UNIT 1 INDUSTRY AND ECONOMIC

DEVELOPMENT

I .1 Introduction
1.2 Industrialisationand Economic Development
1.2.1 Meaning of Industrialisation
1.3 Need for Industrialisation
1.3.1 Industrialisation and Productivity of Labour
1.3.2 Industrialisation and Generation of Employment
1.3.3 Industrialisation and Low Elasticity of Demand for Food Products
1.3.4 Industrialisationand Mobillsation of Surplus
1.3.5 Industrialisation and Economies of Scale
1.3.6 Industrialisation and Balance of Payments
1.3.7 Industrialisation and Savings
1.3.8 Industrialisation, Stability and Flexibility
le.3.9 Industrialisation and Linkage Effects
.I 4 CritiqueofIndustrialisation
1 .5 Problems associated with Industrialisation
1.5.1 Extent and Pace of Industrialisation
1.5.2 Nature of Industries
1.5.3 -Order of Priority
1.5.4 Locatlon of the Industries
1.5.5 Large and Small-Scale Industries
1.6 Factors Hindering Industrialisationin Developing Countries
1.6.1 Economic Factors
1.6.2 Socio-demographic Factors
1.6.3 Administrative Factors
1.6.4 International Factors
1.7 Let Us Sum Up
1.8 Key Words
1.9 Some Usefhl Books and References
1.10 Answers or Hints to Check your progress Exercises

1.0 OBJECTIVES
This introductory unit provides an overview of the need for and significance of
Industrialisationin a developing economy. After going through this unit, you will be

a appreciate why economic development is considered synonymous with

a pinpoint the need for and siflcance of industrialisationin a developing economy;

I ~ ~ t l u \ r r i aEconomics:
l identify the relationship between industrialisation and productivity levels in an
Ir~tr~~duction
economy;
identify the constraints to the process of industrialisation;
suggest suitable measures to accelerate the process of industrialisation.

1 . INTRODUCTION
The economic well -being of a nation is ciosely linked with the rate at which the
production ofmanufactured goods increases. Ever since the advent of the Industrial
Revolution in the last quarter of the eighteenthcentury, man has been making efforts
to improve the methods of production, by innovations and technological changes.
Production of manufactured goods has become central to human activity. Along
with this change in the focus of economic activity, associated socio-cultural-political
changes have come into existence. The primitive, isolated, self-contained socio-
economic life has paved the way for one in which human beings are more closely
interdependent and the geographical barriers have broken down.

Industrialisationhas become a way of life a'nd a key to progress.

1.2 INDUSTRIALISATION AND ECONOMIC

DEVELOPMENT
Industrialisation has come to be associated with economic development, a
synonymous term for economic development.

It is ofcourse true that the available empirical evidence makes us believe the thesis
that no country could have developed and reached its current state of econon~ic
development without a sound agricultural base. Some countries, which had an
under-developed agricultural sector could make use of agricultural resources in
some other dependent country. In some other countries, agriculture served as a
'leading sector' of growth.

But it is also true at the same time that fast economic development everywhere had
been made possible essentially due to rapid industrialisation. There is hardly a
country in the world (with the possible exception ofNew Zealand) that could reach
the level ofper capita income ofindustially developed counties ofthe West, drawing
mainly upon its agriculture and processing of its products (petroleum produciilg
countries like Saudi Arabia, Kuwait and UAE represent a special case or exception
to the positive relationshipbetween per capita income and the share ofmanufacture).

The essential criteria that are being used to distinguish a developed economy from
an underdeveloped one, relate to the proportion ofwork force engaged in industrial
activity,the proportion of national output originating in the industrial sector, etc. No
wonder that not much distinction is made between the two terms "industrialisatio1.1"
and "economic development" and that both are used interchangeably.
1.2.1 Meaning of Industrialisation
Industrialisationis a process whereby a predominantly agrarian economy becomes
an industialised one.
 ..'.
The process of transformationof an agrarian economy into an industrial economy is Industry and Economic

accompanied by three changes:

