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.