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Lecture 21Don DeVoretz

Industrialization:

A Strategy for Development ?

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Debate 1 Multinationals

• Pros and Cons of Multi-nationals

• The argued benefits from Multi-national Corporations operating in your country are: – fill savings gaps, provide foreign exchange,

government revenue, management skills and – technology which all will lead to further

growth.

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Debate 1 con’t

• The counter arguments are that; – capital is raised locally, – little profits are reinvested, and tax avoiding transfers

• Which point of view appears appropriate for your country?

• What is the evidence to support above?

• How would you gain the required evidence to support one view or the other?

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Debate 2 Infant Industry

– Korea used both the Infant Industry technique and then followed it by an outward looking export-oriented strategy. Korea was successful because it could enjoy at first the gains from import protection before switching to an export strategy because it was a political ally of the west.

– Jamaica, which followed a similar strategy, failed because they did not get favored treatment by developed countries since it had a socialist government.

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Debate 2 Infant Industry

• Which view do you agree with?

• What are the essential ingredients in the infant industry argument to insure that gains are available in short-run ?

• What policies must be in place to insure an export oriented policy both at home and in the developed countries ?

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Industrialization as a Pathway

• A. History: – U.K. Industrialization lead to economic

development – 1. But was this the entire story ?

• No, Enclosures and Corn laws

– 2. Industry was a leading sector: • Textile exports, steel etc. and caused backward and

forward linkages.

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Modern Evidence• 1.Share of industrial value

added in GNP to Yp

• 2. Evidence for large countries: 4x Yp raises industrial share by 20%

• 3. Only 1/2 of variation in valued added share of industry explained by level of Yp

• 4. Variations around sc line explained y

– i. Import substitution– ii. Resource endowment

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Industrialization and Employment

• 1. Elasticity value = % industry employment / % industry value added = .6– or a 10% increase in Yp leads to a 6% growth

in employment.

• 2. This implies that productivity rose by 4 % per annum or– trade off between higher wages but less

industrial employment

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D. Industrial Structure:

• Backward Integration:– rise in final or consumer demand feeds– back to producer goods.– Turning point is $2,500 in Yp

• Forward Linkage– Textiles to cloth:

• .A necessary condition is that textiles must be produced below world cost:

• Policy to achieve above is infant industry tariff.

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Investment Choices and Industry: Choice of Technique

• 1. Context– Workers in rich country paid 10X that of poor country.– . Capital costs in poor country twice of rich country.– . Textile is of equal quality in both countries.

• 2. Three Technologies – defined by capital-labour ratios

» .T1: capital/labour ratio = 80/22=3.6» . T2=18.1 » .T3=400/5=80

• thus, T3 is 22 times more capital intensive than T1

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Choice of Three Techniques

• Tech 1 Tech 2 Tech 3

• A. Inputs (M $)

• 1.Equip 80 200 400

• 2.labour 22 11 5

• 3. Other 11.4 9.3 6.7

• Which technique to choose and why ?

• What is the effect on employment ?

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Factor costs: Rich and Poor Countries

» RichPoor

• 1. i rate .05 .10

• 2. wages/yr 15 1.5

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PV of Cost of T1-T3 Rich

– ($1,000) T1 T2 T3– a. cap charge 80 200 400– b. wages 4112 2056 935– c. other costs 142 116 83– d. Total Rich 4334 2372 1418– T3 is the clear choice since it is relatively

capital intensive or labour saving

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PV of Cost of T1-T3 Poor

– ($1,000) T1 T2 T3– a. cap charge 80 200 400– b. wages 280 140 64– c. other costs 97 79 57– d. Total Poor 457 419 521

• Poor Pick T2 However, if wages drop than T1

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LAC

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What are Scale Economies

• 1. What are scale economies?– a. Scale economies are declining Lac curves.– b. Declining LAC arise due to

– a. fixed costs; research,

– b. spreading of capital,

– c. greater scale implies greater specialization

– d. quantity discounts

• 2. What role do they play in an investment decision ?– Crucial to being competitive.

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Second Criterion : Product Choice?

• Want to experience large scale economices quickly ? Why? – Small Domestic markets ?

• Concepts: MES– MES= minimum efficient scale

• % increase in ac @1/2 MES – Tells you how steep your cost increase is on short run Average

cost curve

• MES as % of market

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Product Choices: Why No Beer ? • %rise in LAC MESas % of market• 1. Bread 15% 1 %• 2. Beer 9 3• 3. footwear 2 .2• 4. dyes 22 100• 5. sulfuric acid 1 30• 6. polymers 5 33• 7. cement 9 10• 8. steel 8 80• 9. machine tools 5 100• 10. Electric motors 15 60• 11. Autos 6 50• 12. bicycles 1 10• 13. diesel engines 4 10

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Conclusions:

• Beer and Bread: No major scale economies and too quickly realized. Thus, all countries are efficient. Can’t compete by scale

• Steel and Machine tools, – Huge scale economies, – First there is efficient and tough for others to

compete

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Technical Choice and Scale

• Favour Developed Countries:

• Capital Intensive have large scale economies and thus low capital costs keep developed countries continually out front when new techniques emerge for same products. Steel in Canada.

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End of Show