The Making of the book: The General Theory of Rapid Economic Development
Updated: May 2, 2022
For far too long many many young Indians like myself pause at some point in our lives feeling discuraged with the slow pace of change and development in India.
Sure, India has made big strides in the past two decades, seeing massive improvement in the quality of life and work especially in the major urban towns and cities. Our national income per capita increased from USD 325 in 1995 to USD 1400 in 2015—4.3 times the income in 1995. During the same period, China also increased its income from USD 550 to USD 6500—almost 12 times the income in 1995.
You see, India, sadly, does not have the right macro and micro structure to replicate the successes of China, or Taiwan, or South Korea, or Japan. For a brief assessment, consider cement production data—one of the three key secondary indicators of development potential besides steel production and electricity output. The graph below shows the 25-year timeline of cement production in Mega tonnes from 1990 to 2014 for China and India. We can see that not only has India’s cement production been lagging China’s (which is fine), but also India is showing no signs of production spurt identical to one we clearly see in the case of China.
Source: for 1990–1999, Chinese Statistical Yearbook 2000, & India Cement Manufacturer’s Association Report 2008–09; for 2000–2014, US Geological Survey. For time series data of electricity and steel output, click here.
All those who live in India or made a trip knows that India has been on a construction spree in the last two decades building bridges, airports, highways, urban housing, etc. But China has been operating on an entirely different scale. For perspective, consider this fact. Astonishingly, China between 2008 and 2010 emplaced more cement in new construction—about 4.9 Giga tons—than the United States did during the entire twentieth century—about 4.56 Giga tons; between 2009 and 2011 China emplaced even more—about 5.5 Giga tons. Source: Vaclav Smil, Making the Modern World: Materials and Dematerialization (Chichester, WS: Wiley, 2014)
Besides India, there are many other countries throughout the world and especially concentrated in South Asia and Africa that rank in the lower-middle income and low income categories of the World Development Index (the other two categories are high income and upper-middle income). For perspective, there are 51 countries under the lower middle income category totaling roughly 3 billion people, and 29 countries under low income category totaling roughly 600 million people (see here). India exists in the lower-middle income category.
After finishing MBA at a business school in Australia, I came back to India in late 2014 and began work on some projects and later started Starry Technologies along with few of my friends. During the same time I began on a lonely endeavor to understand the subject of economic development, to which I kept dedicating increasingly more of my time and effort.
Like anybody who can glean the same from taking even a cursory look into the subject, it quickly became clear to me that no economist has been able to figure how exactly countries can develop or even how the successfully developed countries such as Japan, South Korea and Taiwan developed so fast in the first place. These contemporary academics are wrangling about some concepts developed decades ago that have shown to be of no use at all. They failed. Worse, the entire subject of economics is in doldrums as the 2008 Financial Crisis exposed the economists’ lack of grip on the reality.
In the last seventy years of academic research and discourse, billions of dollars of research grants and academic salaries, you will find hundreds and thousands of books on economic development—enough to fill a giant room—written by economists that simply are a rehash of the same-old concepts offering nothing of practical value.
I went to work. I went to work to understand. Even though it has been a long-standing desire of mine to pursue and inquire, I was able to do something more than that. I hit two major breakthroughs. First in the macro; and second, later, in the micro.
It was from 2015 to 2017, after almost three years of personal research, reading hundreds of books and academic articles, analyzing economic data, calm observation of the operations of banking and international trade in the real world, inquiring and reassessing the meaning and definitions of several basic concepts such as savings, investment, markets, exploring the meaning of other relevant concepts like invention and innovation, etc., it slowly dawned on me that many countries such as India failed to develop because they did not create a workaround solution to the two obscure technical barriers the countries did not know existed.
How can a country or anybody devise solutions to a problem (a barrier to economic development) that nobody knew existed?