A certain minimum percentage of the country's Gross Domestic Product arises
, &omthe manufacturing,mining and energy sectors of the economy, and it keeps
on continuously increasing as developmentproceeds. At an advanced stage of
industrialisation, a sizeable share of the Gross Domestic Product gets generated
in the industrial activities. However, services sector also gets a growing importance
at later stages of advancement.
Within the industrial activities, the manufacturing activity dominates. In other
words, those countries, which depend largely on mining activity for a larger part
of their national income do not qualify to be called industrialisednations.
The proportion of labour force dependent upon the industrial sector,increases.
It is possible to conceive of an economy with an industrial sector, and within that
amanufacturing sector,which is large enoughrelativeto the rest of the economy;
in such an economy the majority of the population may nevertheless be outside
the industrial sector, which has apparent prominence simply because productivity
and output in the rest of the economy are so very low. Unless a large proportion
ofthe population is affected by the existence ofthe industrial sector, it could only
be said that part of the economy is industrialised. Therefore, it is important that
the share of labour force engaged in the industrial sector should be increasing.

On the basis of the above three criteriawe can define Industrialisation as a process
in which there is a sharp increase in the manufacturing share of GDP and of the
labour force. It is, thus, the process by which the centre of gravity ofthe economy
shifts f b m agriculture to industry.

Industrialisation involvestwo things:

Adoption of superior techniques of production that help to transform basic raw
materials and intermediate goods into manufactured goods.
Application of modern techniques of management and organisation like economic
calculations, accountancy and management techniques, etc.
Check Your Progress 1
1) What do you mean by industrialisation?
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2) How does industrialisation affect (i) the size of the gross domestic product, and

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3) How does industrialisation affect the compositihnoflabour force in an economy?
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Industrial Economics:
Introduction 1.3 NEED FOR INDUSTRIALISATION
As early as the first five-year plan, India'sPlanning Commission had identified two
factors, which favour rapid industrialisationas a means to fast economic development.
These are:
a Theproductivity of labour in industry, which is much higher in industry than in
agriculture.
a In a developing economy the surpluses created in the industrial sector are
likely to be available for investment relatively more easily than surpluses in
agricultural sector. We will examine in detail these and other arguments that call
for rapid industrialisation in the following sections.
1.3.1 Industrialisation and Productivity of Labour

one or more of the following reasons:

a the existence of greater capital intensity
a continuity of production
a greater specialisationand division of labour
a less dependence on natural factors like weather
a a greater possibility ofrealisingintemal-external economies in the manufacturing

Moreover, technologicalrelationshipschange faster in manufacturing activitythan in

agriculture. Thus, if any serious effort is tobe rrlade to pull a developing economy
out of the vicious circle of poverty, it should get translated in a larger diversion of
resources, both physical and financial,to investment in the industrial sector.
1.3.2 Industrialisation and Generation of Employment
An increase in productivity has an additional important benefit for a developing
economy. The agricultural sector is already over-crowded; a growing population
adds to the age of the labour force, which affects agriculture, thus leading to a
W h e r deterioration in that sector. With increase in productivity in the industrial
sector, it will be possible to create more employment opportunities, thus attracting'
labour from less productive occupatibns. This process will add to the national
output as also to the purchasing power and aggregate expenditure which, in tum,
will the aggregate demand upwards and would be instrumental in creating more
employment opportunities.

Lewis has developed a model of economic development with unlimited supplies of

labour. The Lewis model assumes that at early stages in the development process,
the supply oflabour to the modem sector (industry) is perfectly elastic. By offering
a wage above the subsistAceincome level, the modem sector can attract an unlimited
amount of labour. The demand for labour depends upon its marginal product in the
modem sector; as long as the marginal product of labour is above the wage rate,
capitalists will hire extra labour because it add to their profits.

The marginal product curve is determined by the state oftechnology,which is given,

and the quality of capital.

The capital stock is determined by the previous periods, capital stock plus net
investment, which come irom the c;; ------- l n a u s t ~ yrind Economic

This is shown in Fig. 1.1.

Fig. 1.1 illustrates the modern sector $

at one point in the development "M
process. At point J, the modem sector 0 ..
employs OM workers at a wage rate
W. The area under the marginal Figure 1
product of labour (MPL) curve above OM measures the total output of the modem
sector, out ofwhich OWJM is the total wage bill and NWJ is total profits.

