Economic Development

 Economics – Deals primarily with Scarcity: How Should we allocate our limited
resources to satisfy seemingly unlimited human wants and needs?
- It refers to that process by which per capita income and economic welfare
of country increase overtime.
 Resources – are the basis for producing the food, shelter, medical care and luxury
goods that we want.

Example: Land, Timber (Natural Resources)

Factories and Machinery (Capital Goods)
Human Resources (Labor)
 Production Possibilities – Shows the maximum amount of two different goods that can
possibly be produced during any particular time period using society, scarce resources

In examining production possibilities, we must make these simplifying assumptions

about our economy.
1. All available resources are used fully.

2. All available resources are used efficiently.

 Efficiency –means that we use our knowledge and technology to produce the maximum
amount of output with these resources.

3. The quantity and quality of available resources are not changing during our period of
analysis.

4. Technology is not changing during our period of analysis.

5. We can produce only two goods with our available resources and technology.

A production possibilities curve in economicsmeasures the maximum output of two

goods using a fixed amount of input. The input is any combination of the fourfactors of
production:natural resources(including land),labor,capital goods, andentrepreneurship.
The manufacturing of most goods requires a mix of all four.

Economic Concept illustrate by the production possibilities curve

 Opportunities Cost - -represent the potential benefits an individual, investor, or

business misses out on when choosing one alternative over another.
-the best alternative that is foregone to produce or consume
something else.
 Unemployment - A key economic indicator because it signals the ability (or inability) of
workers to readily obtain gainful work to contribute to the productive output of the
economy.
  Economic Growth - -may occur if the quality or quantity of society’s resources
increases, or if new technologies are developed so that we can produce more output
with our available resources.

Demand & Supplies

 Demand – Is a economic principle referring to a consumer desire to purchase goods

and services and willingness to pay a price for a specific good or service.
Law of Demand
• Price and quantity demanded are negatively related, all other things are equal. If the price
goes up, the quantity demanded goes down. If the price decreases, quantity demanded
increases.

 DEMAND CURVE–indicates all possible combinations of alternative prices and quantity

demanded.
Factors that causes changes in demand
1.Changes in the number of consumers who wish to purchase the product;
2.Changes in the tastes of the consumers in the market;
3.Changes in the prices of complements or substitute goods;
4.Changes in consumer’s incomes;
5.Changes in consumer’s expectations about the product’s future price or availability.

 Supply – is a fundamental economic concept that describe the total amount of a specific
good or service that is available to consumers
Law of supply - The law of supply is the microeconomic law that states that, all other factors
being equal, as the price of a good or service increases, the quantity of goods or services that
suppliers offer will increase, and vice versa. The law of supply says that as the price of an item
goes up, suppliers will attempt to maximize their profits by increasing the quantity offered for
sale.

 Supply Curve - in economics, graphic representation of the relationship between

product price and quantity of product that a seller is willing and able to supply. Product
price is measured on the vertical axis of the graph and quantity of product supplied on
the horizontal axis.
 In most cases, the supply curve is drawn as a slope rising upward from left to right, since
product price and quantity supplied are directly related (i.e., as the price of a commodity
increases in the market, the amount supplied increases). This relationship is dependent
on certain ceteris paribus (other things equal) conditions remaining constant.
FACTORS THAT CAUSES CHANGE IN SUPPLY
1 .Changes in the number of sellers in the market;
 2. Changes in the technology used to produce the product;
3. Changes in the prices of resources used to produce the product;
4 .Changes in the prices of other products that could be produced with the same resources;
5. Changes in government taxes or subsidies; and
6. Changes in sellers’ expectations about the product’s future price.
A change in any of these conditions will cause a shift in the supply curve. A shifting of the
curve to the left corresponds to a decrease in the quantity of product supplied, whereas a
shift to the right reflects an increase.
Supply and Demand

