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Lecture 21 Don DeVoretz. Industrialization: A Strategy for Development ?. Debate 1 Multinationals. Pros and Cons of Multi-nationals The argued benefits from Multi-national Corporations operating in your country are:

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Lecture 21 don devoretz

Lecture 21Don DeVoretz

Industrialization:

A Strategy for Development ?


Debate 1 multinationals
Debate 1 Multinationals

  • Pros and Cons of Multi-nationals

  • The argued benefits from Multi-national Corporations operating in your country are:

    • fill savings gaps, provide foreign exchange, government revenue, management skills and

    • technology which all will lead to further growth.


Debate 1 con t
Debate 1 con’t

  • The counter arguments are that;

    • capital is raised locally,

    • little profits are reinvested, and tax avoiding transfers

  • Which point of view appears appropriate for your country?

  • What is the evidence to support above?

  • How would you gain the required evidence to support one view or the other?


Debate 2 infant industry
Debate 2 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.


Debate 2 infant industry1
Debate 2 Infant Industry

  • Which view do you agree with?

  • What are the essential ingredients in the infant industry argument to insure that gains are available in short-run ?

  • What policies must be in place to insure an export oriented policy both at home and in the developed countries ?


Industrialization as a pathway
Industrialization as a Pathway

  • A. History:

    • 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.


Modern evidence
Modern Evidence

  • 1.Share of industrial value added in GNP to Yp

  • 2. Evidence for large countries: 4x Yp raises industrial share by 20%

  • 3. Only 1/2 of variation in valued added share of industry explained by level of Yp

  • 4. Variations around sc line explained y

    • i. Import substitution

    • ii. Resource endowment


Industrialization and employment
Industrialization and Employment

  • 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


D industrial structure
D. Industrial Structure:

  • Backward Integration:

    • rise in final or consumer demand feeds

    • back to producer goods.

    • Turning point is $2,500 in Yp

  • Forward Linkage

    • Textiles to cloth:

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

      • Policy to achieve above is infant industry tariff.


Investment choices and industry choice of technique
Investment Choices and Industry: Choice of Technique

  • 1. Context

    • Workers in rich country paid 10X that of poor country.

    • . Capital costs in poor country twice of rich country.

    • . Textile is of equal quality in both countries.

  • 2. Three Technologies

    • defined by capital-labour ratios

      • .T1: capital/labour ratio = 80/22=3.6

      • . T2=18.1

      • .T3=400/5=80

  • thus, T3 is 22 times more capital intensive than T1


  • Choice of three techniques
    Choice of Three Techniques

    • Tech 1 Tech 2 Tech 3

    • A. Inputs (M $)

    • 1.Equip 80 200 400

    • 2.labour 22 11 5

    • 3. Other 11.4 9.3 6.7

    • Which technique to choose and why ?

    • What is the effect on employment ?


    Factor costs rich and poor countries
    Factor costs: Rich and Poor Countries

    • Rich Poor

  • 1. i rate .05 .10

  • 2. wages/yr 15 1.5


  • Pv of cost of t1 t3 rich
    PV of Cost of T1-T3 Rich

    • ($1,000) T1 T2 T3

    • a. cap charge 80 200 400

    • b. wages 4112 2056 935

    • c. other costs 142 116 83

    • d. Total Rich 4334 2372 1418

    • T3 is the clear choice since it is relatively capital intensive or labour saving


    Pv of cost of t1 t3 poor
    PV of Cost of T1-T3 Poor

    • ($1,000) T1 T2 T3

    • a. cap charge 80 200 400

    • b. wages 280 140 64

    • c. other costs 97 79 57

    • d. Total Poor 457 419 521

  • Poor Pick T2 However, if wages drop than T1



  • What are Scale Economies

    • 1. What are scale economies?

      • a. Scale economies are declining Lac curves.

      • b. 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.


  • Second criterion product choice
    Second Criterion : Product Choice?

    • Want to experience large scale economices 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


    Product choices why no beer
    Product Choices: Why No Beer ?

    • %rise in LAC MESas % of market

    • 1. Bread 15% 1 %

    • 2. Beer 9 3

    • 3. footwear 2 .2

    • 4. dyes 22 100

    • 5. sulfuric acid 1 30

    • 6. polymers 5 33

    • 7. cement 9 10

    • 8. steel 8 80

    • 9. machine tools 5 100

    • 10. Electric motors 15 60

    • 11. Autos 6 50

    • 12. bicycles 1 10

    • 13. diesel engines 4 10


    Conclusions
    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


    Technical choice and scale
    Technical Choice and Scale

    • Favour 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. Steel in Canada.



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