MODULE FIVE

Industrialization and the Third World Countries

Instructional Objectives

After studying this module, you should be able to:

1. Discuss the reasons for industrialization;

2. Identify the problem of industrialization; and
3. Discuss the barriers to industrialization.

Instructions for using the Module

This is a self-instructional module. Before you begin with this module, take the pre-test found in the
next page. This is to find out what you already know about industrialization. Write down your answer on a
separate sheet.

Check your answers against the correct answer key located at the end of this module. If your score is
75% and above, you may proceed to Module Six; if not, proceed in reading this module.

INDUSTRIALIZATION AND THE THIRD WORLD

COUNTRIES

The remarkable progress in communication and transportation has exposed the high standards of
living of the industrial countries in the Third World. Through foreign travels, periodicals and movies the people
of the less developed countries have seen the many wonderful and modern things, which have created by an
industrial society like the United States, France and Japan. In contrast, many leaders of the Third World
countries have realized the difference in their still primitive products of development. Thus, their impressions
of an industrialized economy have further improved.

Henceforth, there has been strong clamor among many of the Third World countries for
industrialization. For years, this has been their aspiration. Through industrialization, they believed they can
eliminate the problems of poverty, insecurity and overpopulation. No less than the great Indian statesman
Nehru and the real progress must ultimately depend on industrialization.

However, industrializing a less developed country is certainly not an easy task. There are great
obstacles along the path of industrialization. It is only massive capital, modern technology, competent
management and skilled labor that are required. Well-developed agricultural and commercial sectors are also
needed. And of course, the most important requirement for industrialization is the restructuring the values
and institutions in society.

In spite of the formidable barriers to industrial development, it is not completely impossible for a less
developed country to industrialize its economy. There are several poor nations which became industrialized
economies. They were able to conquer an almost impossible dream through a vigorous and sincere
implementation of economic, social and political reforms. Former agricultural countries like England, Germany
and the United States met less difficulties in industrializing their economies, because of more favorable
economic and political conditions during their developments.

This chapter presents approaches to industrialization, reasons for industrialization, big mistakes in
industrialization, problems with industrialization, and barriers to industrialization, and early Philippine
industrialization

Approaches to Industrialization

Many less developed countries have good reasons in their crusade for Industrialization. As exporters
of raw materials and one or two agricultural products, there is no good future for them. There have always
been problems in employment and income. Poverty has never left their peoples since the time of their
ancestors up to the present time. Aware of the benefits of industrialization, which the rich countries are now
enjoying, the less developed countries have envisioned to industrialize their economics.

However, not a few developing countries have made mistakes in their strategies’ or approaches to
industrialization. For instance, it is not true that almost any kind of industrialization will help them attain their
objectives. It is likewise wrong to assume that the benefits of industrialization will automatically flow from
investments to industrial projects. Such countries even commit and error if they give industrial development
the top priority in their development programs during the formative stages.

Developing the foundation of industrialization

Most peoples in the less developed countries live and work in the rural areas where agriculture is the
principal source of income. Obviously, improving agriculture and its institutions is also improving the welfare
of the peoples. This means there are more jobs and incomes in the agricultural sector. As a result,
consumption of goods and services increases and further stimulates investments and production.

With favorable agricultural development, it would be much easier to promote industrialization.

Agriculture can serve as a strong foundation of industrialization. On the other hand, a weak and inefficient
agricultural base cannot possibly maintain the viability of industrialization. Products of industries have very
limited markets, because most of the people have little purchase power. There is therefore a need to develop
first the agricultural sector where most of the people are benefited. In addition, agriculture provides raw
materials, food, labor and market to industries.
 Agricultural development and industrialization are interdependent. Agricultural growth cannot go very
far without the help of industrialization. For instance, agricultural improvements in production, processing ad
marketing require modern machines, facilities, and other industrial inputs.

These are the problems of industries. As agriculture becomes more modernized, the number of farm
workers decreases. These are being absorbed by the various industries both located in the rural and urban
centers. Such symbiotic relationship between agriculture and industry therefore needs a more balanced
development and growth.

Industrial countries like the United States, Japan and those in Europe started their economic
development with a strong agricultural base. Even up to the present, their agricultural productivity is the
highest in the world. In the case of the United States, 70 percent of its population was engaged in farming
during its early stage of development. At present, only four percent (4%) of the people work in agriculture.
And yet such small group in the whole economy can support the needs of not only the United States but also
many other countries. In case of Japan, it was the farmers who financed the initial industrialization of their
country through taxes and export of silk.