 Supply and demand, in economics relationship between the quantity of a commodity that
producers wish to sell at various prices and the quantity that consumers wish to buy. It is
the main model of price determination used in economics theory. The price of a
commodity is determined by the interaction of supply and demand in a market. The
resulting price is referred to as the equilibrium price and represents an agreement
between producers and consumers of the good. In equilibrium the quantity of a good
supplied by procedures equals the quantity demanded by consumers
Market Equilibrium

 It is the function of a market to equate demand and supply through the price mechanism.
If buyers wish to purchase more of a good than is available at the prevailing price, they
will tend to bid the price up. If they wish to purchase less than is available at the
prevailing price, suppliers will bid prices down. Thus, there is a tendency to move toward
the equilibrium price. That tendency is known as the market mechanism, and the
resulting balance between supply and demand is called a market equilibrium
Efficiency and Equity

 MARKETPLACE -is very efficient as a means of allocation and distribution as prices

ration away the shortages and surpluses.
 Equity –is a value-laden concept and economists cannot say whether a particular
distribution is fair.
 The market place is often efficient, but not necessarily equitable.
Market Failures and a glimpse of the future

 MARKET FAILURE -is the economic situation defined by an inefficient distribution of

goods and services in the free market. Furthermore, the individual incentives for rational
behavior do not lead to rational outcomes for the group.

 Public Goods and Services-include national defense, public libraries, highway

construction, crime prevention, public education and others.-Most economists agree that
the provision of public goods and services is an appropriate role for government. The
 disagreement concerns just what goods and services these will be, and how much of
them we want.

 Spillovers-Occur when some cost (or benefit) related to production or consumption

“spills over” onto people not involved in the production or consumption of the good.
 Inequity -the marketplace is not necessarily equitable. Aside from discrimination,
poverty and inequality of income distribution are also issues of equity. We may argue
that the inability of low-income people to meet their basic needs is unfair. Housing,
health care and social security also raise issues of equity.

 Market Power-This is the ability of a supplier to influence market price of its product.-
Competition protects us from unreasonable prices. Without competition, we would be at
the mercy of the group.

 Instability-occurs when the factors that influence an economy are out of balance.
Unstable economies are often characterized by inflation, which is a decrease in the
value of money.

Development Economics

 Development economics is a branch of economics that focuses on improving fiscal,

economic and social conditions in developing countries.
 Development economics considers factors such as health, education, working
conditions, domestic and international policies, and market conditions.
 Development economics studies the transformation of poor countries into more
prosperous nations. Strategies for transforming a developing economy tend to be unique
because the social and political background of countries varies dramatically.

Economic Development
- Economic development is the growth of the standard of living a nations people from a low-
income (poor) economy to a high-income (rich) economy. When the local quality of life is
improved, there is more economic development. When social scientists study economic
development, they look at a lot of things.

Economic Growth vs Economic Development

 ECONOMIC GROWTH -An increase in the amount of goods and services produced per
head of the population over a period of time. Economic growth enables an increase in
the indicators like GDP, per capita income, etc.
 ECONOMIC DEVELOPMENT-Economic Development enables improvement in the life
expectancy rate, infant mortality rate, literacy rate and poverty rates
Economic Growth
 -The term economic growth is defined as the process whereby the country’s real national and
per capita income increases over a long period of time.
This definition of economic growth consists of the following features of economic growth:

 Economic Growth implies a process of increase in National Income and Per-Capita

Income. The increase in Per-Capita income is the better measure of Economic Growth
since it reflects increase in the improvement of living standards of masses.
 Economic Growth is measured by increase in real National Income and not just the
increase in money income or the nominal national income. In other wordsthe increase
should be in terms of increase of output of goods and services, and not due to a mere
increase in the market prices of existing goods.
 Increase in Real Income should be Over a Long Period: The increase of real national
income and per-capita income should be sustained over a long period of time. The short-
run seasonal or temporary increases in income should not be confused with economic
growth.
 Increase in income should be based on Increase in Productive Capacity: Increase in
Income can be sustained only when this increase results from some durable increase in
productive capacity of the economy like modernization or use of new technology in
production, strengthening of infrastructure like transport network, improved electricity
generation etc.

