Industrialization in the Development Process

The Development Stage  Developing countries characterized by a high degree of subsistence production  Agricultural sector is paramount and important  While industrialization does not insure development it does have some healthy implications  It implies: technology application  It implies: raising productivity per worker  It implies: releasing labor for other tasks  But all sectors must move forward and some balance is desirable

Industrialization As A Panacea?  Industrialization is not a panacea or cure all but it does carry with it some important attributes  1. Employment for deepening labor market  2. Allows improvement in standard and quality of living  3. Improves balance of payments  4. Provides certain element of national prestige

Industrial Sectors  Primary-that part of the economy that specializes in the production of agricultural products and the extraction of raw materials. Major industries include mining, agriculture, forestry, and fishing.  Secondary: manufacturing portion of the economy that uses raw materials and intermediate products. Industries include: motor vehicle assembly, textiles, and building and construction activities.  Tertiary sector- the services and commerce portion of an economy. Includes both consumer (individuals) and producer (firms) services. Repair of capital goods (e.g. ships), haircuts, medical care, and transport (e.g. taxis and air cargo—consumer and producer respectively.  Quaternary- that portion of a region's economy devoted to informational and idea-generating activities (e.g., basic research, universities and colleges, and news media) and includes the production, processing, and consumption of information.  Quinary activities involve high level decision making or control functions that manipulate the vast resources of private businesses and governments.

Comparing Industry versus Agriculture  Farmer has little control over his environment: pests, drought  Agricultural production is generally slower and product cannot be quality controlled as in manufacturing  Agricultural commodities are susceptible to wide price swings in the global market  Relative inelasticity of demand for agricultural products, i.e. if prices fall more purchases are not assured  Technology has had a much greater impact on industry than agriculture  Increased specialization of labor in manufacturing results in higher productivity  Therefore manufacturing offers a stronger base for raising the level

Nature of Industry in Development  Heavy industry- large scale production of capital goods: iron, steel, machine tools, car production, ship building  Location determined by access to and availability of raw materials  Requires well developed transport infrastructure and power supply  Heavy capital investment  High proportion of relatively skilled workers  Large scale to achieve economies of scale

Nature of Industry in Development  Light industries- generally refer to consumer goods: paints, tools, etc  Relies on semi-processed as opposed to raw materials  Less energy per laborer required  Less complex machinery and lower capital investment – operations in simpler buildings  Scale of operations more suited to small, limited markets

Progression of Industry as Development Matures  Processing of low value, locally available materials or resources Examples: vegetable oil and sugar milling, pineapple and fish canning, jute and cotton spinning, timber, pulp  Processing materials previously exported as raw to increase earnings from export of finished products Example: rubber  Industries which produce goods for agricultural sector: tools, insecticides, pesticides  Manufacturing of cheap consumer goods: cigarettes, soft drinks, sauces, batteries, bicycles, food products  Industries using local skills and traditions: rattan and textile (batik)

Strategies for Industry  Import Substitution Industry (ISI)- produce locally more goods previously imported  Manufacturing done behind high tariff walls or quota policies  Too often results in production of non-essential consumer goods for a limited segment of the urban market ignoring rural areas  Contributes little to a diversified and significant export structure since investments are absorbed by inefficient production firms  Usually discouraged in structural adjustment programs (SAPs)

Structural Adjustment Programs  Used to describe generically the activities of the World Bank and International Monetary Fund in packages of policy reform  Central aims of these programs are to:  Reduce debt that has accumulated  Introduce policy and institutional change necessary to modify structure of economy  Move from agrarian dominance to industrialization  Instruments: currency devaluation, monetary discipline, reduction of pubic spending, trade liberalization, privatization of public enterprises, wage restraints, subsidy removal, institutional reform-especially financial

Principal Instruments of Structural Adjustment  Currency devaluation-encourage trade  Monetary discipline- interest rate control  Reduction of public spending- lower expenses on “grandiose” projects  Price reforms- price commodities to sell and reward producers  Trade liberalization- remove tariff barriers to ease flows of trade  Reduction and/or removal of subsidies- especially gasoline  Privatization of public enterprises- sell SOEs to private firms  Wage restraints- control wage levels  Institutional reforms- improve credit and especially banking sector

Cottage and Small Scale Industries: Textile, Batik and Handicrafts

Cottage and Small Scale Industries  Often outside scope of modern manufacturing organization  Carried on in rural areas, family and local labor which is unskilled- full or part time  Batik- complex, low productivity per worker absence of power-often high import content (higher quality cotton)  But provide a good for export markets  Provide employment opportunities for largely illiterate workforce  Too often unimaginative design, crude workmanship, tend to withdraw into areas where few alternative opportunities

Strategies for Industry  Export Oriented Industry (EOI)  State is producing goods for export and engaged in trade as a means of expanding national revenues  Protection is decreased while diversified exports, often with subsidies, are promoted through an aggressive trade policy  Increasing demanded under SAPs so manufacturing becomes secure

Constraints on Industrializing Progress  Legacy of colonial rule when industry was suppressed  Deficient infrastructure especially transport  Capital shortage to invest in new opportunities  Low educational levels  Lack of entrepreneurial skills  Limited size of market  Corruption, weak legal system and lack of transparency reduces appeal of foreign investors