But when India failed all along, how did the North Asian nations succeed? It also became clear that the groundbreaking successes of nations such as Japan, South Korea, and Taiwan are rooted in their devise of non-ideological, straightforward solutions to practical problems those nations encountered in the beginning. Their solutions, amazingly, turned out to be a practical workaround of those technical barriers (devised by Japan in a trial-and-error fashion to problems the country faced over a 25-year period, 1925–1950; and later replicated from the 1960s by South Korea, Taiwan—both ex-colonies of Japan, and much later by China). I wrote more on this in the book. As we can see in the graph below, the North East Asian nations fare much better than the South East Asian nations who also tried to develop but failed because they never replicated the solutions devised by Japan.
Source: World Bank, World Development Indicator’s Database, <http://data.worldbank.org/indica...>
For data sheet, click here
But what are those TWO barriers to economic development? Nobody knows until NOW. One of them relates to macro and another to micro. Both are very basic, simple, and go to the heart of the subject matter. Both tear apart the long-held understanding of basic economic concepts.
As you can see, uncovering the barriers that nobody knew existed is one step but devising solutions to each one is another. Let’s get started with the Macro.
THE MACRO
Over the last seventy years, or even two centuries if one considers the period when it all really started, the concept the economists and policymakers struggled the most to come to grips with and all but decided to go along with whatever theory showed some confidence in its predictability is SAVINGS.
You see, the idea of savings is somewhat intuitive and basic to us individuals. We think of savings in personal terms and not bother about the larger macroeconomic framework that ‘savings’ maybe part of. In any case, the concept of savings is very important to economics in general and economic development in particular because in any abstract year it is net savings (new savings) that enable new domestic capital investment, creating new wealth in the country (this statement is treated as self-evident in economics but it’s actually not the case. In fact, the opposite is true. It is counter-intuitive, I can tell you. That is it is investment that creates the net savings of a country. But for now, let’s just go along with that statement).
Simply, the higher a country saves from its national income (the rest being consumption) the larger will be the new wealth (capital) it adds to its existing wealth stock (capital stock).
Through a simple mathematical calculation, one can show that the higher a country ramps up its savings rate [(net savings/net national income)*100], the larger the capital stock will become and the higher the country’s national income growth rate. (I am writing the previous statement in very a simplified terms, it is actually slightly more complicated). And if the country keeps going with such high savings figures for couple of decades, the faster will be the expansion of its wealth stock (capital stock).
See the graph below showing how much South Korea and Taiwan each saved from its national income (SAVINGS RATE) in a year for a 35-year timeline. The timeline is drawn from the period when they grew at very high GDP growth rates. For South Korea, it is 1963–1997 and for Taiwan, it is 1961–1995.
We can see that both South Korea and Taiwan starting from very low savings rates of 5% and 10% each went on to rack up very high rates during the considered timeline—the rates going up as far as 30% to 35%. That means the two countries at certain point each saved a whopping 30% of their national income to make new capital investment in a year.
Source: Author’s calculations based on National Accounts data; see Online Appendix at The General Theory of Rapid Economic Development
Amazingly, nobody has been able to figure out how those two countries and a quite few others such as China, were able to save a high proportion of their national income each year over a long time. Simply, what is the cause of high savings rate?
Sure there are theories such as Life Cycle Hypothesis (LCH), whose theorist Franco Modigliani received a Noble for it, trying to explain the phenomenon of savings. But that theory, like others, all have vague, incomplete, and unsatisfactory answers to the phenomenon of high savings (but why did he then receive a Noble for it? —well, that is a question one can ask of for a lot of other recipients in economics).
While we are at it, let’s take a look at the case of China. See the graph below showing Chinese savings rate (right-axis) and national income composition (consumption + savings) for each year from 1989 to 2015. As we can see, China not only increased its savings volume year-after-year—going from couple of billions to couple of trillions over a span of two decades, it also increased the proportion of national income it saved—going from less than 20% of national income in 1989 to about 40% in 2009. (all values in current prices). The Chinese posting a 40% savings rate in 2009 amounting to roughly USD 2 trillion is the stuff of extraordinary feats.
