1. Industrial development and economic growth: Implications for poverty reduction and income inequality Matleena Kaniivilä*
Presented By:
Rabeya Sultana Papri
Student No.: MSS
Masuma Sultana
Student No.: MSS
Economics Discipline
Khulna University
Khulna

2. 1.Introduction
During recent years, the share of poor people in the global population has declined due to rapid economic growth in population-rich countries like China and India. Countries like East Asia are Catching up to industrialized countries. On the other hand, countries like Sun-Saharan Africa are lagging far behind and in such countries, the share of poor people has increased.
Industrial development has had an important role in the economic growth of countries like China, the Republic of Korea (Korea), Taiwan Province of China (Taiwan) and Indonesia. Along with accelerated growth, poverty rates have declined in many countries. Some countries have managed to achieve growth with equity, whereas in others inequality ha remained high.

3. 2. The role of structural change in economic growth
According to the neo-classical growth model which is developed by Robert Solow (1956), capital accumulation is a major factor contributing to economic growth. Productivity is measured as an increase in output per worker which results from increases in the amount of capital per worker or capital accumulation. This capital intensifying will continue until the economy reaches its steady state point. At this point the rate of technological process is assumed to be constant and not impacted by economic incentives.
Romer (1986, 1990) and Lucas (1988) initiated Endogenous Growth theory, and they focuses on explaining the Solow residual. According to them, technological change is the endogenous variable of the model and is the result of allocative choices of economic agents and is driven by R&D activities which are fuelled by private firms’ profit motive inventions and these are also nonrivalrous in nature.

4. 2. The role of structural change in economic growth (Contd.)
This new knowledge can supplement the productivity of exiting knowledge and yield increasing returns to scale. Thus, the marginal productivity of capital does not decline with increasing GDP per capita and incomes need not converge across countries.
Some Essential Sources of Structural Change:
Technological change and innovation
Research and development
Changes in domestic demand
Trade and
Specialization

5. 3. Economic growth and the poor
For achieving a reduction in absolute poverty rapid economic growth is often essential. But growth associated with increased income inequality does not automatically address the whole poverty problem.
The Traditional Economic View:
According to traditional economic view, highly unequal income and wealth distribution is a necessary condition for continued and rapid economic growth.
The New Political Economic View:
The new political economic view links greater inequality to lower future growth paths, and considers it an impediment to poverty-reducing growth, as the elasticity of poverty with respect to growth is found to decline when inequality increases.

6. 3. Economic growth and the poor (Contd.)
There was a widespread move towards greater egalitarianism during the 1950s and 1960s in many developing countries. After that, inequality remained high in many places because of the persistence of the traditional causes like high land concentration, unequal access to education and other public services, and the dominance of the mining and plantation sectors.

7. 4. Impact of industrialization and trade on the poor
Capital intensive location of industrial facilities:
Industrial development is an essential element for economic growth and long term poverty reduction. How the poor benefit from growth is mostly depends on the pattern of industrialization. Use of capital intensive methods instead of labor intensive ones tends to increase income disparities. Location of industrial facilities also has an impact on poverty reduction and inequality. As industries are often concentrated in urban areas, it creates regional inequality between urban and rural areas.
Degrees of Economic Openness:
The degrees of economic openness of a country can have an important influence on its pattern of specialization and industrialization. A country should specialized according to the resource availed to it. A labor abundant country should be specialized in labor intensive industrialization process so that the inequality in that country could decline because of increased demand of labor.

8. 4. Impact of industrialization and trade on the poor (Contd.)
Trade and Investment Liberalization
Trade and investment liberalization can decrease absolute poverty and inequality. The impact of trade liberalization varies between countries depending for instance on factor endowments and liberalization creates both winners and losers. Similarly, to international trade, the impact of foreign direct investment on income inequality varies between countries.

9. 5. Industrialization, economic growth, poverty reduction and inequality: Country examples
5.1 China
China adopted a development strategy after the World War II that included deliberative insulation from the world economy, industrialization and dominance of the state. Since the reforms, growth has accelerated and in the 1980s and 1990s growth rates were highest in the world, 9.9 percent and10.3 percent respectively. Growth was especially high in industry.

10. 5.1 China (Contd.) Reforms Taken by China:
China takes following reforms to accelerate its growth:
Rapid Industrialization
Increased trade openness and export
Gradual liberalization of financial markets
Technology and know-how import
Utilization of labor force
High domestic saving rate
Deregulating and facilitating labor market
De-collectivized agricultural land
Privatization of land use rights
Rural infrastructural development
Reduced mandatory delivery to the government
Creating pricing system and market institution
Reducing state’s role in resource allocation

11. 5.2 India
Like China, India chose economic development strategy after Second World War by near autarky, industrialization and the dominance of the state in the economy. Development was considered synonymous with industrialization and industry was concentrating mainly on basic goods like steel and machinery. India takes several policies and reforms to accelerate its economic growth.

