Industrialization and Structural Change

Traditional Modern
Agricultural Industrial
Rural Urban
Assumes:
▪ Capital accumulation fuels development of industrial sector
▪ Surplus labor in agriculture sector
▪ Migration of surplus labor from agriculture to industrial sector increases labor productivity

→ Industry grows, suppliers also grow

→ General industries such as leather, clothing, textiles, foods, etc and labor intensive manufacturing
industries have strong backward linkages
→ Primary industries such as in agriculture, public utilities, mining have lowest backward linkages

→ Show how a product is related as an input the production of a product at the next stage
→ Strong in industries such as petroleum and chemical and some heavy industries and also in some
labor intensive electronics

❖ Economies of scale
❖ Technology

• In 1960s, primary commodities accounted for a large share of total output and exports while
manufacturing played supporting role
• In 1975, dramatic shift occurred in composition of total outputs and exports

Resource-based industries – including aluminum, food and oil refining

Labor-intensive industries – including garments, footwears and toys
Scale-intensive industries – including steel, automobiles, papers and chemicals
Differential industrial products – TVs, power equipment and advanced machineries
Science-based industries – including electronics, pharmaceuticals and biotechnology
Electronics
◼ Most important export
◼ Export rate grew
◼ Inflow of technology from foreign firms increased
◼ Reverse engineering was undertaken
◼ Enhanced adaptation of technology
◼ Indigenous design for manufacturing and applied
Technological transfer
◼ Low rates of interest, low inflation and high rates of saving within the economies
◼ Response to the open and outward-looking export-led strategies
◼ Development of appropriate human resource development strategies that complemented and
provided trained workers
◼ Appropriate government industrial strategy intervention

→ Creative process of abandoning old ways of doing things and adoption of new methods and
processes
→ Requires ability of the economic system to facilitate exit of inefficient companies and entry of new
and more productive ones
Barriers to entry:
▪ Sufficient capital
▪ Government requirements
Entry costs are low for small and medium sized firms
Special Economic Zones (SEZ)
➢ One way to facilitate entry
➢ Where sites and services are provided; regulatory and licensing requirements are minimized
➢ Can be extended to the notion of an industrial cluster:
• Metropolitan agglomerations
• Small groups of firms with similar interests
• Clusters with a few main producers and their suppliers

✓ Exit costs are low for small and medium sized firms by declaring bankruptcy
✓ Exit is difficult where large firms have a hold on government agencies or where there is a greater fear of
adverse employment effects

→ Will depend on the rate of capital accumulation and technical progress

Labor-Intensive Help
Capital-Intensive Retard
→ Wages should be flexible
→ Directly related to output growth

Most East and Southeast Asian economies were fully or nearly fully employed for most of their growth
spurt; South Asia was not as fortunate as income growth was not sufficient to reduce unemployment
dramatically.
 ➢ When expected future income stream (urban) exceeds the expected income stream in the rural
areas
➢ Expectations and biases from friends and relatives who had previously migrated
➢ Comparability of informal wage in the rural sector with the wage in the urban sector
➢ Incomplete information and amount of risk
➢ Provision of social capital in the form of insurance from relatives and friends in bad times
➢ Low domestic earnings, underemployment and employment opportunities
➢ To provide remittance income for their families at home
❖ Basic Immigration Policy (3S):
“Skilled workers are sought for Short-term employment in Specific sectors”
❖ Large excess demand for immigrants and large inflow of illegal workers
❖ Most are unskilled and will take low-paying jobs which locals are unwilling to work

◼ Nurturing industrial growth depends on the wisdom of industrial policy – infrastructure spending,
prudent infant industry protection, free labor markets, attractive incentives for foreign businesses
and technology, use of special zones.
◼ Efficiency and welfare were traded off in the early stages in favor of the former.
◼ Only recently are social safety nets being constructed in the Asian region.