INDUSTRIALIZATION and

STRUCTURAL CHANGE
10 Countries With The Highest Industrial Outputs In The World

Industrial output in 2016 (billions

Rank Economy
in USD)

1 China 4,566
2 European Union 4,184
3 United States 3,602
4 Japan 1,368
5 Germany 1,050
6 India 672
7 South Korea 531
8 United Kingdom 505
9 France 478
10 Italy 442

Source: worldatlas
INDUSTRALIZATION
• Industrialisation (or industrialization) is the period of social and
economic change that transforms a human group from an agrarian
society into an industrial society, involving the extensive re-
organisation of an economy for the purpose of manufacturing.[2]
• As industrial workers' incomes rise, markets for consumer goods and
services of all kinds tend to expand and provide a further stimulus to
industrial investment and economic growth.
INDUSTRY AS A LEADING SECTOR
• The main structural development that separates the modern high-
income economy from a traditional low-income economy is the rapid
development of industrial sector.
• In the early stages of development, industrial sector comprises of
anything that is not agriculture in nature. It includes all non-
agricultural products.
• As a matter of interest, large countries are likely to have a larger share
of income generated by industrial sector because of economies of
scale.
INDUSTRY AS A LEADING SECTOR
• Economies of scale are cost advantages reaped by companies when
production becomes efficient. Companies can achieve economies of
scale by increasing production and lowering costs. This happens
because costs are spread over a larger number of goods. Costs can be
both fixed and variable.
• EXCEPTIONS: AUSTRALIA and NEW ZEALAND which developed
specialization in minerals and agricultural products respectively.
• INDIA has a large industrial sector but still quite poor.
MODEL OF STRUCTURAL CHANGE
• Jamaican economist and Nobel Prize winner, W. ARTHUR LEWIS
(1954) developed the first 2 model which attempted to capture the
interaction between a traditional agricultural sector and modern
industrial sector for a developing country.
• JOHN FEI and GUSTAV RANIS (1964) built upon his work a decade
later.
• The model developed and called Lewis-Fei-Ranis (LFR)
• 2 sectors: traditional and moderns, agricultural and industrial or rural
and urban.
LFR MODEL
• 2 sectors: traditional and moderns, agricultural and industrial or rural
and urban.
• The essence of this model is to contrast traditional agricultural
methods and rural social organization which revolves around family
enterprises, with the modern industrial sector where workers earn
wages and industrial goods are produced.
• Ex. In an urban area, there may be a traditional informal sector.
• Ex. There may be modern processing industries in the countryside.
Terms alert!
• Surplus
• Opportunity cost
• Marginal product
• Prima facie evidence
• Terms of trade
Terms alert!
• Surplus labor- excess labor
• Opportunity cost – benefit forgone
• Marginal product – change in the total output as one additional input
is added to the production.
• Prima facie evidence – Latin expression, “at first sight”, “on its first
encounter”
• Terms of trade – the relative price of export in terms of imports and is
defined as ration of export prices to import prices. It can be
interpreted as the amount of import goods an economy can purchase
per unit of export goods.
FEATURES OF LFR MODEL
• Capital accumulation fuels the development of industrial sector.
• There is assumed to be surplus labor in the rural/agri sector.
• Supply of labor is virtually unlimited.
• Opportunity cost is virtually zero.
• When it is removed from the rural sector, the output of the sector does not
change at all, or very little.
• This would occur when there is a high population density in the rural areas
and family farming is widespread.
• By removing excess labor from the traditional sector, and moving it to
the industrial sector, the productivity of labor increases.
FEATURES OF LFR MODEL
• LFR model assumes a particular kind of social organization in the
agricultural sector, which is traditional in nature, and also that the
marginal product of the last worker is zero.
• The surplus labor movement into industry provides net gain to the
society.
• Once the stock of surplus labor is exhausted, the process of industrial
development becomes an interplay between the two sectors as the
wage rate is driven up in both sectors.
INTRODUCTION OF TRADE INTO THE LFR
MODEL
• A food self-sufficiency policy is often followed when more satisfactory
outcome can be achieved by trading.
• food self-sufficiency is defined as being able to meet consumption needs
(particularly for staple food crops) from own production rather than by buying
or importing.
• In Asia, Korea and Japan heavily subsidize rice farmers while in
European Community and the US also have a large farm subsidy
program.
INTERACTION BETWEEN INDUSTRIAL AND
RURAL SECTORS
• BACKWARD LINKAGES – channel through which information, material,
and money flow between a company and its suppliers and create a
network of economic interdependence. An effect in which increased
production by a downstream manufacturer provides positive
pecuniary externalities to an upstream manufacturer responsible for
different stages of the same production.
• FORWARD LINKAGES – distribution chain connecting a producer or
supplier with the customer. Occurs when the products of one industry
is used as the raw material of another industry.
Backward and Forward Linkages
• Strong backward linkages – leather, textile, clothing, food and
beverage and paper.
• The lowest backward linkages are in agriculture, public utilities,
mining and services.
• Labor intensive manufacturing industries have the highest linkages,
while primary industries have the lowest.
• The Asian NIEs and the countries of Southeast Asia began their
industrialization process with import-substituting industries, but later
began to focus on exports in labor-intensive industries such asleather,
clothing and textiles.
• IMPORT SUBSTITUTION INDUSTRIALIZATION(ISI) is a trade and
economic policy which advocates replacing foreign imports with
domestic production.
• LABOR INTENSIVE INDUSTRIES – industries that produces goods or
services requiring large amount of labor.
ASPECTS OF INDUSTRIAL DEVELOPMENT
1. CHOICE OF TECHNOLOGY
• Using simple production theory, factor proportions are determined by the
relative cost and of capital and labor.
• Theory of production, in economics, an effort to explain the principles by which a business
firm decides how much of each commodity that it sells (its “outputs” or “products”) it will
produce, and how much of each kind of labour, raw material, fixed capital good, etc., that it
employs (its “inputs” or “factors of production”) it will use.
• Labor-intensive technologies may be appropriate in a poor country with
plenty of low-skilled and cheap labor but because of factor market
distortions (such as those created by tax breaks for capital equipment), the
choice of technology may be more capital-intensive.
• Market distortion is an economic scenario that occurs when there is an intervention in a given
market by a governing body. The intervention may take the form of price ceilings, price floors,
or tax subsidies.
• Capital intensive refers to business process or industries that require large amounts of
investment to produce a good or service and thus have high percentage of fixed assets such
as PPE.
ASPECTS OF INDUSTRIAL DEVELOPMENT
2. ECONOMIES OF SCALE
• Economies of scale are cost advantages reaped by companies when production becomes
efficient. Companies can achieve economies of scale by increasing production and
lowering costs. This happens because costs are spread over a larger number of goods.
Costs can be both fixed and variable.
• Come into play when the country is exporting or when production is
taking place on a large scale for domestic market.
• In very small country, it may be difficult to reach a competitive plant
size of production is intended for the domestic market alone.
• Even in larger countries, some industries may be inefficient – such as
automobile industry in most Asian countries and Australia.
EFFICIENCY ISSUES
• ECONOMIC EFFICIENCY AND SCALE OF PRODUCTION
• The larger the firm, the more efficient? This not necessarily the case as size
can introduce inefficiencies.

