapidly develops and accumulates capital, capital-income ratio likewise increases year-after-year. As a country becomes wealthy, the ratio moves beyond 400% and higher thereafter (due to asset appreciation caused by speculation on assets, and about which we will touch upon later).

 

 

 

What is Economic Development?

 

It appears that the following way of understanding the concept of economic development is mightily effective. Simply, economic development through industrialization involves the process of industrialization and modernization. And economic development through non-industrial route involves modernization alone. Modernization of a country through non-industrial route is achieved on the back of industrialization (and therefore the heavy industry) of foreign countries; heavy industry output is simply imported in this case. Countries of this stripe are Chile, Botswana. Industrialization serves the process of modernization, and the two processes together constitute economic development. Therefore,

 

Economic development = industrialization + modernization

 

Previously, we have classified capital into four parts: a) Housing capital, b) Public infrastructure capital, c) non-Industrial business capital, d) Heavy Industry business capital. It is the gradual accumulation of Housing capital, Public infrastructure capital and non-Industrial business capital that represents the modernization of all traditional economic activities we have identified previously. Also, the accumulation of Heavy Industry business capital represents the process of industrialization, which serves the above modernization process. The term ‘modernization’ has a definite and useful meaning to it. It connotes the idea of installation of materials, product machinery and equipment—all supplied from heavy industry, to perform traditional activities in modern form.

 

Heavy industry supplies materials such as cement, glass, steel, etc. and machines such as cranes, excavators, bulldozers, etc. for performing construction activity. Heavy industry supplies product machinery such as textile machinery to perform light industry manufacturing of textiles; supplies pulp and papermaking machinery to perform light industry manufacturing of paper and paperboard; supplies power generation machinery such as boilers, turbines and electric generators to enable electricity generation in power plants (utilities); supplies fertilizers and farm machinery to produce agricultural output.

 

In that way, heavy industry serves to modernize the traditional activities. It is the process of industrialization and thus the acquisition of Heavy Industry business capital that enables the economy to produce all of those products listed above and more—when supplied with materials and product machinery & equipment to all traditional economic activities, which modernize as part of the process.

 

A product of heavy industry is in and of itself not useful. It is when a heavy industry product enables men to perform such traditional activities that make it useful and productive; hence the better the product of heavy industry, the better will be the provision and performance of traditional activities including all kinds of services activities.  

 

A country’s march to accumulate Heavy Industry business capital and in effect enabling the accumulation of housing capital, public infrastructure capital and non-industrial business capital completes the process of economic development through industrialization. The rapid march of such a process of accumulation of capital, in extension, represents the process of economic development through rapid industrialization.

 

(Rapid) economic development = rapid industrialization + (rapid) modernization

 

The rapidity of modernization process derives from the rapidity in industrialization process, and in extension, fuels the pace of economic development.

 

A country’s efforts to accumulate housing capital, public infrastructure capital and non-industrial business capital based on the industrialization of other countries represent the process of economic development through non-industrial route. The rapid march of such capital accumulation process, in extension, represents the process of rapid economic development through non-industrial route.

 

Classification of wealth into those four forms and especially the classifying of business capital into non-industrial and heavy industry assume importance because it is the process of accumulation of heavy industry capital by businesses that constitutes in effect the industrialization of a country. It is the accumulation of heavy industry business capital by industrial nations that squarely separates them from the non-industrial ones.

 

In all early-industrialized countries, industrialization came first, instigating modernization. But large-scale and widespread modernization quickened only after the discovery of specific essential processes critical to extraction and manufacturing. The liquefaction of air and Ford’s moving assembly line are two such discoveries with profound and far-reaching consequences. About the latter, one such synergy characteristic of inventions at that time was its utterly unanticipated utility in the production of nitrogen for the Haber-Bosch synthesis of Ammonia. Additionally, the discovery of large-scale, steel-making and aluminum-making processes—that being the Bessemer process and Hall-Heroult process respectively—mightily improved the capability to supply materials up the value chain in large quantities in short time, enabling large-scale modernization.    

 

Among all late-industrialized countries, industrialization and modernization occurred simultaneously and that too, in a compressed timeline. Whereas the process of industrialization and modernization in all of the early-industrialized countries consumed about a century (roughly 1870 to 1970), the late-industrialized countries meagerly took about two to three decades.