Reason for Industrialization

1. To increase the national income of the country. Productivity is higher in manufacturing

industry. This means more income for the factors of production such as land, labor, capital and
entrepreneur. Another, prices of industrial products are more stable and higher both in the local
and world markets. Such earnings, together with the incomes of the factory owners, increase
national income.
2. To improve the stability of export earnings and national income. Most agricultural countries
export one or a few agricultural products. These are sold in highly competitive international
markets. Their prices are determined by demand and supply. The supply of agricultural products
is not stable. Whenever a bad or natural calamity strike the crops, supply decreases, and so with
export earnings. On the other hand, over supply likewise brings down export earnings. Such
shortcomings of agricultural products have been further aggravated by the unfair trade practices
of the industrial countries towards the agricultural goods of the less developed countries. As a
result, such exploited countries suffer from balance of payment problems. The price of their
imports exceeds that of their exports evidently, industrialization appears to be the solution to such
problems.
3. To provide more employment to the unemployed and underemployed. Industrialization
creates more jobs, and therefore absorbs surplus rural labor. Industrialization means more
factories. This demands for more workers. Farmers during their slack seasons can do some part-
time jobs in processing plants in their own communities.
4. To expand markets of local raw materials. Local manufacturing industries need raw materials.
Agricultural products and byproducts will be fully used by factories. Such products will be
processed for both personal and industrial consumption

Big Mistakes in Industrialization

 Many of the observations under this topic are based from the book Industrial Development by
Murray, Bryce. The author has assisted many developing countries who organized their development plans.

Maximum benefits can only be acquired if the individual industrial projects are economically sound,
feasible, and appropriate to local conditions. Not a few industrial projects in most developing countries could
not even pass the most basic economic test. Many of these unsound projects were put up without proper
evaluation. Such mistake was a great waste of scarce resources.

Many pet government projects have been inspired by a political leader who has no training industrial
economics. Although such economically unsound projects were made in good faith, the error entails a high
price for a poor country. Some useless projects were organized for political expediency. Others are misguided
symbols of national prided. For example, long and beautiful super high ways, and imposing buildings whose
cost is several items as much as the expensive machines they housed.

Industrialization is a gradual and systematic process. It includes a network of interwoven skills and
facilities, such system can only perform effectively if there is a progression from the small to the large, from
the simple to the complex. For a less developed country, it becomes impossible to do too many large and
difficult things in a very short time. For instance, super highways provide insignificant economic benefits if
most of the farms have no feeder roads to the markets. Only the very few elite can enjoy the pleasure of
travel while riding in their luxurious imported cars.

There is a fundamental principle in community development that applies to industrial projects. It states
that in putting up a community project, always begin with a simple project which is a felt need of the
community. The idea is to minimize the possibility of failure and frustration. Clearly, the probability of success
in implementing a simple project is greater than that of a big and complex project. Moreover, the experience
of being able to plan, implement, and manage a successful project, becomes a very valuable training process
for those who have been involved. Thus, they can continue to undertaker bigger feasible projects that are
also needed by the community.

Problems of Industrialization

Countries which became industrialized after England had attained such economy were luckier. They
used the technology and machines developed by the Industrial Revolution, British investments flowed in
Continental Europe. Their attitudes, values, and institution were favorable to industrial development. Max
Weber, in his Protestant Ethics claimed that the thrift and industry of the Protestants were the causes of
progress in Europe. He proved the direct correlation between the growth of capitalism and the Protestant
religion. Likewise, the presence of colonies provided an advantage to the industrial pursuits of the colonizers.
Such colonies became the suppliers of raw materials and labor and buyers of industrial products. Most of
these countries are now the less developed nations.
 For the less developed countries to industrialize their economies at this time is extremely difficult. In
addition to changing their values and institution and controlling their population explosion, they need massive
capital to push vigorously their bid for industrialization. Leaders of the Third World countries have complained
that foreign loans are too small to be able to fund their development programs. They have also criticized the
high interest rates of international financial institutions. Many economic nationalist have alleged that foreign
loans and bids are only for agricultural or rural development – not for industrial development. They claimed
further that the international financial institutions are owned by the industrial countries, and even concluded
that such institutions are tools of the multinational institutions.

Another problem is the very keen competition in the world market for industrial products. The highly
industrialized nations like the United States, Japan, England, France and Germany have a great comparative
advantage. Products of the factories of the newly industrializing countries face a very slim chance in the world
market. Such predicament is further aggravated by discriminatory trade practices of the industrial countries.
They impose quotas, tariffs, and similar trade barriers against products coming from the less developed
regions. They cannot immediately retaliate because their economies are heavily dependent on the rich
countries.

Encourage foreign investments

A most likely alternative for a less developed country is to encourage foreign investments. Singapore
became prosperous because of foreign investments. This also happens in Hong Kong. However. In the
experiences of many less developed countries, foreign investments have only improved the economic
conditions of the multinational corporations and their local representatives.

The few counties which have achieved prosperity through foreign investments dictate the rules of the
game. It is up to the investor to accept them or not. If not, then they have to find another country which is
willing to be exploited. Under such arrangement, only the top government officials and other local business
elite are benefited. The mases remain poor and deceived.

Foreign investment should be a stepping stone for industrial development. It should not be a substitute
for local private initiative entrepreneurship. It should not compete with local investment. There are many areas
of investment in which both foreign investor and the less developed country could gain mutual benefits.
Precisely, these should be developed, and not those which hamper the economic interest of the local
industrialists.

