Chapter 18 Industry Norton Media Library Chapter 18 Dwight H. Perkins Steven Radelet David L. Lindauer

Chapter 18: Industry Industry as a Leading Sector Linkages Urbanization Investment Choices in Industry Choice of Technique Economies of Scale Small-Scale Industry Industry and Development Goals

Chapter Learning Objectives 1.The empirical patterns of industrialization associated with rising per capita income. 2.The meaning and significance of backward and forward linkages. 3.The strong association between industrialization and urbanization, with its potential benefits and costs. 4.The wide range of capital-labor ratios that characterize manufacturing and the factors that influence the choice of technology. 5.The importance of economies of scale in manufacturing. 6.The pros &cons of promoting small-scale industry.

1.The empirical patterns of industrialization associated with rising per capita income. See figure 18.1 Strong Correlation is found between industrialization and average income In large countries: as income increases from $1000 to $5000 manufacturing value added increases from 13 to 22% For small country the same change increases from &7% to 17% more sharply A Low income country growing at 3% can take 54 years for transition to an industrial country

Fig. 18.1 Manufacturing Share of GDP & Income

Manufacturing Share of GDP The manufacturing share does not grow indifinetely. It picks at $10,000 and then declines. There is wide variations among LDCs Columbia, Mexico=20%, Thailand=28% Uganda=4%, Kenya=12% Uganda is landlocked. Kenya is favorably located. There are other factors for the difference

Linkages: Forward & Backward Linkages depend on input-out put tables A direct linkages for industryJ is measured by Lbj= Sum Aij where Aij= input-output coefficients Example: if textile adds value of 30% of output and imports input of 15% of its output, then backward linkage (Lb) 100-30-15=55%. Which is only the direct link. But if textile production stimulates cotton production and fertilizer production, there is indirect linkage. Direct & Indirect Link: Lij =Sum of total linkages See table 18.1 for sector Indexes and Rankings in 5 LDCS

Fig. 18.1 Manufacturing Share of GDP for Small States

Table 18.1: Industry Sectoral Linkages

Urbanization & Industrialization Industrialization and urbanization have historically moved forward in tandem or together. UK started 19th century with 30% of its people in cities ended the century with 70% in cities or urban. Cross country regression show that as GNP per capital rises by $7500, the manufacturing sector rises by 24%, while urban share of the population grows from 18 to 66% (see figure 18.2)

Causes of Urbanization Economies of scale: large population concentration the reduces cost of finding labor Infrastructure: Electricity, Roads, Sewage, etc can be provided by the government Economies of Agglomeration: Presence of multiple firms reduce transportation &shipping costs Once a city is established, large market creates attractions and reduces distribution costs

Fig. 18.2: Industrialization and Urbanization

Investment Choices in Industry Choice of Technique (see table 18.2) 3 choices are possible for example in textile: T1: Semi automatice Loom T2. Modern fully automatic loom, T3. Intermediate technology Analysis is based on Project Benefit cost Analysis that includes cost of investment and projected profits or net cash flows (see table 18.2)

Technological Choice in a weaving Industry- see figure 18.3 Three Technologica choices : Labor intensive (T1), Intermediate (T2) and capital intensive (T3) An Advanced country may choose T3, while low income or poor country may choose T1 or T2 These choices depend on cost of labor vs Capital. How?

Fig. 18.3: Technical Choice in an Industry

Economies of Scale (see figure 18.4) There are economies for some industries such as Steel, Cement, etc based on size or Long-run average cost delcines Reasons for economies of scale: Fixed start up cost such as research will spread over wide range of output Amount of inventory or other working capital may decline Greater Specialization of labor and equipment may incur up to certain point. (see figure 18.4)

Fig. 18.4: Economics Scale & declining LAC

Economies of Scale in Manufacturing (Table 18.3) The table shows scale economies for several industries in Europe in early 1980s. MES (Minimum Efficient Scale) is a plant large enough so that no further economies of scale can be gain i.e at Qo is MES in figure 18.4 The first column in table 18.3 shows the %of cost increase if the plant was build smaller. For example, for Cement Small plant will cost 26% more than MES or larger plant. How much will it cost for Dairy Products?