12. 5.2 India (Contd.) Reforms Taken by India Import substitution
Licensing of industrial activity
Capital goods import
Rational tax system
Relax industrial regulation
Allocative role of the government
Relaxation of licensing system controlling internal production
Currency devaluation
Relaxation of restrictions on the inflow of foreign capital and technology transfer
Abolition of quantitative restrictions on raw material imports, intermediates and capital goods
Reduce tariff level
Relaxation of rules restricting large companies
Simplification of exchange control

13. 5.2 India (Contd.) Reforms Taken by India (contd.)
xiv. Breaking public sector monopolies
xv. Reduce foreign currency debt dependence
xvi. Tax reforms

14. 5.3 South Korea
During the last years, economic growth in South Korea has been rapid. Due to rapid industrialization, the country was able to achieve remarkable growth with steep reduction in poverty and inequality. Growth in manufacturing is high in this country. But growth in agricultural value added has been continuously declining and thus, employment in this sector also declines. Employment in industrial sector has had an inverted U shape from during the last 25 years.

15. 5.3 South Korea (Contd.) Reforms Taken by South Korea Trade reforms
Export promotion
Direct export subsidies
Tax exemption
Low interest export loans
Duty free access to imports
Protection of infant industries
Investment programmes to promote heavy industries
Direct government controls in banking sector
Tax incentives
Trade protection
Land reform

16. 5.4 Taiwan Province of China
Taiwan has experience rapid economic growth over the past half century. Economic growth has been heavily based on the growth of manufacturing sector and export oriented. The country specialized in labor intensive production and later shifted towards capital intensive and high-tech production.

17. 5.4 Taiwan Province of China (Contd.)
Reforms Taken by Taiwan
Import substitution
Excessive use of tariff and non-tariff barriers on imports
Selective credit policies
Push for exports of manufacturing
Sectoral industrial policies
Promotion of state owned firms
Set up industrial parks
Duty free import materials
Establishment of institutions designed to identify, transfer, diffuse and absorb foreign industrial technology and innovation

18. 5.5 Indonesia
Indonesia’s growth was very rapid from the late 1960s until the Asian crisis of 1997.During that 30 years period, the country moved from a predominantly agricultural production base to a more industrialized base economy. Rapid economic growth has benefited a large share of the population as poverty fell form more than 70 percent in the mid 1960s to 11 percent in The Asian crisis in 1997 caused an increase in poverty rates.

19. 5.5 Indonesia (Contd.) Reforms Taken by Indonesia
Shift from a closed economy and heavily interventionist policy to more market oriented economy
Restoration of external stability, fiscal constraints
Restoration of banking system
Liberalization of the investment regime included incentives and assurances to new foreign investors
Simplification of export and import procedure
A unified and fully convertible fixed exchange rate
Price control were eliminated
Balanced budget policy
Import substitution and public financing
Erection of barriers to import
Allowing foreign banks to open offiecs

20. 5.6 Mexico
During the 1980s and 1990s, Mexico faced several economic crisis. The service sector is the largest contributor to Mexican economy and accounted 70 percent in The contribution of agriculture was minor in GDP and it was only 4 percent in The share of manufacturing has been relatively constant over the years and 18 percent in GDP at A remarkable part of Mexico’s production of manufacturing for export is currently occurring in maquiladoras (in bond assembly for re-export plants).
Mexican economic policy was based on import-substituting industrialization. The strategy included high protective tariffs and other import barriers, especially to consumer goods. Industrial expansion was promoted through public investment in energy and transportation infrustracture.

21. 5.7 Brazil
Economic performance in Brazil has been volatile like other Latin American countries. The contribution of the industrial sector (manufacturing, construction, mining and utilities) has remained constant over the past three decades. Manufacturing is the single most important sub-sector of industry and accounts for nearly two-thirds of industrial GDP. Through small contribution to GDP, agriculture is still an extremely important sector for Brazil. The share of service sector increases and it is about 60 percent in GDP. The government has liberalized the service sector especially the telecommunication, financial services, and port and airport services. Public banks private participation and foreign investment has increased over the years.
In Brazil, poverty reduction was significant especially in the 1990/1999 period with poverty rates falling by 10 percent. Since then poverty rates remained unchanged at least through the early 2000s.

22. 6. Conclusion
The extent to which industrial development effectively decreases poverty and inequality depends on the pattern of industrialization. The degree of policy freedom left to developing countries is narrower than it was some decades ago, even if some well-planned government intervention may seem justified based on the success stories of the earlier decades. The government still have a primary role in promoting sustainable economic growth and especially poverty-reducing growth. But government’s role in skill formation, technology support, well-functioning institutions, innovation financing, infrastructural development, and provision of variety public goods are notable. Rapid economic growth tends to decrease poverty. Rapid growth may increase income inequality but it is inevitable. Promotion of job creating industries and SMEs and supporting the creation of domestic linkages an reduce inequality.

23. Thank You All