Measuring Growth and Development

ECONOMIC GROWTH –implies a process of increase in real national income and real per
capita income.
ECONOMIC DEVELOPMENT –is defined as sustained improvement in material well being of
society.

NEW APPROACH TO MEASURE ECONOMIC DEVELOPMENT

 HUMAN DEVELOPMENT INDEX (HDI)-The United Nations Development Program

(UNDP) developed the HDI in the late 1980’s and has been publishing it since 1990.
Is developed as a ratio of a particular country to the most developed country.
It varies between zero and one.
Three components of HDI:

 Per capita income

 Life expectancy at birth
 Level of educational attainment that combines adult literacy and educational enrolment
rates.

 HEALTH LIFE EXPECTANCY - a measure used by the World Health Organization

(WHO) summarizes the expected number of years to be lived in “full health”
 The years of ill-health are weighted according to severity and subtracted from the overall
life expectancy rate to give the equivalent years of healthy life.

 GREEN GNP - One of the more recent approaches developed to address the inherent
shortcomings of GDP and GNP as growth and development measures is based on what
is known as the “green” system of national accounting. Is the formal name given to
national income measures that are adjusted to take into account the depletion of natural
resources (both renewable and non-renewable) and environmental degradation.
Types of adjustment made to standard GNP:

 Cost of exploiting a natural resource

 Valuing the social cost of pollution emissions
 Damages to the global environment such as global warming and depletion of the ozone
layer.

Making Comparisons between countries

TWO DIFFERENT METHODS USE FOR COMPARING INCOME BETWEEN COUNTRIES:

 Exchange Rate Method -This method uses the exchange rate between the local
currency and the U.S dollar to convert the currency into its U.S. dollar equivalent. A
country’s GDP and GDP per capita would then be valued accordingly, in U.S. dollars.
 PPP Method -The purchasing power parity method develops a cost index for
comparable baskets of consumption goods in the local currency and then compares this
with prices in the United States for the same set of commodities.

Asian Crisis
Four Asian Tigers – Countries that have a highly development economies

 Hong Kong
 Singapore
 South Korea
 Taiwan
These region were the first newly industrialized countries, noted for maintaining exceptionally
high growth rates and rapid industrialization between the early 1960s and 1990s
All four Asians tigers have a highly educated and skilled workforce; have specialized in area
where they had a competitive advantage.
Their Economic success stories became known as the miracle on the Han River and the Taiwan
miracle
East Asian Countries
  South Korea
 Indonesia
 Philippines
 Thailand
 Hong Kong
 Singapore
 Taiwan
Asian Growth Miracle

 The Asian financial crisis was a period of financial crisis that gripped much of East Asia
beginning in July 1997 and raised fears of a worldwide economic meltdown due to
financial contagion.
 The crisis started in Thailand with the financial collapse of the Thai baht after the Thai
government was forced to float the baht due to lack of foreign currency to support its
currency peg to the U.S dollar.
 At the time, Thailand had acquired a burden of foreign debt that made the country
effectively bankrupt even before the collapse of its currency.
 As the crisis spread, most of Southeast Asia and Japan saw slumping currencies,
devalued stock markets and other asset prices.
Asian Financial Crisis

 Financial Crisis - is a situation in which some financial institutions or assets suddenly

lose a large part of their value
 It is a testament to the shortcomings of the international capital markets and their
vulnerability to sudden reversals of market confidence.
Asian Financial Crisis

 The Asian financial Crisis, also called the Asian Contagion, was a sequence of
currency devaluations and other events that began in the summer of 1997 and spread
through many Asian markets. The currency markets first failed in Thailand as the result
of the government’s decision to no longer peg the local currency to the US. dollar (USD)
Currency declines spread rapidly throughout East Asia, In turn causing stock markets
declines, reduced import revenues, and government upheaval.
 The Asian financial crisis is a crisis caused by a collapse of the currency exchange rate
and hot money bubble. It started In Thailand in July 1997 and swept over East and
Southeast Asia. The financial crisis heavily damaged currency values, stock markets,
and other asset prices in many East and Southeast Asian Countries.
Cause of the Asian Financial Crisis

