Industrialization Development 1 Key Questions Q 1 Industrialization

Industrialization & Development 1

Key Questions: • Q 1: Industrialization = Development? (Choice of strategies) – Association – Deviations from the Norm • Q 2: Industry = Which Sector? – (Choice of products) – Backward linkage & Forward linkage – Economies of scale • Q 3: Modern Technology = • (Choice of Techniques/Technologies) – Minimize the present value of costs – Employment effect 2

Q 1: Industrialization = Development? Figure 1: Association for Large Countries 3

Q 1: continued Figure 2: Association for Small Countries 4

Q 1: continued • Association (strong): – – B > 0; C < 0 • Variation (wide): – – – Size of economy Resource endowments Development strategies (policies): IS & EP Geographic location Historical circumstances 5

Industrialization as a Pathway: Historical Perspective • U. K. Industrialization lead to economic development – 1. But was this the entire story ? • No, Enclosures and Corn laws – 2. Industries which led: • Textile exports, steel etc. which caused backward and forward linkages. 6

Q 2: Industry = Leading Sector? Linkage & Products • Backward Integration (Example: Automobile->machinery->metal process->steel) – Given a rise in final or consumer goods – Demand feeds back to producer goods. • Forward Linkage (Example: Textiles->clothes) – Rise in producer goods – Supply stimulates final or consumer good demand • A necessary condition is that textiles must be produced below world cost • Policy to achieve above is an infant industry tariff 7

Q 2: continued Infant Industry – Korea used both the Infant Industry technique and then followed it by an outward looking export-oriented strategy. Korea was successful because it could enjoy at first the gains from import protection before switching to an export strategy because it was a political ally of the west. – Jamaica, which followed a similar strategy, failed because they did not get favored treatment by developed countries since it had a socialist government. 8

Q 2: continued Economics of scale • 1. What are economies of scale? – Scale economies are declining LAC curves. – Declining LAC arise due to – – a. fixed costs; research, b. spreading of capital, c. greater scale implies greater specialization d. quantity discounts • 2. What role do they play in an investment decision ? – Crucial to being competitive. 9

Q 2: continued LAC & Products 10

Q 2: continued MES & Products • Want to experience large scale economics quickly? Why? – Small Domestic markets? • Concepts: MES – MES= minimum efficient scale • % increase (or decrease) in ac curve@1/2 MES – Tells you how steep your cost increase is on short run Average cost curve • MES as % of market 11

Q 2: (continued) Why Not Beer? Products % rise in LAC MES as % of market Bread 15 1 Beer 9 3 Footwear 2 0. 2 Dyes 22 100 Sulfuric acid 1 30 polymers 5 33 Cement 9 10 Steel 8 80 Machine tools 5 100 Electric motors 15 60 Autos 6 50 Bicycles 1 10 Diesel engines 4 10 12

Q 2: Conclusion: Q 2: Conclusions Products Choice and Scale • Beer and Bread: No major scale economies and too quickly realized. Thus, all countries are efficient. Can’t compete by scale. • Steel and Machine tools, – Huge scale economies, – First there is efficient and tough for others to compete 13

Q 3: Modern = Good? Choice of Technique 14

Q 3: (continued) Capital-labor ratio • Capital-labor ratios – T 1: = 80/22=3. 6 (Labor intensive technology) – T 2: =200/11=18. 2 (Intermediate technology) – T 3: =400/5=80 (Capital intensive technology) • Thus, T 3 is 22 times more capital intensive than T 1 15

Q 3: (continued) Factor costs 16

Q 3: (continued) PV of Costs: Rich 17

Q 3: (continued) PV of Costs: Poor 18

Q 3: (continued) Employment effects • 1. Elasticity value = % industry employment / % industry value added =. 6 – or a 10% increase in Yp leads to a 6% growth in employment. • 2. This implies that productivity rose by 4 % per annum or – trade off between higher wages but less industrial employment 19

Q 3: Conclusion: Technical Choice and Scale • Favor Developed Countries • Capital Intensive have large scale economies and thus low capital costs keep developed countries continually out front when new techniques emerge for same products. 20