Norton Media Library
Chapter 18
Industry
Dwight H. Perkins
Steven Radelet
David L. Lindauer
Chapter 18: Industry
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Industry as a Leading Sector
Linkages
Urbanization
Investment Choices in Industry
Choice of Technique
Economies of Scale
Small-Scale Industry
Industry and Development Goals
Chapter Learning Objectives
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1.The empirical patterns of industrialization
associated with rising per capita income.
2.The meaning and significance of backward and
forward linkages.
3.The strong association between industrialization
and urbanization, with its potential benefits and
costs.
4.The wide range of capital-labor ratios that
characterize manufacturing and the factors that
influence the choice of technology.
5.The importance of economies of scale in
manufacturing.
6.The pros &cons of promoting small-scale industry.
1.The empirical patterns of industrialization associated
with rising per capita income. See figure 18.1
• Strong Correlation is found between
industrialization and average income
• In large countries: as income increases from $1000
to $5000 manufacturing value added increases
from 13 to 22%
• For small country the same change increases from
&7% to 17% more sharply
• A Low income country growing at 3% can take 54
years for transition to an industrial country
Manufacturing Share of GDP
• The manufacturing share does not grow
indifinetely. It picks at $10,000 and then declines.
• There is wide variations among LDCs
• Columbia, Mexico=20%, Thailand=28%
• Uganda=4%, Kenya=12%
• Uganda is landlocked. Kenya is favorably located.
There are other factors for the difference
Linkages: Forward & Backward
• Linkages depend on input-out put tables
• A direct linkages for industryJ is measured by Lbj= Sum
Aij where Aij= input-output coefficients
• Example: if textile adds value of 30% of output and
imports input of 15% of its output, then backward linkage
(Lb) 100-30-15=55%. Which is only the direct link.
• But if textile production stimulates cotton production and
fertilizer production, there is indirect linkage.
• Direct & Indirect Link: Lij =Sum of total linkages
• See table 18.1 for sector Indexes and Rankings in 5 LDCS
Urbanization & Industrialization
• Industrialization and urbanization have historically
moved forward in tandem or together.
• UK started 19th century with 30% of its people in
cities ended the century with 70% in cities or
urban.
• Cross country regression show that as GNP per
capital rises by $7500, the manufacturing sector
rises by 24%, while urban share of the population
grows from 18 to 66% (see figure 18.2)
Causes of Urbanization
• Economies of scale: large population
concentration the reduces cost of finding labor
• Infrastructure: Electricity, Roads, Sewage, etc can
be provided by the government
• Economies of Agglomeration: Presence of
multiple firms reduce transportation &shipping
costs
• Once a city is established, large market creates
attractions and reduces distribution costs
Investment Choices in Industry
• Choice of Technique (see table 18.2)
3 choices are possible for example in textile:
T1: Semi automatice Loom
T2. Modern fully automatic loom,
T3. Intermediate technology
• Analysis is based on Project Benefit cost Analysis
that includes cost of investment and projected
profits or net cash flows (see table 18.2)
Technological Choice in a weaving
Industry- see figure 18.3
• Three Technologica choices : Labor intensive
(T1), Intermediate (T2) and capital intensive (T3)
• An Advanced country may choose T3, while low
income or poor country may choose T1 or T2
• These choices depend on cost of labor vs Capital.
How?
Economies of Scale (see figure 18.4)
• There are economies for some industries such as
Steel, Cement, etc based on size or Long-run
average cost delcines
• Reasons for economies of scale:
• Fixed start up cost such as research will spread
over wide range of output
• Amount of inventory or other working capital may
decline
• Greater Specialization of labor and equipment
may incur up to certain point. (see figure 18.4)
Economies of Scale in
Manufacturing (Table 18.3)
• The table shows scale economies for several
industries in Europe in early 1980s.
• MES (Minimum Efficient Scale) is a plant large
enough so that no further economies of scale can
be gain i.e at Qo is MES in figure 18.4
• The first column in table 18.3 shows the %of cost
increase if the plant was build smaller.