 The causes of the Asian Financial Crisis are complicated and disputable. A major cause
is considered the collapse of the hot money bubble. During the late 1980s and early
1990s, many south East Asian countries, including Thailand, Singapore, Malaysia,
Indonesia, and South Korea, achieved massive economic growth of an 8% to 12%
increase in their gross domestic product (GDP). The achievement was known as the
 “Asian economic miracle. ”However, a significant risk was embedded in the
achievement.
 The economic developments in the countries mentioned above were mainly boosted by
export growth and foreign investment. Therefore, high interest rates and fixed currency
exchange rates (pegged to the U.S. dollar) were implemented to attract hot money.
Also ,the exchange rate was pegged at a rate favorable to exporters. However, both the
capital market and corporates were left exposed to foreign exchange risk due to the
fixed currency exchange rate policy.
 In the mid-1990s, following the recovery of the U.S. from a recession, the Federal
Reserve raised the interest rate against inflation. The higher interest rate attracted hot
money to flow into the U.S. market, leading to an appreciation of the U.S. dollar.
 The currencies pegged to the U.S. dollar also appreciated, and thus hurt export growth.
With a shock in both export and foreign investment, asset prices, which were leveraged
by large amounts of credits, began to collapse. The panicked foreign investors began to
withdraw.
 The massive capital outflow caused a depreciation pressure on the currencies of the
Asian countries. The Thai government first ran out of foreign currency to support its
exchange rate, forcing it to float the baht. The value of the baht thus collapsed
immediately afterward. The same also happened to the rest of the Asian countries soon
after.
The Bubble Economy

 INADEQUATE FUND MANAGEMENT SYSTEM - the financial sectors in these

countries were unable to efficiently handle and disburse the massive inflows of foreign
funds, which allowed them to invest as much as 40-50% of GDP when economic growth
was in excess of 8 % per annum.
 INEFFECTIVE STERILIZATION OF CAPITAL INFLOWS - The sterilization mechanism
that could have been used to choke off some of the excess demand generated by the
influx of capital was constrained by thin markets for government securities and a fixed
exchange rate.
 RESTRICTIONS ON FOREIGN BANK’S ENTRY - Apart from Hong Kong and, to a
lesser extent, Singapore, East Asian countries do not encourage the entry of foreign
firms providing financial services, compared with other countries at similar levels of
development.
 NONPERFORMING LOANS - Unsound projects were approved, uncollateralized loans
were made, offshore dollar borrowing, which were unhedged ballooned –taking
advantage of low interest rates in the United States.
 HIGH COSTS OF FINANCIAL SERVICES - Cross-country empirical evidence compiled
by the World Bank suggests that the limited internationalization of the financial sector
also led to higher costs of financial services (higher interest margins and lending rates)
to borrowers and slower institutional development.
 BALANCE SHEETS - the extent of balance-sheet troubles is difficult to measure without
careful country-by-country analysis. As the crisis and post-crisis period evolved, the
evidence suggests that balance sheets have been helped considerably by the recovery
in demand and the resumption of economic growth in 1999, 2000 and 2001.
External Sector Difficulties

 Rapid Growth in Current- Account Deficits

 Overvalued Exchanges Rates
 The Collapsed in Exports
A combination of external factors and a domestic economic boom that had gotten out of control
set the stage for the attack on the Thai baht in June 1997. Taken alone, any one of these
factors would not have been too worrisome.

