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Industrialization & Development Kenny Zhang Nov. 2002 Key Questions of Choice: Q1: Industrialization = Development? ( Choice of strategies ) Association Variation Q2: Industry = Leading Sector? ( Choice of products ) Backward linkage & Forward linkage

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industrialization development

Industrialization&Development

Kenny Zhang

Nov. 2002

key questions of choice
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
q1 continued
Q1: continued
  • Association (strong):
    • B > 0; C < 0
  • Variation (wide):
    • Size of economy
    • Resource endowments
    • Development strategies (policies): IS & EP
    • Geographic location
    • Historical circumstance
industrialization as a pathway historical perspective
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.
q2 industry leading sector linkage products
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
q2 continued infant industry
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.
q2 continued economics of scale
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.
q2 continued mes products
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
q2 continued why not beer

Products

% rise in LAC

MES as % of market

Bread

15

1

Beer

9

3

Footwear

2

0.2

Dyes

22

100

Sulfuric acid

1

30

polymers

5

33

Cement

9

10

Steel

8

80

Machine tools

5

100

Electric motors

15

60

Autos

6

50

Bicycles

1

10

Diesel engines

4

10

Q2: (continued) Why Not Beer?
q2 conclusions
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
q3 continued capital labor ratio
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
q3 continued employment effects
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
q3 conclusion technical choice and scale
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.
summary of lecture
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)