Industrialization & Development

Key Questions: Q1: Industrialization = Development? (Choice of strategies) Association Deviations from the Norm Q2: Industry = Which Sector? (Choice of products) Backward linkage & Forward linkage Economies of scale Q3: Modern Technology = (Choice of Techniques/Technologies) Minimize the present value of costs Employment effect

Q1: Industrialization = Development Q1: Industrialization = Development? Figure 1: Association for Large Countries

Q1: continued Figure 2: Association for Small Countries

Q1: continued Association (strong): Variation (wide): B > 0; C < 0 Variation (wide): Size of economy Resource endowments Development strategies (policies): IS & EP Geographic location Historical circumstances

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.

Q2: 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

Q2: 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.

Q2: 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.

Q2: continued LAC & Products

Q2: 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

Q2: (continued) Why Not Beer? 10 1 Bicycles 60 15 Electric motors 100 5 Machine tools 50 6 Autos 9 Cement 80 8 Steel 3 Beer 0.2 2 Footwear 4 Diesel engines 33 polymers 30 Sulfuric acid 22 Dyes Bread MES as % of market % rise in LAC Products

Q2: Conclusion: Products Choice and Scale Q2: Conclusions Q2: Conclusion: 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

Q3: Modern = Good? Choice of Technique

Q3: (continued) Capital-labor ratio Capital-labor ratios T1: = 80/22=3.6 (Labor intensive technology) T2: =200/11=18.2 (Intermediate technology) T3: =400/5=80 (Capital intensive technology) Thus, T3 is 22 times more capital intensive than T1

Q3: (continued) Factor costs

Q3: (continued) PV of Costs: Rich

Q3: (continued) PV of Costs: Poor

Q3: (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

Q3: 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.