1 Lecture 21 Don DeVoretz Industrialization: A Strategy for Development ?

2 Debate 1 Multinationals Pros and Cons of Multi-nationals The argued benefits from Multi-national Corporations operating in your country are: –fill savings gaps, provide foreign exchange, government revenue, management skills and –technology which all will lead to further growth.

3 Debate 1 con’t The counter arguments are that; –capital is raised locally, –little profits are reinvested, and tax avoiding transfers Which point of view appears appropriate for your country? What is the evidence to support above? How would you gain the required evidence to support one view or the other?

4 Debate 2 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.

5 Debate 2 Infant Industry Which view do you agree with? What are the essential ingredients in the infant industry argument to insure that gains are available in short-run ? What policies must be in place to insure an export oriented policy both at home and in the developed countries ?

6 Industrialization as a Pathway A. History: –U.K. Industrialization lead to economic development –1. But was this the entire story ? No, Enclosures and Corn laws –2. Industry was a leading sector: Textile exports, steel etc. and caused backward and forward linkages.

7 Modern Evidence 1.Share of industrial value added in GNP to Yp 2. Evidence for large countries: 4x Yp raises industrial share by 20% 3. Only 1/2 of variation in valued added share of industry explained by level of Yp 4. Variations around sc line explained y –i. Import substitution –ii. Resource endowment

8 Industrialization and Employment 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

9 D. Industrial Structure: Backward Integration: – rise in final or consumer demand feeds – back to producer goods. – Turning point is $2,500 in Yp Forward Linkage – Textiles to cloth:.A necessary condition is that textiles must be produced below world cost: Policy to achieve above is infant industry tariff.

10 Investment Choices and Industry: Choice of Technique 1. Context – Workers in rich country paid 10X that of poor country. –. Capital costs in poor country twice of rich country. –. Textile is of equal quality in both countries. 2. Three Technologies –defined by capital-labour ratios ».T1: capital/labour ratio = 80/22=3.6 ». T2=18.1 ».T3=400/5=80 thus, T3 is 22 times more capital intensive than T1

11 Choice of Three Techniques Tech 1 Tech 2 Tech 3 A. Inputs (M $) 1.Equip labour Other Which technique to choose and why ? What is the effect on employment ?

12 Factor costs: Rich and Poor Countries » RichPoor 1. i rate wages/yr 151.5

13 PV of Cost of T1-T3 Rich – ($1,000) T1 T2 T3 –a. cap charge – b. wages –c. other costs –d. Total Rich –T3 is the clear choice since it is relatively capital intensive or labour saving

14 PV of Cost of T1-T3 Poor – ($1,000) T1 T2 T3 –a. cap charge –b. wages –c. other costs –d. Total Poor Poor Pick T2 However, if wages drop than T1

15 LAC

16 What are Scale Economies 1. What are scale economies? – a. Scale economies are declining Lac curves. –b. 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.

17 Second Criterion : Product Choice? Want to experience large scale economices quickly ? Why? –Small Domestic markets ? Concepts: MES –MES= minimum efficient scale % increase in MES –Tells you how steep your cost increase is on short run Average cost curve MES as % of market

18 Product Choices: Why No Beer ? %rise in LAC MESas % of market 1. Bread 15% 1 % 2. Beer footwear dyes sulfuric acid polymers cement steel machine tools Electric motors Autos bicycles diesel engines 4 10

19 Conclusions: 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

20 Technical Choice and Scale Favour 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. Steel in Canada.

21 End of Show