Source: Author’s calculations based on National Accounts data; see Online Appendix at The General Theory of Rapid Economic Development
The area shaded black in the graph above representing the savings volume China racked up each year is the true source of all new wealth the country accumulated thus far (all old wealth accumulated prior to 1989 will remain so small that the large wealth recently accumulated completely dominates the net wealth stock figures).
One can see in the graph below showing average savings rate for two groups of countries over a varied timeline. The timeline for each country in green covers most (for France & Germany) or part (for US, UK) of the duration when they built their capital stock. The timeline for each country in orange (Taiwan, South Korea, and China) also covers the most of the duration when they grew at record rates and built their capital stock. We can readily observe the stark differences in the savings rate figures between those two groups. What explains the amazingly high and consistent (for year-by-year time series data, see the Online Appendix tab on book’s website Economic Development) savings rate figures?
Source: For US, UK, France, Germany
Authors calculations based on data retrieved from Alvaredo Facundo, Anthony B Atkinson, Thomas Piketty, Emmanuel Saez, & Gabriel Zucman, The World Wealth and Income Database 2016, data retrieved from <WID - World Inequality Database>
Note: Data corresponds to West Germany for the period 1946 – 1990
Source: For South Korea, Taiwan, China:
Author’s calculations based on National Accounts data; see Online Appendix at The General Theory of Rapid Economic Development
Note: The timeline for the early industrializers France, Germany, US, UK is based on the availability of data, going back the longest for France because of its excellent record keeping.
But what has economics got to say about the reasons for China or all those North East Asian nations posting such enormously high rates when compared to the low rates posted by the early developers who also grew at a small GDP growth rates? Well, nothing.
The economists were on the wild goose chase! See for yourself the title of one of the articles on China published in 2004 by the theorist of one of the most influential macroeconomic theories on savings, Franco Modigliani. It is here The Chinese Saving Puzzle and the Life-Cycle Hypothesis the economist Franco Modigliani is trying to use his own theory to explain the Chinese savings puzzle and failing.
Other economists are onto solving the puzzle as well (using the same LCH theory most of the time to attempt an explanation), consider few other works by professional economists.
1. Why Are Saving Rates so High in China? (2011)
2. Why Is China’s Saving Rate So High? A Comparative Study of Cross-Country Panel Data (2010)
3. Counterintuitive facts regarding household saving in China: the saving glut (2018)
What was the ultimate cause of those countries being able to post record-breaking savings rates?
Are you now ready to find out what that first barrier to rapid economic development that I uncovered in my research? Well, the first one, the one relating to the Macro, is that a non-trading capitalist Nation CANNOT accumulate a savings rate beyond 10% of its national income during any period (take the meaning of non-trading here as what it means: no exports and no imports).
What does this savings cap mean? Also, Why the 10% rate?
Unlike personal income where there is technically no cap to how much an individual can save, a non-trading capitalist economy can only save at max 10% of its national income during any period. Regarding the 10%, the way the theory was developed is that I am able to show how there exists a limit to how much a non-trading country can save. The 10% rate is the most likely one arrived using the real-world historical savings rate data of the early-industrialized countries such as the US, the UK, France and Germany, accounting for the savings accrued from elsewhere (we’ll soon find out).
Also, didn’t we just go through graph after graph for three North East Asian countries that posted some of the highest average savings rates and all above the 10% rate?
The reason China was able to post such high savings rates of 30%, 35%, 40%, etc. each year even though the threshold is 10% is because the 10% limit to how much savings a country can accumulate in a year originates from and relates to only the domestic domain of the economy (also the same as when a country is closed to the outside world). That is when a country’s economy has no trade going on with the outside world (consideration of such an abstract scenario is necessary to dissect and understand the origination of various savings in the real-world), the savings a country can rack up is limited to 10% of whatever its national income is.
But this so-called threshold rate (the 10%)—being a barrier to rapid development because such a limit prohibits FAST accumulation of a lot of capital —can be beaten. Well, how?
