1. Industrialization & Development

2. Key Questions:
Q1: Industrialization = Development? (Choice of strategies)
Association
Deviations from the Norm
Q2: Industry = Which Sector?
(Choice of products)
Backward linkage & Forward linkage
Economies of scale
Q3: Modern Technology =
(Choice of Techniques/Technologies)
Minimize the present value of costs
Employment effect

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

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

5. Q1: continued Association (strong): Variation (wide):
B > 0; C < 0
Variation (wide):
Size of economy
Resource endowments
Development strategies (policies): IS & EP
Geographic location
Historical circumstances

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. Industries which led:
Textile exports, steel etc. which caused backward and forward linkages.

7. Q2: Industry = Leading Sector? Linkage & Products
Backward Integration
(Example: Automobile->machinery->metal process->steel)
Given a rise in final or consumer goods
Demand feeds back to producer goods.
Forward Linkage
(Example: Textiles->clothes)
Rise in producer goods
Supply stimulates final or consumer good demand
A necessary condition is that textiles must be produced below world cost
Policy to achieve above is an infant industry tariff

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.

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.

10. Q2: continued LAC & Products

11. Q2: continued MES & Products
Want to experience large scale economics quickly? Why?
Small Domestic markets?
Concepts: MES
MES= minimum efficient scale
% increase (or decrease) in ac 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?10 1
Bicycles 60 15
Electric motors
100 5
Machine tools 50 6
Autos 9
Cement 80 8
Steel 3
Beer
0.2 2
Footwear 4
Diesel engines 33
polymers 30
Sulfuric acid 22
Dyes
Bread
MES as % of market
% rise in LAC
Products

13. Q2: Conclusion: Products Choice and Scale
Q2: Conclusions
Q2: Conclusion: Products Choice and Scale
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

14. Q3: Modern = Good? Choice of Technique

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. Q3: (continued) Factor costs

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

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

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

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.