This is the first chapter of the synthesis of the various institutional diagnostics undertaken in IDP, including those of South Korea and Taiwan. It compares the main economic development challenges, or advantages faced by the various countries, and the major institutional causes behind them. Development is seen as the structural transformation of the economy through the absorption of traditional low-productivity activities by the modern high-productivity sectors of the economy, rather than merely GDP growth rates. The comparative analysis is conducted with systematic reference to the well-known framework proposed by Arthur Lewis to represent this progressive diminution of ‘dualism’. If South Korea and Taiwan fit this framework rather well, the structural transformation is shown not to rely on growth engines sufficiently strong and labour-intensive to proceed satisfactorily in the IDP countries, except maybe in Bangladesh where the domestic engine is supplemented by massive outmigration of workers. It turns out that the cause for such a situation most often lies in the political economy context of the design, decision, and implementation of the appropriate development strategies.

Chapter 4 starts by distinguishing between long-term growth and short-term fluctuation. The former is determined by the supply-side factors of investment, education and technological progress, whereas the latter is affected by demand-side factors of consumption, investment and exports. Investment creates both short-term demand and long-term supply. China has enjoyed the highest investment rate in the world in the past few decades, made possible by its extraordinarily high savings rate. After evaluating several popular explanations for China’s high savings rate, the chapter argues for a cultural explanation. Although a high rate of savings and investment is one of China’s distinct advantages over all other developing countries, the popular press often describes China’s growth as seriously imbalanced, relying too much on investment and exports and too little on consumption. Chapter 4 shows why this popular view is misplaced. Much of the misunderstanding is caused by the failure to distinguish between long-term and short-term growth and the resulting failure to understand that economic development as long-term growth cannot be driven by consumption.