INDUSTRIALISATION

Development Economics 6th November 2012 Solano Da Silva

Objective > To understand the importance of industrialisation for economic development. 1) 2) 3) 4) 5) 6) Introduction Meaning of industrialisation Major effects of industrialisation Factors which can impede industrialisation The context of industrialisation Role of the state in industrialisation 6.1) State policies for industrialisation

1. Introduction >> [Why focus on industrialisation] From the economic history of developed economies industrialisation has been the turning point for modernising their economies and societies. Industrial development has been associated with economic growth: greater GDP and per capita income.

1. Introduction >> [Why focus on industrialisation] Industrial development has been associated with economic growth: greater GDP and per capita income.

2. Meaning of industrialisation >> [What does it mean to industrialise?] Narrowly: refers to the capacity to produce the means of production (factories, machines, tools). Broadly: refers to the application of industrial (modern) methods of production to various sectors of the economy. Developing economies: A system of economic development in which the major part of the national resources are used to develop a technically up-to-date, diversified national industry capable of assuring a high rate of growth for the economy as a whole and of overcoming economic and social backwardness.

3. Major effects of industrialisation >> 1. Structural transformation of the economy. Share of industry increases vis--vis agriculture Increasing share of industry in GDP Increasing employment of industrial sector. 2. Development of agriculture. Creation of a market for agricultural products (namely food for industrial workers). Changes subsistence nature of production. Commercialisation of agriculture: Demand for cash crops. Technical transformation of agriculture. 3. Increase in per capita income Due to greater returns from industry & expansion of sector. 4. Social changes. Changes in cultural values (modern values, scientific method). 6 Creation of entrepreneurial class.

4. Factors which can impair industrialisation >> 1. Economic factors Shortage of capital Inadequate entrepreneurs (or mostly engaged in speculative investments, non-risk takers, wasteful expenditures) Lack of skilled personnel or insufficient skilled personnel. Infrastructure problems: Transport bottlenecks Power shortages 2. Social factors Problems w.r.t. cultural values (non-modern, pre-scientific) Problems w.r.t. mobility of labour

4. Factors which can impair industrialisation >> 3. Demographic factors Population pressure dissipates capital accumulation. Pressure on land. 4. International factors Capital imports are tied to foreign exchange (forex) reserves, which are dependent on export surpluses. But developing countries export mostly primary products whose prices tend to remain stagnant. Shocks (famine, natural calamities) sometimes require even primary products to be imported. Aid often comes with conditionalities.

5. The context of industrialisation >> Context of industrialisation of Western economies different Industrial revolution (organic development following renaissance, scientific revolution and rise of capitalism) Colonies (sources of raw materials and markets) Different international environment (economies not as integrated compared to today) Disadvantages for developing economies Experience of colonisation (bequeathed with distorted economic and political structure) Large populations and poverty. Small private sector Advantage for developing economies Dont have to completely re-invent the wheel (process of industrialisation). Many technologies now available. Adaptive reuse.

6. Role of the state in industrialisation >> Arguments for the role of the state in industrialisation of developing economies Small private sector (insufficiently developed) Pvt. Sector not interested in some industries. Huge investments required (Large capital requirements) Long gestation period to get returns (long-term profitability) Infrastructure investments (where difficult to charge user fees) Social objectives (e.g. Poverty eradication, social justice, employment, education)

(in case of India) mixed economy proposed; with public sector focusing on capital industries and private sector focusing on consumer goods.
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6. Role of the state > 6.1. State policies for industrialisation >> 1. Industrial policy Promote public sector enterprises Regulate and direct private sector Industrial licensing; Licence permit raj Locational policy 2. Fiscal policy Mobilise resources and direct investment Mobilise resources: taxes and duties (used to regulate trade and prevent imports of wasteful products). o Tax incentives for private players: tax holidays, concessions for specific industries and locations. Borrowings Sale 11 Directing investment in productive enterprises.

6. Role of the state > 6.1. State policies for industrialisation >> 3. Credit policy Also known as the monetary policy by which central banks control money supply in the economy. To do this setting up of network of banking facilities linked to the apex banking authority (central bank, India: RBI). Credit policy can be: Expansionary Contractionary 4. Balance of Payment policy Seeks to ensure the supply of forex required to import important capital goods and technology. Involves import restrictions Control over supply of forex. ISI (Infant industry argument) Tariff or quotas on certain commodities Local industry produces the same

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6. Role of the state > 6.1. State policies for industrialisation >> Criticisms of ISI 1. Main beneficiaries foreign firms who prosper behind tariff wall and repatriate profits. 2. Indiscriminate imports can worsen BoP. 3. High cost of inputs which get passed on to forward linked industries can hamper industrialisation. 4. Infant always remains one.

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REFERENCES Misra, S. K. and Puri, V. K. (2010), Industrialisation and Agriculture, in Development and Planning: Theory and Practices, 13th ed. Himalaya Publishing House Pvt. Ltd. Mumbai, pp. 384 390.

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