1

Industrialization&

Development

Kenny Zhang

Nov. 2002

2

Key Questions of Choice:• Q1: Industrialization = Development? (Choice of strate

gies)– Association– Variation

• Q2: Industry = Leading Sector? (Choice of products)– Backward linkage & Forward linkage– Economies of scale

• Q3: Modern Technology = Good Technology? (Choice of Techniques/Technologies)– Minimize the present value of costs– Employment effect

3

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

4

Q1: continuedFigure 2: Association for Small Countries

5

Q1: continued

• Association (strong):–

– B > 0; C < 0

• Variation (wide):– Size of economy

– Resource endowments

– Development strategies (policies): IS & EP

– Geographic location

– Historical circumstance

2)(logloglog ycybaMS

6

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. Industry was a leading sector: • Textile exports, steel etc. and caused backward and

forward linkages.

7

Q2: Industry = Leading Sector?Linkage & Products

• Backward Integration(Example: Automobile->machinery->metal process->steel)– Rise in final or consumer goods– Demand feeds back to producer goods.

• Forward Linkage(Example: Textiles->clothes)– Rise in producer goods– Supply stimulates the final or consumer goods

• A necessary condition is that textiles must be produced below world cost

• Policy to achieve above is infant industry tariff

8

Q2: continuedInfant 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.

9

Q2: continuedEconomics 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.

10

Q2: continuedLAC & Products

11

Q2: continuedMES & Products

• Want to experience large scale economics quickly? Why?– Small Domestic markets?

• Concepts: MES– MES= minimum efficient scale

• % increase in ac @1/2 MES – Tells you how steep your cost increase is on short run Average

cost curve

• MES as % of market

12

Q2: (continued) Why Not Beer?

101Bicycles

6015Electric motors

1005Machine tools

506Autos

109Cement

808Steel

39Beer

0.22Footwear

104Diesel engines

335polymers

301Sulfuric acid

10022Dyes

115Bread

MES as % of market% rise in LACProducts

13

Q2: 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

Q2: Conclusion:Products Choice and Scale

14

Q3: Modern = Good?Choice of Technique

Inputs (M$) T1 T2 T3

Equipment 80 200 400

Labor 22 11 5

Other 11.4 9.3 6.7

Which technique to choose and why? What is the effect on employment?

15

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

16

Factor costs Rich Poor

Interest rate % 5.0 10.0

Wages($1,000/yr) 15.0 1.5

Workers in rich country paid 10X that of poor country

Capital costs in poor country twice of rich country

Products (Textile) is of equal quality in both countries

Q3: (continued)Factor costs

17

Q3: (continued)PV of Costs: Rich

Rich country T1 T2 T3

Capital charges 80 200 400

Wage 4112 2056 935

Other costs 142 116 83

Total 4334 2372 1418

T3 is the clear choice since it is theminimum of PV of costs (relatively capitalintensive or labor saving)

18

Q3: (continued)PV of Costs: Poor

Poor country T1 T2 T3

Capital charges 80 200 400

Wage 280 140 64

Other costs 97 79 57

Total 457 419 521

Poor Picks T2 (intermediate). However, ifwages drop than T1.

19

Q3: (continued)Employment effects

• 1. Elasticity value = % industry employment / % industry value added = .6– or a 10% increase in Yp leads to a 6% growth i

n employment.

• 2. This implies that productivity rose by 4 % per annum or– trade off between higher wages but less industr

ial employment

20

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.

21

Summary of Lecture• Choice of strategies

– Industrialization– Import promotion and export substitution

• Choice of products– Backward linkage & Forward linkage– Economies of scale– Long-run average cost (LAC)

• Choice of Techniques/Technologies– Appropriate technology (labor- or capital-intensive)– Minimum Efficient Scale (MES)

• Topics un-covered but important– Urbanization– Township and village enterprises (TVEs)– Small-scale industry (informal sector)