Barriers to Industrialization

South Asian leaders have been aware of the economic success of highly developed countries due to
their industrialized economies. Hence, the aspiration for industrialization has not been forgotten.

However, to imitate Western technology as a development strategy may not be correct. Conditions
during the take-off stage of the now developed countries were different for the conditions which pervade the
less developed countries in the region. For instance, during the industrialization process of the Western
countries, there was no population explosion, and competition in the world market was not yet keen.

It is noted that not a few conditions in many South Asian countries have not been favorable to
industrialization. For instance, there has been inefficient public administration. Colonial economy is
widespread. Negative attitude towards work persist. There is conservatism in business enterprises. Wealth
and income distribution is still unjust. Nepotism is very strong in both government and private sectors. Instead
there should be a new spirit of nationalist, efficiency, punctuality labor mobility, discipline, and entrepreneurial
propensity.

In his ten-year survey of South Asian conditions, Myrdal gave his observations on the region’s dream
of industrialization;

 There is an unskilled labor force and a small-inexperienced managerial resource.

 Rapid industrialization will not generate sufficient employment. It may even be negative if
modern industry will compete with traditional labor- intensive manufacturing.
 There is inadequate logistic support such as power, transport and communication facilities.
Also, not all raw materials for industrialization are locally available.
 Existing social economic, cultural, and political institutions are not favorable to development.
 Attitudes and values are likewise not suitable to industrialization.

Nevertheless, Myrdal did not discourage South Asian countries in their industrialization drive. He
proposed that such economic pursuit should be complemented with mass education and public health
programs. In addition, he suggested that the bid to industrialization should be supported by the development
of other fields of the economy. Myrdal stated that vigorous policy measures should be aimed towards
improving labor utilization and productivity in other sectors, especially agriculture which is the largest and
most important sector in a less developed economy.

Early Philippine Industrialization

The goal of the early Philippine economy has been to increase to share of manufacturing in the GNP.
Like other developing countries, the Philippines has been aspiring for industrialization. Since 1916, there
were experimentation with policies which were envisioned to promote manufacturing in the Philippines, and
the promotion of entrepreneurial ventures among local businessmen. Professor Frank Golay of Cornell
University stated that Philippine industrialization policy included (Golay, 1961)

- Direct Participation of the State in manufacturing and industrial activities as an entrepreneur or

partner of private firms.
- Development of financial institutions for allocating scarce credit and foreign exchange resources.
- Provision of government incentives to private entrepreneurs.
- Promotion of selected foreign investments in manufacturing.

Government Participation
 Philippine industrialization in its formative stage provide little or no priority to manufacturing for export.
It only sought to reserve the domestic market for local manufacturers and to expand the range of Philippine
manufacturers. For 20 years since 1935, the government established and operated various marketing and
industrial enterprises. In the early 1950’s the government owned and managed railroads, hotels, electric
power, gas, and water works. It directly produced coal, cement, steel textiles, pulp and paper. It also operated
shipyard and engineering shops. Moreover, the government had substantial investments in firms
manufacturing incandescent bulbs fluorescent tubes, domestic and foreign airlines, and owned three ocean
vessels. There were several other manufacturing enterprises in which the government was an active
participant.

However, with the election of President Ramon Magsaysay in 1953, there was a radical change in
industrial policy the following year. The government initiated the policy of selling government companies in
which the private sector was interested and those companies which were inefficient.

Not a few government corporations had been inefficient and became bankrupt. Corruption, nepotism,
and mismanagement were rampant. The notorious “padrino system” did not spare the government
corporations. The heavy losses and waste of public money and property in maintaining Government
Corporation prompted President Magsaysay to get rid of such inefficient firms.

Industrialization Evaluated

Philippine industrialization rose rapidly since 1950 in terms of growth, number of firms, and number
of plants or extent of Filipino participation. In 1950, the value added in manufacturing was only 8.5 percent of
the national income compared with 42.3 percent in agriculture. Eight years later, the contribution of
manufacturing to national income increased almost three times. During this period many infant industries
were heavily subsidized by the government. They were granted tax exemptions and foreign exchange
allocations. They were also protected from foreign competition.

Likewise, inefficiency, favoritism, and corruption crept into the operations of infant industries. Many of
these industries remained in their infant stage at the expense of the taxpayers and consumers. The quality
of their products did not improve. They just took advantage of the subsidies extended to them by the
government.

In the1950’s, economic nationalism has become stronger. Through the leadership of the then Senator
Claro M. Recto, foremost Filipino nationalist, several noted Filipino leaders criticized the Philippine brand of
industrialization, Recto pointed out:

The policy of industrializing the country should be pursued vigorously and sincerely. Many of
these industries to which our administration, past and represent, point with pride as achievements of their so-
called industrialization programs are nothing more than assembling, bottling or packaging plants or concerns
which import an almost finished product and perform the last stage of manufacturing before selling it on the
selling counter . When we refer to these enterprises as “industries” we are deceiving ourselves (Constatino,
1965)