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Industrialization&
Development
Kenny Zhang
Nov. 2002
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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
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Q1: Industrialization = Development?Figure 1: Association for Large Countries
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Q1: continuedFigure 2: Association for Small Countries
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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
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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.
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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
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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.
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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.
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Q2: continuedLAC & Products
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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
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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
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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
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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?
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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
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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
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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)
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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.
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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
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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.
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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)