 

A point of note is that throughout the book the discussion concerns the topic of economic development through rapid industrialization. Whenever discussion turns to non-industrial route, mostly specific portions in Chapter Seven and the entirety of Chapter Nine, the Chapter and section titles reflect the same.

 

Capital Accumulation Phase

 

The two terms coined as part of this sub-section are Capital Accumulation Phase and Capital Efficiency Phase. The term capital accumulation phase relates to the period during when the economy of a developing country catches up with the economies of the early-industrialized countries in terms of capital-income ratio, and the term capital efficiency phase relates to the period after when the economy attains high capital-income ratio. Capital accumulation phase defined technically is the period when the contribution of capital accumulation to economic growth dominates the contribution of TFP.

 

Capital efficiency phase is the period during when the contribution of TFP to economic growth is markedly higher than what is observed of its contribution during the capital accumulation phase, and the contribution of capital to growth is less than what is observed of its contribution during the capital accumulation phase. TFP underscores the productive use of capital, derived partly from the improved performance of technology acquired from capital investment. 

 

For a late-industrializing country, Capital accumulation phase experiences rapid acquisition of residential and industrial capital and the capabilities to manufacture product machines using design and technology that has already been invented and perfected.

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Author’s calculations based on National Accounts data; see Online Appendix

It is in the following phase—capital efficiency phase, that is—that innovation emerges as a primary contributor, aside from general factor productivity, to the long-run growth.

 

Throughout Capital accumulation phase, investment rates would be much higher than they would during the Capital efficiency phase. Faster capital acquisition requires a substantially bigger share of investment in the makeup of GDP. Also, a markedly higher savings rate is required to fund an optimally high investment rate, which in turn produces a superior income growth rate enabling capital-income ratio of the economy to rise to higher values within a short period. Consider Fig. 1.5 that shows investment rates for Taiwan (1961-2013) and South Korea (1963-2015) over a 53-year period of economic activity. The first 35 years of each country produced investment rates upwards of 15%. South Korea had much higher investment rates, in the long run, shooting above 20% in most years and attaining a peak 30% rate in two specific years. Taiwan produced investment rates upwards of 20% at the beginning, and as capital controls were relaxed in 1981, its investment rates dropped but only to recoup and remain within 15%-20%. From year 36 to 53—a period that can be referred to as Capital efficiency phase— for each country lower investment rates compared with the rates of the prior phase have been the norm. We see that during the first 35 years of economic activity in both counties, a much larger share of output had gone to domestic capital investment (from 15%-30%) confirming that there was, for a fact, a capital accumulation process underway. We can deduce from here that the two periods can aptly be called Capital accumulation phase and Capital efficiency phase, in the way we have defined. In Chapter Two, we dig deep into various contributing factors, besides capital investment, to the output growth of those two countries during the first phase. For now, discussion limiting to the definition of those two terms suffices.

 

 

 

Capital-Income Ratio

Capital-income ratio is a simple accounting notion that indicates a country’s aggregate net national wealth stock in market prices as a proportion of its annual national income also compiled in market prices at the end of a year. Income measurement corresponds to the year in question, and net wealth stock corresponds to aggregate wealth accumulated by the country from time immemorial to the end of the year. For example, the ratio of aggregate wealth stock of the US measured at the end of 2007 at prevailing 2007 market prices and US national income for the year 2007 yields the figure 5.5 or 550%. This indicates that the national wealth of the US at the end of 2007 was five-and-a-half times the annual national income in that year. However, US capital income ratio in 2010 declined to about 430%, a drop of 120% of national income in three years.

 

What explains such tremendous drop? The big decline in capital-income ratio can be explained by the Great Recession that followed the 2008 Global Financial Crisis, which induced a significant fall in the market prices of housing and financial assets such as stocks and bonds. Thus the 2010 prevailing market value of net assets (assets – liabilities) together yield only a little more than four-and-a-quarter times the national income in that year.  As the US stock market recouped since the debacle, capital-income ratio jumped to 450% in 2013.

