2. 1 Industrialization & Development Kenny Zhang Nov. 2002

3. 2 Key Questions of Choice: Q1: Industrialization = Development? (Choice of strategies) –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

4. 3 Q1: Industrialization = Development? Figure 1: Association for Large Countries

5. 4 Q1: continued Figure 2: Association for Small Countries

6. 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

7. 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.

8. 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

9. 8 Q2: continued Infant 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.

10. 9 Q2: continued Economics 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.

11. 10 Q2: continued LAC & Products

12. 11 Q2: continued MES & 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

13. 12 Q2: (continued) Why Not Beer? 101Bicycles 6015Electric motors 1005Machine tools 506Autos 109Cement 808Steel 39Beer 0.22Footwear 104Diesel engines 335 polymers 301Sulfuric acid 10022Dyes 115Bread MES as % of market% rise in LACProducts

14. 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

15. 14 Q3: Modern = Good? Choice of Technique

16. 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

17. 16 Q3: (continued) Factor costs

18. 17 Q3: (continued) PV of Costs: Rich

19. 18 Q3: (continued) PV of Costs: Poor

20. 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 in employment. 2. This implies that productivity rose by 4 % per annum or – trade off between higher wages but less industrial employment

21. 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.

22. 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)