Industrialization

By
Prof. M. Sajidin
 Industrialization
Having decided to industrialize, developing nations
must also decide whether to produce manufactured
goods for export or to replace imports. A policy of
import-substitution was to some extent imposed on
developing nations by outside circumstances. But to
an important extent, it was a deliberate policy
adopted by developing nations as the best way to
industrialize, because
1. Their manufactured imports clearly indicated the
existence of a domestic market for certain products,
2. Protection against foreign competition could easily
be provided, and
 Industrialization
3. It was thought to relieve even greater balance of
payments problems-later.
Protection was provided mostly by import tariffs which
became progressively higher with higher stages of
processing. This was done to encourage first the simpler
step of assembling foreign parts in the hope that later
more and more of these parts and intermediary products
could be produced domestically (backward linkage). It
also encouraged foreign firms to establish so ­called
tariff factories to overcome the tariff wall.
 Industrialization
An Example:
The process of import-substitution on a wide scale
and as a deliberate policy for in­dustrialization
was started earliest and went furthest in
Argentina, but soon spread to other large
developing nations such as Brazil and Turkey
and, more recently, to India and Pakistan. In
general, the policy of import-substitution provided
excessive protection to domestic (infant) industry.
Continue…
 Industrialization
An Example:
This resulted in inefficient industries, excessive
capital intensity and limited employment
opportunities and became progressively more
and more difficult and inefficient to pursue after
the- simpler types of manufactured imports
had been replaced by domestic production. As
a result, more attention is being paid today to
efficiency considerations in establishing and
encouraging domestic industries and to
producing manufactured goods for export.
 CAPITAL-INTENSIVE TECHNOLOGY AND
EMPLOYMENT IN INDUSTRY
Most economists believe that an excessive capital-intensive-
technology is used in industry today in developing nations. This is
due to:-
The policy of import-substitution itself.
Distortions in factor markets.
The general unavailability of a more labor-intensive technology.
A desire to be modern and use the latest production
techniques. The use of this excessive capital-intensive technology
severely limited the expansion of employment opportunities in
industry. At the same time that a massive urban migration from
the countryside was taking place. This resulted in very serious
urban unemployment which, aside form the tremendous human
suffering that it involved, also created a very explosive situation.
 CAPITAL-INTENSIVE TECHNOLOGY AND
EMPLOYMENT IN INDUSTRY
Example:-
Even though developing nations have a preponderance of labor relative to
capital with respect to developed nations, they use almost as much capital per
worker in their modern industrial sector as developed nations. For example, India
uses about $30,000/- of capital per worker in its steel industry, which is not much
different from developed nations. To some extent, excessive capital intensity
resulted from low-capacity utilization in developing nations. For example,
industrial capital is utilized 50% of the time in the U.S. but only 33% of the in
Pakistan. Because of this excessive capital intensity in developing nations,
industrial employment did not expand rapidly. For example, employment in the
industrial sector (both modern and traditional) of Latin America has increased by
4% per year over the past two decades. Since this sector employs about 25% of
the total labor force, a 4% increase in its employment absorbed only 1 of the 2-3%
increase in its total labor force. In Columbia, of the 200,000 yearly increase in the
labor force, only about 10,000 per year being absorbed in the modern
manufacturing sector. This means that the greater part of the yearly increase in
the labor force of developing nations had to be absorbed into agriculture and
other traditional sectors or remain unemployed. It has been estimated that form
25 to 30% of the labor force of most developing countries may be considered
unemployed or underemployed.
 INDUSTRIAL EXPORTS
Because of the limitation of industrialization through import-substitution. Today
more attention is being paid by developing nations to the production of
manufactured good for export. This policy is recommended especially for small
nations, which often lack a sufficiently large domestic market to take advantage
of economies of scale. However, it can also be very helpful for large developing
nations, especially those that have already pushed far in their policy of import
substitution. Production of manufactured goods for export not only permits
further industrialization but also serves as stimulus to greater all-around
production efficiency. There are, however, many obstacles; as follows:
1. The trade restrictions of developed nations on manufactured imports, especially on
the simple, labor-intensive manufactures which are of special interest to
developing nations.
2. The overvalued exchange rates generally maintained by developing nations
discourage their exports.
3. The supply rigidities and low product quality in developing nations and the
competition from producers in more developed nations.
4. The limited markets for manufacture exports to other developing nations, due to
the fact that all developing nations seek to push industrialization more or less along
the same lines under heavy protection. Nor does it seem that this problem can be
easily resolved by economic integration among group of developing nations.
 INDUSTRIAL EXPORTS

Example:
In order to protect domestic employment, developed nations have traditionally
imposed above-average effective protective tariff rate on imports of textiles,
shoes, processed foodstuffs, bicycles, sewing machines and other simple
manufactured goods in which developing nations already have or can soon be
exported to acquire a cost advantage in production. The U.S. government
induced foreign exporters of textile, shoes and steel (under the threat of all-
around trade restrictions) to impose “voluntary” quartos on their exports to the
U.S. At a series of United Nations Conferences on Trade and Development
(UNCTAD) held in 1964, 1968, 1972, developing nations demanded
preferential access for their manufactured….