Table 18.3: Economies of Scale in Manufacturing

Small Scale Industry Small Scale Industry are widely use in LDCs in area of textiles, footwear, furniture, food processing, bricks, tec Small is beautiful (E.F Schumacher book) Small scale enterprises and informal sector creates a wider base of political support for free-market economies and democracy India, China? As the country develops the average size of the plant tends to rise as shown in figure 18.4

Table 18.4: Share of Small Scale Industry rises as Income increases

Industry and Development Goals Industry is not the cure for underdevelopment or poverty But a greater per capita income is linked to industry as shown in the Lewis Model Industrialization and Rural Development must move in Tandem Industry itself cannot generate enough jobs to absorb the growing number of workers or provide equitable income in poor countries.

Summary Outline: Concluding Summary 1. Empirically, industry is a leading sector in that the share of GDP originating in manufacturing tends to rise with per capita income, up to income levels around $10,000 (1992 PPP$). Manufacturing tends to be more prominent in large countries than in small ones, due to the size of the domestic markets. Cross-country variations in the development of manufacturing also relate to resource endowments and the choice of development strategy. To serve as a leading sector in a functional sense, industrial growth should generate rich linkage effects. Standard measures of linkages bear this out, but such measures are based on fixed input-output coefficients; as such, they provide little guidance about which interindustry relationships are most efficient.

Summary Conclusion contd. 2. Industrialization also is strongly associated with urbanization. The benefits of urban growth, including economies of agglomeration, as well as the costs, which include infrastructure requirements and congestion effects. Many governments have attempted to provide inducements for dispersing industrial development, to reduce the growth of major urban centers. Depending on the circumstances, the benefits of such policies do not always outweigh the economic costs. In the long run, the best approach is to achieve a balance between policies that encourage rural development and urban industry.

Summary Conclusion contd. Technology Choice 3. A fundamental issue in industrialization is the choice of technology. Empirical studies reveal a wide range of technology choices in many industries, with large differences in factor intensities. Factor price distortions and engineering biases in noncompetitive protected industries typically promote inappropriate, capital-intensive technologies. This results in high social costs and lost opportunities for productive job creation.

Summary Conclusions of Chapter 18 4. A related aspect of industrial technology is the extent of scale economies. The text explains the meaning, the source, and the empirical significance of scale economies. Most developing countries have small domestic markets; consequently, many products cannot be manufactured efficiently without cultivating export markets. 5. Many simple products, though, can be produced by small-scale enterprises, which tend to be very labor-intensive. Development specialists often argue for programs to promote small-scale industry. Efforts to evaluate the efficiency of small versus large firms yield mixed results, but it appears that few cottage and small-scale enterprises have much potential for growth and development. Consequently, costly subsidies to promote small-scale enterprises may be wasteful in the long run. The best policy is to establish a market environment in which efficient small businesses can thrive, without special subsidies.

Summary Chapter 18 VI. The chapter concludes with some basic themes. Industrial productivity is a key to improved standards of living, but industrialization should not be pursued at the neglect of rural development. Industrial development should be pursued efficiently. In many countries, however, political objectives outweigh economic considerations in the design of industrial policy. Boxed Example: chapter has one case study explaining how China, in the 1970s, promoted rural small-scale industry at the same time as it de­veloped large-scale urban manufacturing. The discussion deals with the pros and cons of this policy of “walking on two legs.” The breakup of the Chinese commune system has given way, in part, to the emergence of “township and village enterprises” (TVEs). The TVEs played a key role in the boom that has accompanied China’s transition to a market economy.

Economics of Development SIXTH EDITION End Chapter 18 W. W. Norton & Company Independent and Employee-Owned This concludes the Norton Media Library Slide Set for Chapter 18 Economics of Development SIXTH EDITION By Dwight H. Perkins Steven Radelet David L. Lindauer