 

Measuring wealth relative to national income is a much better way of gauging national wealth, or even its two components—private wealth and public wealth (another way of classifying wealth). The aggregate value of wealth stock on its own does not convey any meaning and does not capture the magnitude of the wealth stock. A small country such as Singapore has a wealth of US$ 1,100 Billion whereas India has had a wealth of US$ 3450 Billion in 2015. Those figures do not tell us which country is wealthier among the two. Wealth per adult in 2015 for Singapore comes to US$ 270,000 compared with US$ 4,350 for India. On a per adult basis, relative figures enable us to infer that Singapore is significantly wealthier than India. Even so, capital-income ratio rather than capital (wealth) per adult better enables us to capture the relative wealth at national level and allows us to study wealth on a temporal and spatial level.

 

Typically low-income countries have a small capital-income of the order of less than 200%, which indicates that those countries rely to a much lesser extent on physical capital for output production. Less capital per worker means less than optimal output, thus the low-income. Advanced, capital-intensive economies rely heavily on physical capital, accumulated over a long period, as a factor of production. More capital per worker means efficiency and higher output, henceforth their high-income status. Although the above example is an over simplification, it captures the essence of capital-income ratio. We will become much more familiar with the concept in the later Chapters of the book.

 

From here onwards, we will rely exclusively on capital-income ratio, as a simple measure of wealth or capital, to compare and contrast wealth accumulated by nations and also to study the dynamics of convergence along the same lines between the less-wealthy countries and the wealthy countries. In Chapter Two, we shall come back to this concept, and in particular, we will see the link between capital-income ratio and the two important parameters of macro-economy that determine the ratio: savings (s) and income growth (g).

 

 

 

The Essential state and the Enabling state

 

We have come across once before, in the Introduction, the term ‘enabling state’. The term was used to characterize those aspects of state function impacting the development of economy. A more elaborate discussion is warranted to understand the many roles played by the state—some roles dictated by constitution, law, precedent, and some by the exegesis of the temporary events at play—to properly come to terms with the kind and extent of role the state will and can have in economic development. The state emerged as the successor to the princely kingdoms of the medieval world; and through constitution and law, the state retains its core functions and powers such as national defense, internal security and tranquility, law and justice, protection of private property, external and internal communication, external trade and the right of taxation to fund the above functions. Those constitute the Regalian functions of the state.

 

With the advent of heavy industry and the modern capitalist economy, scope and complexity of production and economic exchange vastly increased. The state (of the early-developed countries) intervened in the economy to transform the then fragmented local and regional markets into a national market for land, labor, and money and thereafter to regulate those markets as conditions warranted. The markets of land, labor, and money are unlike any other because of their nature. Often ignored by economic theorists who specialize in abstract worlds, the three elements—land, labor, and money—are the fictitious commodities of the economy. That is, when market forces come into play, demand for the three commodities may vary within the national economy but the supply cannot. That is, at any given time it is the demand side of market forces of each of the three commodities that remains as the sole adjusting factor; supply side being fixed because the total land endowed from nature, the available national labor force, and the money supply do not change. It was due to the state’s efforts among the early-developed countries to restrain the untoward market outcomes including the conditions of incorrigible unemployment numbers, the regulatory bureaucracy came into existence expanding the role of the state beyond the regalian functions in the process. Those new functions, coming into play roughly around late-nineteenth century, remodeled the state to what may be called the Essential state.

 

Soon after, the state that came to be the Essential state had come to incorporate during the twentieth century such additional functions as regulation of business, business organization and re-organization, business opening and closing, anti-trust issues, business operating within an inherently-monopolistic industry (such as electricity transmission). After the Great Depression, the New Deal expanded the scope of the functions of the state to regulating the financial industry. It turned out, without appropriate and measurable regulations in place, the financial industry already rife with speculation was and has been prone to malpractice, deceit, and fraud. Efforts to curtail those timeless practices in financial industry and guarantee economic stability had, thereby, placed the resulting functions of the state in the Essential box.

 

After the Second World War, the functions of the state, especially among the countries in the Global South, were expanded in the name of developing their economy and also due to an affinity for socialism (for example, India). In some instances, the incentive for the state to do so came from such sources as national security (Israel, and also India). The resulting functions to accomplish the task of economic development created the Enabling state in some places or the Disenabling state elsewhere. Probing the functions of the Enabling state is another way of asking how late-developing countries can become rapidly rich and what governments can do about it. It is to uncover and illuminate those answers to the same question that this book is tasked.

 
 
 
 
 
 
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