Contagion, Globalization and Financial Integration

Effects of Financial Crisis

 The countries that were most severely affected by the Asian Financial Crisis included
Indonesia, Thailand, Malaysia, South Korea, and the Philippines. They saw their
currency exchange rates, stock markets, and prices of other assets all plunge. The
GDPs of the affected countries even fell by double digits.
 The countries that were most severely affected by the Asian Financial Crisis included
Indonesia, Thailand, Malaysia, South Korea, and the Philippines. They saw their
currency exchange rates, stock markets, and prices of other assets all plunge. The
GDPs of the affected countries even fell by double digits.
 Besides its economic impact, the Asian Financial Crisis also resulted in political
repercussions. The Prime Minister General of Thailand, Yongchaiyudh, and the
President of Indonesia, Suharto, resigned. An anti-Western sentiment was triggered,
especially against George Soros, who was blamed for triggering the crisis with large
amounts of currency speculation by some individuals.
 The impact of the Asian Financial Crisis was not limited to Asia. International investors
became less willing to invest in and lend to developing countries, not only in Asia in
other areas of the world. Oil prices also fell due to the crisis. As a result, some major
mergers and acquisitions in the oil industry took place to achieve economies of scale.

IMF ROLE IN ASIAN FINANCIAL CRISIS

 The International Monetary Fund (IMF) is a international organization that promotes

global monetary cooperation and international trades, reduced poverty, and supports
financial stability. The IMF generated several bailout packages for the most affected
countries during the financial crisis. It provides packages of around $20 billion to
Thailand, $40 billion to Indonesia and $59 billion to south Korea to support them.

Lesson and Prospects for the future

AN AGENDA FOR REFORM
The following items could be helpful in speeding up reform in the crisis-affected countries of
Asia.

 Debt Restructuring
 Private Sector-Credit Lines
 Reform Exchange-Rate Regimes
 Capital Account Reform
 International Portfolio Controls
 Establish Minimum International Standards of Financial Practice
 Information and Transparency
 Global Surveillance
 Reform of Financial Markets
 Greater Competition
 Consolidation
 Supervision and Regulation
 Accounting and Disclosure
 Stock Markets
 Trade Policies
 Foreign Direct Investment
 Human Capital
 Better Understanding of the Crisis Process
 New Data
 New Analysis

Lesson Learned from the Asian financial Crisis

 One lesson that many countries learned from the financial crisis was to build up their
foreign exchange reserves to hedge against external shocks. Many Asian countries
weakened their currencies and adjusted economic structures to create a current account
surplus. The surplus can boost their foreign exchange reserves.
 The Asian Financial Crisis also raised concerns about the role that a government should
play in the market. Supporters of neoliberalism promote free-market capitalism. They
considered the crisis as a result of government intervention and crony capitalism.
 The conditions that IMF set within their structural-adjustment packages also aimed to
weaken the relationship between the government and capital market in the affected
countries, and thus to promote the neoliberal model.

Agriculture

 Agriculture - plays a key role in the process of economic development. Most developing
countries must rely on their agricultural sector to produce the food necessary to feed
their people. In the initial phase of industrialization, farmers must produce food not only
to feed themselves, but also to feed a growing urban population.
Factors Inputs of Agricultural Sector

 Labor – With 70% or more of the workforce in agriculture based employment in poor
and medium-income economies, the agricultural sector is virtually the only source of
increased labor power for the urban sector. Importation of labor resources is another
option, but it can hardly be sufficient as a short-term solutions.
 Capital – Capital comes from invested saving and savings from income. In the early
stages development capital may build up to support the start of industries, but the rate of
capital accumulation from this source may be very slow.
 Foreign Exchange – In the early stage of growth, agriculture products serve as the
principal source of foreign exchange. As such, the agricultural sectors ability to supply
foreign exchange enables the economy to import capital equipment and intermediate
goods necessary for its continued growth.
 Provide Rich Market – If income distribution is highly uneven, the large majority of the
rural population will be poor.
Lewis-Ranis-Fei (LFR) economic model-an economic growth model that captures the transition
of an economy from being mainly agricultural to becoming mainly industrial-based.

In this model, there are two main sectors of an economy:

 Modern Sector – Based on cities

 Traditional Sector – Based on Countryside

Countries - that grow very rapidly show a sharper decline in agriculture value-added and
employment than do countries that have grown more slowly.
Yet, at the same time that the share of agriculture declines, there is pervasive evidence that a
dynamic and vibrant agricultural sector plays a key role in providing a surplus to the rest of the
economy. This is particularly true for the industrial sector in the early stages of rapid economic
growth.