• For example, for Cement Small plant will cost
26% more than MES or larger plant. How much
will it cost for Dairy Products?
Small Scale Industry
• Small Scale Industry are widely use in LDCs in
area of textiles, footwear, furniture, food
processing, bricks, tec
• Small is beautiful (E.F Schumacher book)
• Small scale enterprises and informal sector creates
a wider base of political support for free-market
economies and democracy
• India, China?
• As the country develops the average size of the
plant tends to rise as shown in figure 18.4
Industry and Development Goals
• Industry is not the cure for underdevelopment or
poverty
• But a greater per capita income is linked to
industry as shown in the Lewis Model
• Industrialization and Rural Development must
move in Tandem
• Industry itself cannot generate enough jobs to
absorb the growing number of workers or provide
equitable income in poor countries.
Summary Outline: Concluding Summary
• 1. Empirically, industry is a leading sector in that the
share of GDP originating in manufacturing tends to
rise with per capita income, up to income levels around
$10,000 (1992 PPP$). Manufacturing tends to be more
prominent in large countries than in small ones, due to
the size of the domestic markets.
• Cross-country variations in the development of
manufacturing also relate to resource endowments and
the choice of development strategy.
• To serve as a leading sector in a functional sense,
industrial growth should generate rich linkage effects.
Standard measures of linkages bear this out, but such
measures are based on fixed input-output coefficients;
as such, they provide little guidance about which
interindustry relationships are most efficient.
Summary Conclusion contd.
• 2. Industrialization also is strongly associated with
urbanization. The benefits of urban growth, including
economies of agglomeration, as well as the costs, which
include infrastructure requirements and congestion
effects.
• Many governments have attempted to provide
inducements for dispersing industrial development, to
reduce the growth of major urban centers.
• Depending on the circumstances, the benefits of such
policies do not always outweigh the economic costs.
• In the long run, the best approach is to achieve a
balance between policies that encourage rural
development and urban industry.
Summary Conclusion
contd. Technology Choice
• 3. A fundamental issue in industrialization is the
choice of technology. Empirical studies reveal a
wide range of technology choices in many
industries, with large differences in factor
intensities.
• Factor price distortions and engineering biases in
noncompetitive protected industries typically
promote inappropriate, capital-intensive
technologies.
• This results in high social costs and lost
opportunities for productive job creation.
Summary Conclusions of Chapter 18
• 4. A related aspect of industrial technology is the extent of scale
economies. The text explains the meaning, the source, and the
empirical significance of scale economies. Most developing
countries have small domestic markets; consequently, many
products cannot be manufactured efficiently without cultivating
export markets.
• 5. Many simple products, though, can be produced by small-scale
enterprises, which tend to be very labor-intensive. Development
specialists often argue for programs to promote small-scale
industry. Efforts to evaluate the efficiency of small versus large
firms yield mixed results, but it appears that few cottage and
small-scale enterprises have much potential for growth and
development. Consequently, costly subsidies to promote smallscale enterprises may be wasteful in the long run. The best policy
is to establish a market environment in which efficient small
businesses can thrive, without special subsidies.
Summary Chapter 18
• VI. The chapter concludes with some basic themes. Industrial
productivity is a key to improved standards of living, but
industrialization should not be pursued at the neglect of rural
development. Industrial development should be pursued
efficiently. In many countries, however, political objectives
outweigh economic considerations in the design of industrial
policy.
• Boxed Example: chapter has one case study explaining how China,
in the 1970s, promoted rural small-scale industry at the same time
as it developed large-scale urban manufacturing. The discussion
deals with the pros and cons of this policy of “walking on two
legs.” The breakup of the Chinese commune system has given way,
in part, to the emergence of “township and village enterprises”
(TVEs).
• The TVEs played a key role in the boom that has accompanied
China’s transition to a market economy.
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This concludes the Norton Media Library
Slide Set for Chapter 18
Economics of
Development
SIXTH EDIT ION
By
Dwight H. Perkins
Steven Radelet
David L. Lindauer