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11 24 Lecture Notes - Industrialization.docx

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Western University
Geography 3312A/B
Haroon Akram Lodhi

Industrialization: is it a development imperative? What is the key difference between developed countries and developing countries? Material well-being, which generates the resources needed to invest in social and human development Differences in material well-being reflect differences in economic structure: the relationship between patterns of economic activity • developing countries involve agriculture/extractive activities • developed countries involve manufacturers/services activities 1. Pattern of employment » rich countries—services » poor countries—agriculture 2. Pattern of industrial output » rich countries—heavy and chemical industries, technology- and knowledge-based industries » poor countries—light industries like textiles, toys and shoes (if at all) 3. Pattern of agricultural inputs » rich countries—capital intensive » poor countries—labour intensive 4. Pattern of demand » rich countries—domestic demand high, home market important » poor countries—domestic demand weak, foreign market important Economic development = structural transformation How? Capital accumulation: increases in the stock of productive assets: • physical (plants, equipment, computers, robots) • financial (money) • human (education) is a precondition of more needs being met, and well-being improved A necessary but not sufficient condition of development, however defined Increasing rates of capital accumulation requires increases in productivity: The more effective use of capital, labour, and their effective combination (total factor productivity) ‘Productivity isn’t everything, but in the long-run it is almost everything’: Paul Krugman Labour productivity makes the smallest contribution: but without effective workers, there is no increase in total factor productivity Therefore, increasing rates of capital accumulation: • requires increases in labour productivity • which requires the development of manufacturing industry—why? Manufacturing generates the highest rates of growth of labour productivity The richest countries are the most productive China and India are catching up, but lag well behind South Korea Faster growth of labour productivity—the amount of output from every hour worked— • allows production of goods and services to increase • raises living standards • can allow countries to choose to work less without reducing living standards More productive labour also uses plant, equipment, computers and robots more widely and more productively More productive labour more quickly adapts to new techniques and technologies This continual technical innovation produces dynamic economies of scale (producing more from the same) and thus further productivity improvements Technical innovation in manufacturing dramatically exceeds • agriculture • services Therefore, rates of productivity growth in manufacturing are greater than rates of productivity growth in • agriculture • services Sample rates of productivity growth: • China (2000-2006): 10 per cent per year • India (2000-2006): 5.2 per cent per year • US (1995-2006): 2.3 per cent per year • Europe (1995-2006): 1.4 per cent per year China and India transfer labour from low productivity sectors (agriculture) to higher productivity sectors (manufacturing), raising living standards The inability of Europe to maintain productivity growth leads to living standards falling behind those in the US …there are demand side reasons why a manufacturing sector is required Engel’s law again: the demand for agricultural products are income inelastic (%∆Q /%∆Y < 1) This means that the real rate of growth of demand for manufactures is greater than the real rate of growth of demand for agricultural output Agriculture occupies a declining share of spending as incomes rises To meet this growing demand for manufactures, a country could import But: how to pay for manufactured imports? Through exports But: demand for agricultural exports is also income inelastic (the Prebisch-Singer hypothesis) There is thus the need to develop an efficient, sufficient manufacturing sector for capital accumulation to be unleashed Efficient: a manufacturing capacity that is • able to sell in global markets, in terms of price and quality • ecologically sustainable Sufficient: • able to sell enough to cover (a significant share of) import requirements This does not mean manufacturing will dominate the pattern of economic activity (New Zealand, Denmark, Australia, Canada), but it will drive it In order to develop a manufacturing capacity it is necessary to invest Investment has a pivotal role in the growth process Investment results in increases in incomes that are greater than the initial investment—the multiplier For instance, suppose a government loosens its fiscal policy, increasing net public spending by pumping an extra $10 billion into education This may immediately • increase the income of teachers • increase the income of people who sell educational supplies • increase the income of people who build or maintain schools These people will in turn spend some of their extra money, putting more cash into the pockets of others, who spend some of it, and so on Multipliers are higher when money is spent on manufacturing investment because of differential productivity growth Manufacturing can also broaden and deepen growth through its linkages into other spheres of activity 3 types of linkages 1. backward production linkages (ie, making cellphones creates demand for industrially produced machines to make the cell phones) 2. forward production linkages (ie, clothing production leads to producers to supply cotton textiles for clothing) 3. consumption linkages (ie, increased income from working in manufacturing increases demand for manufactured consumer products) Technological change can stimulate linkages and productivity ie, development of new machinery (ICT?) and backward production linkages ie, development of uses for farm output, and forward production linkages (clothing made from bio- mass) ie, income growth, consumer demand and consumption linkages Technological change is more rapid in manufacturing industry and is usually a precondition of technological change in services Lack of investment is not explained by a lack of profitability; rates of profit are higher in Africa than in rich countries It is explained by structural adjustment, which • starved firms of profits for reinvestment as demand for products shrank and markets contracted • starved firms from access to finance for investment as interest rates rose thereby cutting productivity and growth Those offering the solution were part of the problem A. Listian import substituting industrialization (ISI) • 1950s-1970s • produce simple non-durable consumer goods (food processing, clothing, shoes) at first • move later to more complex durable consumer goods (white goods--refrigerators) and intermediate goods (steel, chemicals) • protect domestic production against import competition • government intervenes to shape industrialization Critique of the Washington Consensus concerning ISI: 1. promotes inefficiency 2. discriminates against agriculture 3. biased against exports So... B. Export-oriented industrialization (EOI) • 1980s—2010… • remove price controls to make domestic markets work better • liberalize international trade by cutting quotas and tariffs to enter international markets • devaluation and financial liberalization to encourage competitiveness • reduce state intervention by cutting spending and privatization • thus: use comparative advantage in the context of neo-liberal globalization Granted, ISI was heavily dependent on foreign • capital • technology • skills • consumption patterns But: successful late industrializers (Korea, Taiwan) did not follow classic EOI Neither does China Moreover, ISI produced economic growth that was more rapid in many countries than EOI Despite China, a favourable difference of 1% a year for the ISI period compared to the EOI period for developing countries as a whole An alternative that more closely resembles East Asia: C. export oriented import substitution • 1960s – 2009… • an appropriate balance between state and market so that resources flow to foster rapid development • market signals to stimulate growth » use world market prices as signals, which means matching international price • state intervention to overcome market failures » ie, tax ince
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