Artur Lewis quote: “Industrial revolutions and agrarian revolutions always go together ...
economies in which agriculture is stagnant do not show industrial development.”

Agricultural transformation in Asia

At the beginning of the postwar era, all the economies in Asia were primarily dependent on
agriculture.

 In Taiwan, between 70-80% of the labor force was employed in agriculture and more
than half of value-added was created by the sector. Agriculture absorbed the majority of
the Taiwanese workforce in the early years.
  Southeast and East Asia had both high rates of economic growth and agricultural growth
in the last 3 decades, while the countries in South Asia had lower rates of growth both in
agriculture and in GDP.
 All the future “miracle” economies were in the high growth and high agricultural growth
group of countries compiled by the World Bank in 1982.

Some Exceptional

 Indonesia and Malaysia did not have to rely exclusively on primary products as they
had large mineral exports.
 Korea was able to augment local saving with large amounts of foreign borrowing.
 Singapore and Hong Kong being city-states did not have any agricultural sectors to
speak of

Engel’s Law –there is a low-income elasticity of demand for agricultural products. As income
increases, a smaller proportion of this increase in income is spent on agricultural products.
Since demand grows slowly, the sector lags behind the rest of the economy.
Given the demand is sluggish because of the Engel effect, if productivity increases in agriculture
is relatively strong, then it is likely that the terms of trade for agriculture in international markets
will begin to decline.

PRODUCTIVITY IN AGRICULTURE

 Timmer (1991) showed that agricultural productivity growth is generally higher than that
of industry at the beginning of the process when industry is still weak and in need of
protection from foreign competition.
 He attributes the sectoral differences in the average productivity of labor to differences in
the production function and technological change.
 He points out thatsuch differences may also arise from the low mobility of resources, a
condition that underlies the persistence of a disequilibrium state, such as surplus labor
in agriculture and other low productivity activities including handicrafts and services.

AGRICULTURAL DEVELOPMENT IN MONSOON ASIA

The nature of the weather cycle in Asian agriculture requires some adjustments to the model of
interaction between agriculture and industry.
In much of Asia, the monsoon nature of the weather cycle led to reliance on rice production,
which is well adapted to growing where there are large amounts of rainfall and flooding.
How then the shift from agriculture to industry take place in Asia? The two keys were:
  Irrigation -More extensive irrigation helped to regulate the level of water in the fields and
also allowed farmers to plant two or three crops with an increase in income with the
same number of workers.
 Higher-yielding varieties -The higher-yielding rice varieties were designed for a more
stable water level.

THE EFFICIENCY OF TRADITIONAL AGRICULTURE

Traditional Agriculture is reasonably efficient, although some minor improvements could be
made
Despite the potential for improving traditional agriculture, the thrust of development and the
gains in productivity in the years since World War II have been adopting modern farm
technology.
Why do Peasant Farmers Resist Innovation and Modernization?

 Apparent resistance to employ new production methods -The “conservative” and

“backward” attitude throws away an “obvious” economic opportunity to improve living
standards
 Change that may be accompanied by uncertainty - Farmers will consider carefully the move
to a better and higher-yielding technology only after seeing whether it has worked for other farms
in the same vicinity and after he is convinced that the risk is worth the change.

The Microeconomics of Agricultural In Asia

 GREEN REVOLUTION - Created by International Rice Research Institute, located

in Los Banos, Phils.
-This study broke down rice production growth into several components, including
area effects from greater irrigation and yield effects from fertilizer and new
technology.
 APPLICATION OF FERTILIZERS, PESTICIDES, AND HERBICIDES
 IRRIGATION - Better irrigation and water management have contributed significantly
to agricultural development in Asia by allowing farmers to increase productivity
through regulating the flow of water and reducing the risk of flooding.
Factors have not helped much

 FARM SIZE –the inverse relationship between farm size and productivity also tends
to break down when modern technologies are introduced.
 CHANGES IN LAND TENURE - here are owner-operated farms. These farms can
vary dramatically in size and in the use of technology.
- Farms can be operated under tenancy arrangements.