As profits arereinvested, the MPL curve shifts to the right, more workers are hired
in the modern sector, and its output grows.

The process will continue as long as investment opportunitiesexist in the modern

sector or until the supply of labour ceases to be perfectly elastic.

As a startingpoint to explain this issue, we take an imaginary society of small-scale

farmers living in a closed economy, i.e. a society where no imports or exports are
made. At ledst initially, f k e r s will produce for their own consumption, but they
will soon pegin to trade among themselves to achieve some variety in theii-
consumption patterns.

As this process increases, farmers will begin to specialise in producing certain crops,
and as they become more skilled at doing so, they increase their productivity. Each
specialist farmer is thus able to produce more food, and so exchange surplus food
with fellow farmers.

The result is that both individual and total incomes increase. However, at this point
the process reaches definite limits for the need of human beings for fwd is finite, and
after a while the need of the peasants (as consumers) for food will not grow as fast
as their output and income is growing. This is what is called 'low income elasticity
of demand for agriculturalproducts'.

At this point, then, farmers will want to exchange their surplus food products, not
for other farmers' surplus food, but for clothes, shelter and so on. However, such a
situation presupposes the existence of industrial production.

But in the real world, economies are not closed and are part of a global system in
which nation-states trade with each other. Is it not possible, then for some agrarian
economies to trade their surplus food with the products ofindustrial countries?

In such a scenario some counhies need tb industrialise, and can expand output and
incomes through increasing their productivity in industry. This is the basis of the
theory of comparative advantage,which holds that countries should specialise in
producing those goods in which they are efficient and competitive.
l r ~ d u s t r i a lEconomics:
Introduction
beyond imaginary closed economies, and exists at a global level. The potential
effectis that demand for food products rises less quickly than demand for industrial
products, and so the terms of trade can potentially decline for agrarian producers as
against industrial producers.

The result of such a decline is that agrarian producers pay relatively more for their
industrial imports against the amounts they receive for their exports. Agrarian
economies, therefore, would have to "run faster" in order to maintain even a slow
increase in living standard. In the real world where massive surpluses of cheap food
exist, it is simply not viable for nations to try to develop solely on the basis of
agricultural production.
1.3.4 Industrialisation and Mobilisation of Surplus
A major constraint on development in adevelopingeconomy is the lack of adequate
resources to finance the required needs. Inadequacy is the result of two interrelated
factors:
The absolute size of resources, national output and saving in a developing
economy,and
Difficulty to mobilisethe surpluses.

Whereas the problem of inadequacy of resources is common to all the sectors of

the economy, the problem of mobilisation of resources is peculiar to the agricultural
sector, where the larger share of national income originates.

The task ofmobilisationof surplus savings in this sector is rendered difficult by the
fact that there is no suitable organisational set-up for this purpose. Why such set-
ups do not exist and why they cannot be created easily, needs to be explained. Such
a set-up can more easily be provided inthe industrial sector of the economy. Thus,
by concentrating resources on industrialisation, the pace of economic developinent
can be quickened.
1.3.5 Industrialisation and Economies of Scale
The case for large-scaleindustrialisation is also based on economies ofscale. These
economies are derived fiom investment in large-scale, capital-intensivetechnologies,
which have the effect of decreasing the unit cost ofproduction as the volume of
output increases. Thus, a country with output per annum of 1,000 units may have
production costs of 100 per unit. However, with technological innovation output
per annum may increase to 2,000 units, but unit costs will decrease to say, 75. The
primary reason why unit costs are likely to decrease is that labour productivity is
intensified as technological innovations increase.

