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The Initial Structural Transformation(Initiating the Industrialization Process)

Introduction: An Industrialization Imperative?

The Lewis Dual-Economy Model of Structural Transformation

Initiating the Structural Transformation Toward Industrialization

Why is Government-Sponsored ISI Needed?

Infant Industry Tariff: Government Intervention to Protect DomesticIndustry

Static and Dynamic Welfare Effects of An Infant Industry Tariff

The Elimination of Infant Industry Protection: When is Enough,

Enough?The Importance of Embedded State Autonomy to Successful ISI

Potential Gains from Easy ISI Stage of Industrialization

Para-state Firms and Social Capital

Measuring the Success of Easy ISI

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Introduction

Achieving an adequate level of economic growth and developmentappears to be inextricably intertwined with the level ofindustrialization of an economy

Structural transformation of industrialization change not only thephysical landscape of nations via urbanization, internal labormigration and the establishment of a complex usually urban

business enterprises but also alters many of the cultural, social, andother institutional arrangements that have made a particular societyunique and made it what it is to that particular point in time

Industrialization and development provide many benefits to societybut sacrifices also are required so choices must be made

Reconciling conflicting interests may slow progress but each societymust evaluate as objectively as possible to what extend trade-offsmade to sustain traditional dimensions of its society

There is a 2-fold industrial imperative:1. Higher levels of industrialization contribute to higher rates of economic

growth

2. Industrialization sets the stage for a desired transformation of importand export patterns

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Structural Change and Economic Growth

and Development The size of the agricultural (primary) sector tends to shrink with

economic growth as rural workers move into the industry(secondary) and services (tertiary) sectors

Therefore, the larger the share of the labor force engaged inagriculture, the lower the level of development

Likewise, there is an equally strong positive relation between the

share of the labor force in industry and in services and the level ofdevelopment

The compelling correlation between the agricultural and industrialtransformations which contribute to greater development can bemeasured by income or by the Human Development Index (HDI)

Development involves both an industrial evolution and

reorganization of the agrarian sector, the additions of human andphysical capital and the attention to endogenous technologicalchange

All sectors of the economy must become more technological andmore productive as the shift in labor from primary to secondary totertiary uses moves forward

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The Lewis Dual-Economy Model of

Structural Transformation (pg 252 253)

He observed that less-developed nation typically wasdualistic (having 2 key sectors of agriculture andindustry) and these sectors had little interconnection(Can you tell us what those little connection were? Pg

252) The labor migration is cumulative once begun as the

higher wages of industry attract rural workers until anequilibrium is reached when the productivity of workersis more or less equalized between sectors

Initiating the Structural Transformation TowardIndustrialization: It is Import Substitution Industrialization(ISI) with several stages of: 1) Easy ISI 2) Difficult orSecondary ISI

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The First Stage of Industrialization: Easy

ISI

ISI involves the establishment of usually domestic-owned firms within the less-developed economy thatbegin to produce for domestic consumption some of themanufactured goods currently being imported(domestically produced goods substitute for the foreign

produced goods) (Usually what do they produce first?)(Pg 253)

What are the factors needed to be considered in acountry when one is to implement ISI? (Pg 254)

A reorganization of the internal structure of production

toward a higher degree of industrialization is not enoughfor long-term progress without a fundamentalreorientation of what less-developed nations export tothe world market as industrialization must go beyond justbeing internally oriented so that it ultimately reaches outto world markets if long-term success is to be attained

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Why is Government-Sponsored ISI

Needed?

A lack of financing for projects, few trainedentrepreneurs, low skill levels of workers and foreigncompetition from imports all worked against theexpansion of the manufacturing sector in most LDCs sothe government be the initiator

Transitional Inefficiencies: (What are the inefficiencies,can you find them in the book? Pg 258

259)

Infant Industry Tariffs: Government Intervention toProtect Domestic Industry which is one way to financethe higher cost involved in nurturing the infant industry(Can you figure out how is it that the infant industry canresult in higher cost?) (Pg 260

265)

This is an economic paradox at work by getting priceswrong (raising prices above the international marketlevel with a tariff) it can sometimes yield positivedevelopment outcomes (Can you think of another

economic paradox?)

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The Elimination of Infant Industry

Protection: When is enough, enough?

It is quite dangerous to put a number to it, but in the non-durableweight consumer goods industries in which ISI begins, 5 7years would seem to be a reasonable target date for endingprotection and for domestic producers to have overcome thebasic transitional inefficiencies encountered at the beginning ofeasy ISI

For more complicated products with longer learning curves orwhere technology is more complex, somewhat longer transitionperiods may be warranted

A timetable for the eventual phasing-out of tariff protection shouldbe part of the governments policy

When ISI begun, government should reveal this schedule to thenew firms so that they anticipate with certainty the end of infantindustry tariff protection or suffer the consequences of outsidecompetition

If tariff on ISI industries are not phased out, then the tariff itselfcan become a substantial internal barrier to progress(deadweight-losses) (Do you know what is dead-weight losses?)(Pg 262

265)2

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The Importance of Embedded State

Autonomy to Successful ISI

Industrialists in an ISI sector where tariffs are notprogressively removed may be able to reap substantialeconomic rent (profits higher than are necessary for thecurrent production) because the tariff prevents the full-forceof foreign competition

The contact between protected industrialists andgovernment bureaucrats can result in substantial degreesof corruption and bribery

When government lack relative autonomy from strongvested interest, they often respond to the private concernsof those groups which have the power, money, influenceand access to government to make their voice heard

The barrier of a weak, captured state needs to beovercome by appropriate institutional reform, culminating inthe creation of a developmental state (Chapter 7, pg 213)(Can you let us know what are the main criteria of a

developmental state?) page 215

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Potential Gains from the Easy ISI Stage

of Industrialization

During the easy ISI phase, the industrial labor forcedevelops both specific and general human capital skillsas a result of learning-by-doing as they work withmodern machines and technology

These skills will be at least partially transferable to otherfirms thus shortening the lag time required for other firmsto overcome transitional inefficiencies in the future

ISI is a training ground for entry-level local industrialistswho have an opportunity to mature and learn how to

produce thus facilitates the establishment, extension andsolidification of a domestic class of private entrepreneurswho are essential to the continuation of the process ofdevelopment in the future

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Para-state Firms and Social Capital Infrastructure investments (heating oil, natural gas,

electricity, ports, telecommunications, etc.) require a lot ofinitial investment in terms of physical and financial capitaloutlays while also demand a mastery of intermediate levelsof technology

It may be too much for local private entrepreneurs so thatthe government can help in this area

It is very common that the state firms are being accused ofbeing less efficient and that they do not profit because theycharge too low but any losses incurred can be funded outof the national budget

Such state enterprises can actually be contributing quite

effectively to social efficiency by producing the sociallyoptimal level of electricity, water, transportation andcontributing the positive externalities helping to make theprivate sector more productive

Para-states may not always by definition be purveyors ofinefficiency (Can you think of any other benefits that thepara-state might contribute to the society?)(Pg 270 -271)

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Measuring the Success of Easy ISI

A successful easy ISI stage of industrializationshifts a countrys production possibilities frontier(PPF) outward both along the agricultural axisand the manufactured goods axis (See Fig 9.3,

pg 272)With the transfer of labor from agriculture to

industry and the introduction of new technologyin both the agriculture and industry sectors, it willresult in a new production possibilities curve

Both the share of total production and of totalemployment originating in agriculture andmanufacturing rise over the transition