Two kinds of tenancy arrangements:

 the tenant gives a proportion of the output to the landlord
 land is rented to the tenant for a fixed fee.
Several features are common to most countries. Here are the macroeconomic policies.

 Agriculture in Asia is primarily intensive rather than extensive.

 A bonus from exchange rate regimes that tended to undervalue the currency was
that the terms of trade for agriculture (with industry) also improved.
 In Asia, import-substitution policies were abandoned quite early and stress was put
on export promotion and developing competitiveness in exports.

MODERNIZING AGRICULTURE AND RURAL WELFARE: LESSON AND POLICY

ISSUES

 MECHANIZATION AND THE DEMAND FOR LABOR - Several studies have shown
that a shift to modern varieties has increased the amount of labor input per hectare
but probably decreased the amount of labor per ton of production because of yield
increases.
 TECHNOLOGICAL TRANSFER, GROWTH AND EQUITY - The introduction of new
technology, be it higher-yielding varieties or new methods of crop rotation and
cropping systems, or improved irrigation and fertilization, has been the major factor
contributing to increased productivity in agriculture in Asia during the past 50 years.
 GENETIC ENGINEERING - Genetically modified organisms (GMOs) are produced
by transferring a gene or set of genes conveying specific desirable traits within or
across species.
 ZERO TILLAGE - It minimizes or eliminates tilling of the land and retains crop
residues as ground cover. It saves on labor and energy required to overturn the soil,
conserves soil fertility, increases tolerance to drought and reduces greenhouse gas
emissions.
 FOOD PRICES AND THE LINKAGES TO ENERGY - High demand in China and
India, as well as the industrialized countries was responsible for the price
acceleration in food grains, while oil demand increased in the industrial and
developing countries alike.
 INTERNATIONAL TRADE AND RESOURCE TRANSFER
 SHIFTS OUT OF PRIMARY GRAIN PRODUCTION - This shifts have occurred in
line with changes in comparative advantage, relative prices and profitability which
have encouraged the diversification of agriculture.

Industrialization & Structural Change

 Industrialization – is the process by which an economy is transformed from

agricultural to one based on the manufacturing of goods. Individual manual labor is
often replaced by mechanized mass productions, craftsmen are replaced by
assembly lines
  Characteristics of Industrialization – Include economic growth, more efficient
division of labor, and the use of technological innovation to solve problems as
opposed to dependency on condition outside human control.
STRUCTURAL CHANGE –refers to dramatic shift in the way a country, industry or market
operates, usually brought on by major economic developments. The key to effect structural
change is the dynamism that is inherent in that system

Model of structural Change

W. Arthur Lewis (1954) – Jamaican economist and Nobel Prize winner who developed the first two-
sector model which attempted to capture the interaction between traditional agricultural sector and a
modern industrial sector for a developing economy

John Fei & Gustav Ranis (1964) – developed the model with Lewis which called as LFR Economic Model.

 Lewis Fei Ranis a dualism model In developmental economies or welfare economic.

TWO Sector of the model

 Traditional and Modern
 Agricultural and Industrial, or Rural and Urban

What are the Features of this Model?

 Capital Accumulation
 Labour Supply
 Integration to the World Economu
Lewis-Fei-Ranis(LFR)Model
-This model has two sectors which can be defined as traditional and modern ,agricultural and
industrial or rural and urban.
The essence of the model is to contrast traditional agricultural methods and rural social
organization, which revolves around family enterprises, with the modern industrial sector where
workers earn wages and industrial goods are produced.
BACKWARDAND FORWARD LINKAGES - The interaction between the industrial and rural
sectors can be studied using the concept of backward and forward linkages.
INDIRECT BACKWARD LINKAGES- Secondary effects which growth in an industry has on its
suppliers. Industries that have strong backward linkages have low value-added and a large input from
local suppliers.