Such internal economies of scale are reinforced by external economies such as

access to decent infiastructural facilities, to suppliers and to established markets,
which are usually located in towns-hence the historical tendency ofindustries to
"cluster" in certain localities.
1.3.6 Industrialisation and Balance of Payments
The effect of industrialisation on a nation's balance ofpayments can be looked at
either from the side of exports or fiom the side of imports. . -
For' most 'developing countries there are depressing prospects for exporting
agricultural raw materials (as a result of the problems of competing with inore
industrialised countries and of their restrictions on such trade). Clearly, Industry and Eco~~omic

however, for countries able to produce only agriculturalproducts with particularly

unpromising world demand prospects, the necessity of finding markets for goods is

Most developing countries import a higher proportion of their consumption of

industrial products than of agricultural products. None the less, food imports into
developing countriesare often much higher than seemsjustified by their agricultural
potential; and it is quite possible that in some cases agricultural import substitutes
will be easier for developing countries to produce than industrial import substitutes.
In any case the expansion of industrial output as a substitute for imported output
may, in the short run at least, do little to alleviatebalance ofpayments problems in
that it creates the need for the import of capital goods.

On the whole, this is an argument where differences between the short-run and
long-run are important. Given a higher income elasticity ofdemand for industrial as
opposed to agricultural products, it might be argued that a failure to begin to build
up an industrial sector may produce increasing current-accountbalance of payment!:
problems as incomes rise and demand for industrial goods expands. But possibly
more important is the kind of industrialisation,which is undertaken, particularly in
respect of the balance between capital goods and consumer goods.
,
1.3.7 Industrialisation and Savings
*
Industrial investment expands savings. This propositioncould be argued in two ways:

In the first place, agricultural development in developing economies involves

improvement in traditional agricultural or small-scale peasant agriculture. There is
little or no development of amore capitalist agriculture, which might be expected to
produce more savings. On the contrary, capital based industry has more potential
to create sa~Yng.Of course, the assumption made is that there is more saving
proportionally out of profits than out ofwages.

In the second place, an econoiny may attach more importance to taxation rather
than savingsas a means of mobilising financial resources for economicdevelopment.
It is easier to tax income received in industrial activitiesthan in agricultural activities,
both for administrativereasons (greater literacy, concentration ofpopulation and so
on) and for economic reasons (higher standard of living, more awareness and so

\
1.3,8 Industrialisation, Stability and Flexibility
In~dustrialgrowth relieves fluctuationsand encourages stability of incomes, tax receipts -
and so on. This is most often used as an argument for the promlotion ofindustriahsation
in contrast to the traditional production of primary products for export markets
where prices and total export receipts vary considerably.

Similarly,an economyproducing a limited range of commodities, especiallyprimary

raw materials or final consumer goods is very vulnerable to change in tastes unless
its industries can rapidly change what they produce. In final-demand industries and
sor,~e raw materials, capital equipment and other resources are very specific and
generally not easy to adapt. They are, therefore, less "skilled" than certain strategic
capital and intermediate -goods industries, which are more versatile and adaptable
in the products, whish they can produce.
Industrial Economics:
Introduction 1.3.9 Industrialisation a n d Linkage Effects
Industrial sector lends direct stimulus to the setting up ofnew activities through
linkage effects.As Hirschmanputs it, "Agriculture certainly stands convictedon the
count ofits lack of direct stimulus to the setting up ofnew activities through linkage

1) Explain in briefhow productivity levels are higher in the industrial sector than in
the agricultural sector.

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3) What is the long-run impact ofindusttiwon on a country's balance ofpayments?

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4) How does industrialisation help in generationand mobilisation of larger savings?

1.4 CRITIQUE OF INDUSTRIALISATION

Rapid industrial growth bas come under attack h m several directions.It has been
argued that social objectivca, such as incomedistribution andjobs, are more important
thafi the rise in some absbiact index number to which industrial growth contributes

To take one example, the argument that industrialisationincreases developme&xan

'at least in part be seen as ia tautology: for if development is dehed as an incr&e in
GrossNational Product, ttren it is hardly surprisingthat the more industrialisednation$
are also the most'devel~~~ed. This is because GNP figures are more likely to take
likely to pass through official channels than the latter, where goods may not be Industrjf and Economic
Development
exchanged but directly consumed,or may be exchanged through unofficial markets.
Moreover, GNP figures do not account for wideimeasures of social development
such as income distribution, l i t m y rates, life expectancyor environmentaldestruction
(indeed, the last of these may actually increase GNP figures).

