The role of industrialization in economic development- theory .ppt

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1、1,The role of industrialization in economic development: theory and evidence,Bineswaree Aruna Bolaky Africa Section Division for Africa, LDCs and special programmes United Nations Conference on Trade and Development UNCTAD,2,Outline of presentation,A Conceptual definitionsB - The case for industrial

2、ization: Economic Arguments (based on Szirmai-UNU)C - The case for industrialization: some econometric evidenceD - Challenges and opportunities from globalizationE-African initiatives on industrialization,3,A - Concepts,1. Concept of a production function and sources of economic growthYit = Ait. F(

3、Kit, Hit, Lit) i = country t =timeY= output over time= Gross National Product K = Stock of Capital ; H = Human capital; L = Labour A = Total Factor Productivity TFPGrowth rate of output over time is a function of Rate of growth in capital stock =investment Rate of growth in human capital Rate of gro

4、wth in labor growth in total factor productivity (TFP) or technological change/technological progressTFP = Solow Residual= portion of output not explained by the amount of inputs used in production Endogenous (new growth theory) or exogenous (old growth theory)?,4,A - Concepts,Determinants of TFP: T

5、FP is commonly identified with level of technology but actually incorporates a wider variety of factors such as internal organization of firms, level of worker effort, knowledge, ideas, R&D, technical efficiency, economic structureCapital intensity (K/Y) and labor productivity (L/Y) depend in the lo

6、ng-run on TFP growth or technological change. Both embodied and disembodied. And vice versaTechnological change can be embodied in the quality of new capital goods =capital-embodied technical change2. TFP and concepts of efficiencyProductive efficiency: Resources are allocated such that firms are pr

7、oducing at lowest possible costs, producing output by minimizing use of inputs, cannot produce more of one good without producing less of anotherAllocative efficiency: Resources are allocated to their best possible uses , producing right goods at the right prices for the right people,5,A - Concepts,

8、3. Increasing returns to scale: a given proportional change in inputs leads to a more than proportional change in output.4. Structural change: An economys structural transformation changes the composition of output and the contributions of each sector to GDP and employment over time.(UNECA)5. Global

9、ization:a. free movement of factors of production and goods and services; b. the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, the spread of technology, and military presence (Bhagwati),6,B-The case for industrial

10、ization: Theory/Economic Arguments,Industrial development is a driver of structural change which is key in the process of economic developmentRecent research suggests that economic development requires structural change from low to high productivity activities and that the industrial sector is a key

11、 engine of growth in the development process. Virtually all cases of high, rapid, and sustained economic growth in modern economic development have been associated with industrialisation, particularly growth in manufacturing production (Szirmai 2009). .,7,B-The case for industrialization: Theory/Eco

12、nomic Arguments,8,The Five Stages of Development: 1. Traditional Society- Refers to a country that has yet to begin developing, where a high percentage of people are involved with agriculture and a high percentage of the countrys wealth is invested in activities such as the military and religion, se

13、en as “nonproductive” by Rostow. 2. Transitional Stage- AKA the preconditions for takeoff. Under the model, the process of development begins when an elite group initiates innovations economic activities. Under the influence of these well-educated leaders, the country starts to invest in new technol

14、ogy and infrastructure, such as water supplies and transportation systems. These projects will ultimately stimulate an increase in productivity likely increasing the GDP. There is a limited production function, and therefore a limited output. There are limited economic techniques available and these

15、 restrictions create a limit to what can be produced. Increased specialization generates surpluses for trading. There is an emergence of a transport infrastructure to support trade. External trade also occurs concentrating on primary products.,9,3. Takeoff- Rapid growth is generated in a limited num

16、ber of economic activities, such as textiles or food products. These few, takeoff industries achieve technical advances and become productive, whereas other sectors of the economy remain dominated by traditional practices. After take-off, a country will take as long as fifty to one hundred years to

17、reach maturity. Globally, this stage occurred during the Industrial Revolution. Industrialization increases, with workers switching from the agricultural sector to the manufacturing sector. The level of investment reaches over 10% of GNP. The growth is self-sustaining as investment leads to increasi