FORWARD LINKAGES - t tells us how a product is related as an input into the production of a product
at the next stage –textiles into apparel, for example, petroleum into plastics

Forward linkages are a good indication of the extent to which an economy can upgrade its industrial base
by using its existing expertise and resource base.

CHOICE OF TECHNOLOGY – in the early stages of industrialization, countries have limited

capital and plentiful labor.
Labor-intensive technologies may be appropriate in a poor country with plenty of low-skilled and
cheap labor but because of factor market distortions (such as those created by tax breaks for
capital equipment), the choice of technology may be more capital-intensive.
ECONOMIES OF SCALE - It come into play when a country is exporting or when production is
taking place on a large scale for the domestic market.

Economic Efficiency and Scale of Production

 Efficiency depends upon a number of special factors .

 It maybe that all firms can be efficient if they have reached a viable size of production
that takes full advantage of economies of scale.
 Better transport and communication also make it possible to have a nationwide
production, marketing and distribution strategy.

Foreign Trade

 Export are critical in explaining productivity gains in the Asian economies. Internal
competition does not seem to be sufficient to bring about high rates of productivity
increase.
 Example, large country with low industrial concentration ratios, efficiency rates are still
low.
OTHER TRANSITION ISSUES
Indonesia has not been able to make the transition because of this following reasons:

 Indonesia still has a large oil and natural gas sector.

 It had a late start in the industrialization.
 It has a labor force that lacks education.
 They dominated much of its development thinking.

Asian Experience with Industrialization

 A FURTHER LOOK AT TOTAL FACTOR PRODUCTIVITY (TFP) - The reason for the
rapid growth was brute force application of a simple Harrod-Domar growth model
augmented by the growth of the population.
In order to sustain a rapidly growing industrial sector in a quickly evolving global
environment, much more is required than just a high rate of investment and appropriate
pricing of inputs and incentive for export.
 HISTORICAL TRANSFORMATION OF THE INDUSTRIAL SECTOR - To give you an
idea of how the structure of industries within these economies has changed over time
consider a snapshot of their industrial sector in the early 1960s, 1975 and 1990.

Five Components
  Resource -based industries that include aluminum, food and oil refining as
examples.
 Labor –intensive industries, including garments, footwear and toys.
 Scale–intensive industries, including steel, automobiles, paper, and chemicals.
 Differential industrial products, including TVs, power equipment, and advanced
machinery.
 Science –based industries, including electronics, pharmaceuticals and
biotechnology.
THE ELECTRONIC SECTOR - In order to examine the structure transformation in the
industrial sectors of the NIEs and to look more closely at the role of technology, it is useful
to focus on the electronics industry.
DIFFERENT PATTERNS OF TECHNOLOGICAL TRANSFER - he methods variedfrom
economy to economy.

There were four basic factor sunder pinning their success:

 Firms benefited from low rates of interest, low inflation, and high rates of saving
within the economies.
 They all respond to the open and outward-looking export-led strategies that were
generally followed.
 All the NIEs developed an appropriate human resource development strategy that
complemented and provided trained workers for the growing industrial sector.
 Government intervention was undertaken whenever it was needed.

Country Experiences –
Hence over the years, the Asian countries have actively developed their electronic sector
although there are differences in their field of specialization owing to differences in the labor
force and technological advances.
Balassa (1965) Accordingt o this line of reasoning, products that are being exported more
intensively are those that a country has comparative advantage in producing and exporting.

Amsden(2001)Here commended that the mix of industries in Japan and the United States be taken
as a benchmark for comparative advantage.

NIEs have a dynamic comparative advantage in electrical and non-electrical equipment as well as
transport equipment.

Dowling and Ray (2000)Have constructed an index of export growth for the Asian economies that
is, by design, heavily influenced by the changing structure of exports.

Electronics Computers Pharmaceuticals These three industries rank as the top-three when the
average annual growth of world exports is calculated for the 1980-1995 period.

INNOVATION – requires a creative process by abandoning old ways of doing things and the
adoption of new methods and processes.