It has been said that the drive for industrial growth has destroyed the environment
and has used up exhaustible natural resources, particularly energy. Contemporary
concerns over global destruction of the ozone layer are pressing reminders of the
fact that the industrial world has intensified pollution, while there is some question
over the degree to which resources can be renewed if all nations choose (or are
able to choose) the route of rapid industrialisation.

It has also been claimed that rapid growth, spurred by the industry, increases
inequalities and proceeds without regard to the damage inflicted upon its victims.

Perhaps, most convincingly, it has been argued that in countries where cultivable
land and capital are scarce &d where labour force grows rapidly and mass emigration
is ruled out, development must aim at raising the yield of land; that food output can
grow only if markets exist in which the food can be sold; and that, exports apart,
these markets must be found in the countryside, amongst the mass of the rural
population. Rural development, the argument goes, combined with income
redistribution is a necessary condition for economic growth.

In the face of these charges against and criticisms of industrialisation it must be

emphasised that to achieve the social objectives rightly advocated and to fight the
evils ofpollution,premature exhaustion of raw materials, unemployment, inequality
and market limitations, faster, rather than slower, industrial growth is an absolute
necessity. It must, of course, be growth that benefits the right groups. It must be
correctly composed and measured so that social costs are hlly accounted for and
proper relative weights are given to different components, to the working conditions
and to human relations in which production is carried out.

1.5 PROBLEMS ASSOCIATED WITH

INDUSTRIALISATION
Once a developing economy chooses the path of industrialisatibn,it gets conhnted
with a number ofproblems, some ofwhich can be identified as follows:
1.5.1 Extent and Pace of Industrialisation
The extent and pace of industrialisationin a developing economy is determined by
the amount of resources, both domestic and foreign, that the economy can mobilise.
1.5.2 Nature of Industries -
Here a developing economy is confronted with different sets of choices, viz., (a)
choice between export and domestic industries, and (b) choice between consumer
goods and capital goods industries. Export industries are required to finance the
import needs of developmentthat industrialisation entails. Resources may have to
be distributed among export industries and industriesproducing for domestic market.
Similarly, investment in capital goods industries helps to mise the productivepotentials
of the economy.
15
lndllrtrial Economics:
l~~troduction
1.5.3 Order of Priority
The likelihood of quick returns is obviously an important consideration in the private
sector in determining the order ofpriority in which industries should be developed.
.. It is true that the diversion ofresources to capital investment reduces the output of
consumer goods for a time, but this period differs in duration with different kinds of
investment. It is for the planning authoritiesto decide the type of investment to be
undertaken at each stage.
1.5.4 Location of the Industries
The location ofnew industries is an important question in a programme of economic
development. In the case of extractive industries, the location is determined by
unalterable natural conditions. In all other industries, efforts are generally made to
secure a balanced regional development of the country.
1.5.5 Large and Small-Scale Industries
Large industries are generally capital intensive, whereas small industries are labour
intensive. A labour-surpluseconomy would prefer labour-intensive small industries.
But it may not be feasible to develop some core and basic industries on a small
scale. Hence, a decision may be taken to make use of the complementary role of
these industries.

1.6 ACTORS HINDERING INDUSTRIALISATION IN

DEVELOPING COUNTRIES
It is true that if a poorhackward economy wants to develop, it must industrialise.
However, industrialisationin a developing economy is neither an easy nor a smooth
task. The process ofindustrialisation in a developing economy gets conhnted with
a number of barriers, which have to be systematically tackled and removed.
1.6.1 Economic Factors
Among the important economic factors that hinder industrialisation in developing
countries,the f o l l d n g ones may be identified. .
i) There is a scarcity of capital in developing duntries. Scarcity of capital is the
result of a low level of per capita income and low productivity. Scarcity of
capital adversely affects investment in industry and infrastructure.
i Developing countries, by their very nature, do not possess adequate
infrastructure facilities such as transport and cornrnunications, water, power,

i The absence of industries to use the by-product of existing industries results in

waste and a bad economy.
iv) 1n developingGnomies thereare noprior institutions,which can give education
and training to labouren to improve their skill.
v) Lack ofrepair facilities is another obstacle to aproper utilisation of machinery.
vi) The absence of specialised institutionsto provide proper c d t facilities, sound
.banking,
,
b cover etc., acts as adeterrentto h d u h a l investment and activity.
4.