• Efficiency depends upon a number of special factors.

• It may be that all firms can be efficient if they have reach the viable size of
production that takes full advantage of economies of scale.
EFFICIENCY ISSUES
• DO PROTECTED INDUSTRIES BECOME EFFICIENT OVERTIME?
• INFANT INDUSTRY is a new industry which in its early stages experiences
related difficulty or is absolutely incapable in competing with established
competitors abroad.
• PROTECTIONISM is the economic policy of restricting imports from other
countries through methods such as tariffs on imported goods, import
quotas, and a variety of other government regulations.
• In India, many domestic industries were protected for a long time (ex.
Automobile, iron and steel), these industries did not become competitive
internationally. They were inefficient and not competitive.
• In Korea, subsidies were given but were performance related. Subsidies
were withdrawn if the industry did not emerge with strong export products
after the initial years of protection.
• In Taiwan, similar story although the emphasis there was on the
development of small and medium scale industries.
ADVANTAGES OF SMALL-SCALE INDUSTRIAL
DEVELPMENT
• SMALL-SCALE ENTERPRISE OR SMALL AND MEDIUM ENTERPRISE-SMEs)
more simply, a small business, is one marked by limited number of
employees and limited flow of finances and materials.
• Are generally more labor-intensive. Start up cost are small and entry and
exit is easy because of the small amount of capital needed.
• They tend to fail more frequently.
• Small-scale firms can be very successful when they concentrate in a
particular locations where they can share skilled labor force base and
where they can produce differentiated product of high quality.
• Industries that require craft occupational skills such as textile and apparel
(batik, silk and cotton), footwear.
• Most small producers need access to intermediate material inputs and thus
prefer to be close to ports or other transportation facilities.
SME IN THE PHILIPPINES
• Are businesses employing less than 200 workers or those with the
asset size of no more than P100 million.
• Examples…
FOREIGN TRADE
• Exports are critical in explaining productivity gains in the Asian
economies.
• Large countries with low industrial concentration ratios, efficiency
rates are still low.
• Examples, textile sectors in India and Philippines, why? Because of
licensing arrangement, or of lack of technological transfer as a result
of taxes and imports.
• Technological transfer is the transfer of new technology from the originator to
secondary user, especially from developed to less developed countries in an
attempt to boost their economies.
• Firms financed by FDI are, other things being equal, are more efficient
than their domestic counterpart.
• There is a need to be competitive internationally.
TRANSITION ISSUES
• Indonesia has not been able to make the transition to higher value-added
products that are in demand in the OECD countries quickly and as
effectively as its neighbors in Southeast Asia.
• First reason, Indonesia still has a large oil and natural gas sector and some
of its resources are devoted to maintaining and expanding this sector.
• Second, it had a late start of industrialization process in the early 1980s,
and Malaysia, Thailand and Philippines had more than a decade lead in
industrializing.
• Third, it has a labor force that lacks education and training to implement
technology in these new industries on a wide scale.
• Fourth, even after if began industrializing engineers, who thought they
could leapfrog to higher levels of technology, dominated much of its
development in thinking.
TRANSITION ISSUES
• Thailand also suffers from lack of skilled manpower. The educational
system is particularly weak in providing technicians with strong
secondary training.
• Philippines and Malaysia are better positioned to take advantage of
the opportunities for upgrading their industrial capacity. Their labor
force are better trained and more familiar with English.
THE ASIAN EXPERIENCE WITH INDUSTRIALIZATION
• From the mid 1960s to the late 1990s, the growth rate of the East
Asian economies of HK, Korea, and Taiwan, together with SG is
Southeast Asia-sometimes called Asian Tigers or the NIEs grew at a
faster rate than any other economy or group of economies had in
history.
• Per capita income increased by about 7% per year, so that income
doubled after 10 years. AT the end of 30 years, income per capita
increase fourfold.
• Per capita income (PCI) or average income measures the average income
earned per person in a given area (city, region, country, etc.) in a specified
year. It is calculated by dividing the area's total income by its total
population.[1][2]
• In Taiwan, Singapore, and Hongkong, the increase in the share of industry was more modest but it also
saw a more rapid growth in the industrial sector than in the economy as a whole.