The answer is International trade. But, how exactly? By devising simple, straightforward solutions to their trade and investment woes, Japan, South Korea, Taiwan, and China all engaged in international trade in a fashion that allowed them to rack up higher savings rate astonishingly without the knowledge of doing it.
The graph below superimposes the threshold rate (of 10%) on the average savings rates of both the early and late industrializers. We can see that all late industrializers have a savings rate phenomenally higher than the threshold rate. But that is not the case with the early industrializers except for Germany. But even Germany’s standout rates among its peers is not beating the average rates of the late industrializers. But what explains the outlier case of Germany. The answer is again Germany’s superiority in international trade. From 1890 to 1910 and again form 1950 to 1973, Germany and then West Germany stood out in their performance in trade (but how exactly trade is giving a pass out of the threshold rate is due in the book).
But what is surprising is the lack of understanding of the implications trade has on the macroeconomic parameters of a country. That is those countries or the economists are yet to learn that it is the specific international trade structure of those countries that allowed them to beat the 10% threshold savings rate—about which also they don’t have a clue (yet).
Source: same as previous figure
If you are surprised that such a thing can happen, it helps to know that the subject of economics, even to this day, has barely developed. The surface has not even seen a hint of scratch in terms of understanding the real world economics.
Modern economists dabble with mathematics-clad economics, which nobody but themselves understand. Like one economist noted, the priority of the profession is to publish academic articles to impress their peers rather than make headway in the subject discipline. So when countries make non-ideological, simple decisions—the way Japan did, a practical approach to tackling a problem sometimes paves the way to the right solution even if there is no theory to guide those decision makers. But nobody until now has been able to show theoretically how those North East Asian countries succeeded and why others failed.
Since the existing terminology has proven to be so inadequate, which also explains the economists’ lack of insight, I have had to coin a number of new terms, redefine old terms throughout to improve understanding. In this part there are three relevant terms that are all newly defined.
Net Savings = net internal savings + foreign savings
And correspondingly;
Net Savings rate = net internal savings rate + foreign savings rate
Net internal savings is one that originates from the domestic domain of the economy (as if the economy is closed to business with the outside world). Net internal savings is capped at 10%—a rate which is also referred to as the threshold internal savings rate. Whereas foreign savings is one that originates from foreign domain, i.e., international trade.
As you can see, the terminology I have coined is based on the various sources of net savings of a nation. The mainstream terminology existing today and has been in use for a very long time is coined based on where the net savings eventually end up. Those terms are household savings, corporate savings, government savings. (The first two are clubbed to refer to as private savings).
There are so many questions relating to the Macro left unanswered in this Writeup.
In terms of the problem: How can you show that there is indeed a threshold to how much a country can save from its domestic domain? And why is there such a threshold that nobody knew about?
In terms of the solution: How exactly is international trade allowing countries to beat the 10% threshold and rack up much higher savings rates? How did the threshold rate come down to 10%? How can we show that it is net investment that is the ultimate creator of net savings?
As you may have guessed, it takes quite a lot of space to cover all of it. That is why I knew I had to write a book. A good part of the 2016 and 2017 was devoted to retrieving and analyzing data, creating graphs in excel sheets, developing various country case studies, writing and developing the theory and the mechanism of rapid economic development. A potential writeup on barriers relating to the Micro will be long, and therefore, that portion is also due in the book.
The book shaped quite well and I put extra effort adding chapters and concepts that can help readers new to this topic get started. With Ten Chapters spread across four Parts: Getting Started; Theory; Mechanism; & Application.
Getting Started, Part One, covers first two Chapters. These two Chapters along with the Introduction sets the reader for what’s to come in the next Part.