18、ng incomes in turn generating more savings to finance further investment. 4. Drive to maturity- Modern technology, previously confined to a few takeoff industries, diffuses to a wide variety of industries, which then experience rapid growth comparable to the takeoff industries. Workers become more s

19、killed and specialized. The economy is diversifying into new areas the economy is producing a wide range of goods and services and there is less reliance on imports. 5. High Mass Consumption- The economy shifts from production of heavy industry such as steel and energy, to consumer goods, such as mo

20、tor vehicles and refrigerators. Of particular note is the fact that Rostows “Age of High Mass Consumption“ dovetails with (occurring before) Daniel Bells hypothesized “Post-Industrial Society.“ The Bell and Rostovian models collectively suggest that economic maturation inevitably brings on job-growt

21、h which can be followed by wage escalation in the secondary economic sector (manufacturing), which is then followed by dramatic growth in the tertiary economic sector (commerce and services).,10,Dual Economy Model-Lewis (source Basu),2 sectors: a small industrialized economy and an agricultural sect

22、or.The industrialized sector is typically located in a few urban pockets and operates ,more or less like any modern industrial economy (modern or urban sector), technologically advancedLarger agricultural sector:primitive modes of production, vast majority of population is very poor-living at or nea

23、r subsistence consumption (primitive, traditional, rural or subsistence sector); low wages, very low productivity close to zeroWorkers in the industrial sector earn higher wages than those in rural sector, wage gap related to productivity gapAssumption of duality an analytical convenience. While dev

24、eloped countries may have traits of dualism, the claim behind the dual economy literature is that such dualism is much sharper than LDCs,11,Dual Economy Model-Lewis,A closed economy with an industrial sector and a rural sector (or capitalist and subsistence sectors) and a fixed endowment of Labor L

25、In the rural sector, there is an unlimited labor supply at the subsistence wage: excess supply is sufficiently large so that no employer incumbent or prospective-has to worry when considering employment expansion about having to bid up wages or about getting rationed in the labor market If the capit

26、alist sector wishes to draw on this unlimited supply of labor, it has to do so by offering a higher wage w which is a mark-up on the rural subsistence wage m Only modern sector capitalists, who are profit maximizers, and are wage and price takers save on their profits and use their savings to invest

27、 to raise the productivity of labor in the modern sector, demand for labor in the modern sector rises absorbing the surplus labor from the rural sector and over time w rises causing at a certain point m also to rise Turning point, wages in both the rural and modern sector get equated, rural-urban wa

28、ge gap disappears and urban employment has grown,12,Replicated from Szirmai(2009): There are powerful empirical and theoretical arguments in favour of industrialisation as the main engine of growth in economic development. The arguments can be summarised as follows:1. There is an empirical correlati

29、on between the degree of industrialisation and per capita income in developing countries.2. Productivity is higher in the industrial sector than in the agricultural sector. The transfer of resources from agriculture to manufacturing provides a structural change bonus.3. The transfer of resources fro

30、m manufacturing to services provides a structural change burden in the form of Baumols disease. As the share of the service sector increases, aggregate per capita growth will tend to slow down.4. Compared to agriculture, the manufacturing sector offers special opportunities for capital accumulation

31、in developing countries. Capital accumulation can be more easily realised in spatially concentrated manufacturing than in spatially dispersed agriculture. This is one of the reasons why the emergence of manufacturing has been so important in growth and development. Capital intensity is high in minin

32、g, manufacturing, utilities and transport. It is much lower in agriculture and services. Capital accumulation is one of the aggregate sources of growth. Thus, an increasing share of manufacturing will contribute to aggregate growth.,13,Replicated from Szirmai(2009):5. The manufacturing sector offers

33、 special opportunities for economies of scale, which are less available in agriculture or services.6. The manufacturing sector offers special opportunities for both embodied and disembodied technological progress (Cornwall, 1977). Technological advance is concentrated in the manufacturing sector and

34、 diffuses from there to other economic sectors such as the servicesector.7. Linkage and spill-over effects are stronger in manufacturing than in agriculture or mining. Linkage effects refer to the direct backward and forward linkages between different sectors. Linkage effects create positive externa