.-vii) Industrialisationmay also be hampered by a lack of appropriate technology.

Most ofthe developingeconomies tend to emulate technologies evolved in the
'
developed countries. Such technologies encourage the substitutionof labour
 by capital. Such sophisticated technologies are held to be "appropriate" on Industry and Economic

the ground that they are so productive that unit production costs are potentially
lower than otherwise. The potential advantages, however, are never realised
because of the lack of higher level of technological and managerial skills that
must accompany sophisticated technology.
viii) In many a situation, industry in a developingcountry may be confronted with a
very small size of market which may not be sufficient to absorb production at
an economically viable level. This results primarily from lack of adequate
purchasing power in the wake of low productivity and low levels of income.
1.6.2 Socio-Demographic Factors
Among the demographic factors that hinder industrialisation is the fast-rising
population. It acts in two ways:
A fast-rising population implies a sharp rise in the level of consumption in the
economy. Given the fact that productivity in these economies is low, as well
growing only at a very slow rate, a rising consumption level leaves hardly any
surplus in the form of saving. Inadequate saving makes investment impossible.
n As the populationrises, the size of labour force also increases. In the absence
of altemat!ve employment opportunities, a larger part of the increased labour
force finds work for itself in already overcrowded agricultural sector and tends
to affect adverselyproductivity in this sector. A lower productivity in agriculture
has two implications for the industry.

One, since the rural sector absorbs the larger proportion of total population, a
major chunk of saving can originate from this source. But this does not happen
when the level ofproductivityin agricultureis low.

Two, industry depends upon agriculture, which is the major source ofdemand for
industrial products. But low productivity and consequent low purchasing power in
this sector, work only as disincentive to further industrialisation,since the domestic
market may not be sufficient to make the industrial activity viable.

As regards social factors, the social organisation and social attitudes in developing
countries are such as to hinder the growth of industrialproduction. These act through
influencing the supply of various productive factors like labour, capital and
entrepreneurial ability.
1.6.3 Administrative Factors
The important factors that hinder industrialisationin a developing economy can be
identified as follows:
i) M c i e n c y of administration generally leads to mismanagement and loss in public
sector undertakings.
ii) Frequent changes in tax policy, in foreign exchange rates, in customs and excise,
in trade controls and licensing policies, etc., create uncertainty in the minds of
investors who may be reluctant to undertake new investment.
iii) Improper and faulty labour legislation is another element of bad public
administration,which causes tension in these countries.
1.6.4 International Factors
Industrialisation in developing countries is also inhibited by various international
factors, like coinpetition froin imported goods, impo~iri;lnofcustoms baniers by'
I n d u s t r i a l Economics: the developed countries, high costs of imports of scarce raw materials, technological
Introduction
know-how, machinery and equipment, etc. The sum total of the various factors
discussed above is that industrialisationof a developing economy is neither an easy
task nor a smooth process; however, as would be seen in subsequent units, the
various difficulties that hinder industrialisation in developing countries are not
insurmountable. At times, they may simply call for easy solutions, at other times
some planned efforts by the'state may be required. More frequently, a successhl
programme in a developing economy cannot be achieved without an active
involvement ofthe state in such an activity.
Check Your Progress 3

1) Mention three criticismsagainst rapid industrialisation.

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2) Mention three problems associated with the process of industrialisation.
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3) Mention some important factors that hinder industrialisation in a developing
economy.
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1.7 LET US SUM UP

Industrialisation and economic development are regarded as synonymous. Rapid
indusbialisationresults in better and more efficient use of available resources, resulting
in rapid economic growth, more employment and capital formation and a fast
improvement in the standardsof living. Notwithstanding the costs associated with a
programme of rapid industrialisation, no country can afford to go slow on the
programmes of industrialisation. Every country would have to find solutions to
various problems that it gets confronted with while on the road to industrialisation.
What is more important about industrialisationis that industrial development has
close sectoral linkages with agriculture, trade, transport and infrastructure.

1.8 KEY WORDS

Economies of Scale :Lowing ofper unit cost as scale ofproductioil increase and
vice-versa.