Introduction
1. Concepts, Notions, & Terminology
2. Early & Late Industrialization
Theory, Part Two, covers four Chapters spread between two sections:
Macroeconomics
3. Low Savings Rate in Capitalist Economy
4. Restoring High Savings Rate in Capitalist Economy
Microeconomics
5. Radical Uncertainty in Industrial Economy
6. Restoring Radical Uncertainty in Late Industrial Economy
The Mechanism, Part Three, takes up the case of China (as a case of economic development through the industrialization route) and the cases of Botswana and Chile (as a case of economic development through non-industrialization route).
7. The Mechanism of Rapid Economic Development
8. The Mechanism of Rapid Industrialization - the Case of CHINA
9. The Mechanism of non-Industrial Development -
the Case of BOTSWANA & CHILE
The analysis of China in Chapter Eight goes to an unprecedented level in its breadth and depth. We’ll be exploring the economic development of China down to the product level where you will learn the general design, operational principle and working of industrial products like boilers, internal combustion engines, jet engines, transformers, motors, generators, etc.
This is where a little bit of science, technology and engineering enters the book. For those from non-STEM backgrounds, no need to worry as this section like the rest of the book is written in plain prose with ample internet links to access GIFs of product design and operation. One can skip these sections if desired as the rest will still take care of the matter at hand.
The economists are an important bunch but most of the profession makes up economic theories impacting the real-world economic activity in products and services without the knowledge of the design and operation of those products. That is why it is important that readers of economic development should also know on the back of what products or technologies exactly a country develops.
The Application, Part Four, takes up the case of India, analyzing the causes of the failure of India in the first thirty years (1956–1985) of policy implementation, and showing for the first time the true causes of the recent successes in the next thirty years (1986–2015) of policy implementation.
As we can see in the graph below, India remained below the 10% threshold savings rate until 1986 when the first of a series of policy reforms in trade and investment arrived (India’s trade, even in small volumes, allowed it to beat the threshold to a tiny extent as we see in the late-1970s).
India never looked back as the savings rate eclipsed past 10% mark in 1986 without going back to below 10% for the first time in its history. India went past the 20% rate in 2001 and during the same decade enjoying some of the highest net domestic investment rates and GDP growth rates in its history.
Source: Author’s calculations based on National Accounts data; see Online Appendix at The General Theory of Rapid Economic Development
All of it is explained and covered in this Chapter dedicated to India. Just for the above I removed a second data series that accompanies the savings rate data series in the graph as originally presented in the book. That second data series relating to trade and that which gives some clues to the rise in India’s savings rate if included would have been a spoiler.
The section above is followed by an analysis of India’s potential at present, and then an estimation of the growth record of India in the next 25-year period (2016–2040) (2016 because it was in 2017 when much of the time series data was retrieved from various databases, which had data only up to 2015).
10. The Case of INDIA & the Future
You see, the two barriers are only obstacles to rapid economic development because nations like India and so many non-Western countries have been (are) embarking on a development mission that is characterized by rapidness and lateness.
All countries industrializing after the end of the Industrial revolution are on the “late” curve. And all of those countries are engaged in developing “rapidly”, unlike all the Western countries which built their wealth stock little by little over a century and longer and which engineered the Industrial Revolution. The late-developing countries such as South Korea, Taiwan, and China have built their capital stocks (which is properly measured in “times of national income”) in a span of three to four decades and borrowed technology from the already-industrialized countries.
On that topic, the proper indicator of economic development is capital-income ratio. All wealthy countries today hold capital stocks above four times their national income (for example, the US wealth stock as estimated by Credit Suisse for their Global Wealth Databook amounts to USD 85.9 trillion at the end of 2015. For the year 2015, the US national income came down to USD 15.38 trillion, as calculated using World Bank data. Therefore, the US Captial-income ratio at the end of 2015 comes down to 5.58 or 558%). All there is for developing countries to do is to catch up with the wealthy ones on the capital-income ratio indicator.
See below the graph showing the historical capital-income ratios of the four major early developed countries and two late-developing (-loped) countries South Korea and Taiwan. (there’s a lot more to this topic and much of it is in the book; you can also read for free right now on the Learning Center tab here on the book’s website https://www.generaltheorybook.com/ )