35、lities to investments in given sectors. Spill-over effects refer to the disembodied knowledge flows between sectors. Spill-over effects are a special case of externalities which to refer to externalities of investment in knowledge and technology. Linkage and spill-over effects are presumed to be str

36、onger within manufacturing than within other sectors. Linkage and spill-over effects between manufacturing and other sectors such as services or agriculture are also very powerful.,14,Replicated from Szirmai(2009):8. As per capita incomes rise, the share of agricultural expenditures in total expendi

37、tures declines and the share of expenditures on manufactured goods increases (Engels law). Countries specialising in agricultural and primary production will not profit from expanding world markets for manufacturing goods.,15,1. Correlation between industrialisation and economic growth,Focus on the

38、share of manufacturing in the total commodity production (i.e. agriculture and industry, including mining, manufacturing, construction and utilities) rather than in total GDP. The share of manufacturing in commodities is set out against a countrys per capita gross national income in 2000. Szirmai fi

39、nds a significant positive correlation of 0.79 between the logarithm of income per capita and the share of manufacturing.Major exceptions among the advanced economies are primary exporters such as Norway, Canada and Australia. Among the developing countries, Taiwan, Thailand and Brazil rank higher i

40、n terms of industrialisation than in terms of income. Nevertheless, the table illustrates the general point about industrialisation. The poorest countries in the table are invariably those with the lowest shares of manufacturing (and the highest shares of agriculture). The more prosperous countries

41、are the more industrialised ones.,16,17,18,2. The Structural Change Bonus-static shift and dynamic shift,A transfer of labour from low productivity agriculture to high productivity industry results in an immediate increase in overall productivity and income per capita. This transfer has been a major

42、 source of growth in developing countries. It is referred to as the structural change bonus (Positive static effect).Szirmai analyses data on value added per worker for a selected number of developing countries for which data are available for longer periods. Immediately clear that value added per w

43、orker is much higher in manufacturing than in agriculture. Table 5Dynamic shift effect If productivity growth in manufacturing is more rapid than in other sectors, a transfer of resources to this sector will result in more rapid aggregate growth (This is referred to as the dynamic shift effect). Her

44、e the evidence is more mixed. In the richest countries of the world growth of labour productivity in agriculture in the post-war period has been higher than in industry - particularly due to biotechnological innovation. However, in developing countries since 1950, productivity growth in manufacturin

45、g has been more rapid than in the primary sector.,19,2. The Structural Change Bonus-static shift and dynamic shift Table 6,Between 1950 and 1973, the growth rate of labour productivity in manufacturing is substantially higher than in agriculture and also higher than that in the total economy. This i

46、s even more pronounced if we look at growth of output (8.6% versus 3.9%). Manufacturing is clearly a very dynamic sector contributing to overall growth performance. In ten of the fourteen developing countries, productivity growth in manufacturing is higher than in agriculture. In the case of value a

47、dded, all countries show higher growth in manufacturingAfter 1973, the picture becomes more complicated.,20,2. The Structural Change Bonus-static shift and dynamic shift,Summarising the information in both tables, we can say that in developing countries manufacturing is indeed one of the more dynami

48、c sectors in terms of productivity and output growth, especially in the period 1950-73. In the period 1973-2003, productivity growth in agriculture surpasses that of manufacturing, but manufacturing still dominates in terms ofoutput growth.,21,3. Structural change burden-Baumols disease,In many serv

49、ice sectors, the possibilities for productivity growth are limited due to the inherently labour intensive nature of service production. This implies that an increasing share of services results in a productivity slowdown (Baumols law). Such service sectors include personal services, restaurants and

50、hotels, health care and medical services and government.Baumols law has recently come under fire, because there are some very important market service sectors such as the financial sector and sales and distribution where there are major productivity improvements, based on ICT technologiesThe working

51、 hypothesis is that a country with a large service sector will tend to grow slower than a country with a smaller service sector. As advanced economies are predominantly service economies, this creates new possibilities for catch up in developing countries where the industrial and the manufacturing sector have a proportionately larger share in output.,