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Industrialization & Development

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

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  1. Industrialization&Development Kenny Zhang Nov. 2002

  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

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

  4. Q1: continuedFigure 2: Association for Small Countries

  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

  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.

  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

  8. 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.

  9. 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.

  10. Q2: continuedLAC & Products

  11. 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

  12. 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?

  13. 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.

  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)

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