Development Is Impossible Without Industrialisation - Essay Example

Development is impossible without industrialisation" Environmental degradation caused by reduction in forest areas, thinning of polar ice, changes in climatic conditions and rise in the sea level are the result of man’s efforts to progress. Sustainable development has to take place without damage to the environment. Progress of mankind is impossible without industrialization. Planned industrialization without further degradation has to take place. Economists strive to find a link between industrialization and development. History evidences that the nations developed as they took to industrialization and those that did not respond to the demands of the situations are still ‘developing’. This paper will critically examine the statement that development is impossible without industrialization. Development has been defined as the process of acquiring and securing the freedoms that we have reasons to value. They make our life richer and allow us to be fuller social persons (Amartya Sen cited by Oden 2001). Development is a complex multidimensional process which cannot be addressed by economic growth alone. It must be approached with a dynamic perspective and the process of development is not the province of one nation. Nations have to cooperate and coordinate with one another. In Africa a large number of people fall below the extreme poverty line, which affects income, education and health. Unless the problem of poverty is resolved, no development can take place. This requires effective sustainable development which translates into jobs creation, education and health amenities. Sustainable development requires efficient, established and regular institutions and processes but most importantly it requires efficient industrial sectors. History provides sufficient evidence that industrial civilization brought about sustained prosperity. The Industrial Revolution brought all the development goals set forth at the UN Conference - clean water and sanitation, the elimination of disease, plentiful food (Tracinski, 2002). Industrial capitalism could make man’s physical environment healthier. Nations with large populations demonstrate a marked transformation and higher income growth. Development may vary across nations and may also vary over time, but development is impossible without industrialization. Nations benefit when they step into industrialization. Virtually every country that has experienced rapid growth in productivity and changes in life style over the last two hundred years has done so by industrializing (Murphy, Shleifer, & Vishny, 1998). Countries like Britain, Korea and Japan had successfully industrialized and hence grew rich. At the same time there are nations that were slow to register growth and development despite industrialization. The late 19th and the early 20th century was a period of innovative manufacturing development in the USA (Melamed, 2002). High import tariffs did not stifle growth and innovation. The US economy was the fastest growing economy in the world. In England, trade was not liberalized until the mid-nineteenth century and measures were used to protect domestic manufacturers. New industries in Taiwan came about only through governmental intervention and policies. Liberalization of trade policies do not necessarily lead to development. Ghana recorded slowdown when trade was liberalized but recoded an impressive growth due to industrialization followed by another set of reforms. The successful economic development in Mauritius demonstrates that interventionist trade policies are vital. Latin America and Africa did register impressive growth rates initially and showed reductions in poverty but growth could not be sustained as the measures to protect local companies were inadequate. All these demonstrate that poor intervention leads to inappropriate growth Underdeveloped nations have a small domestic market due to which they are unable to industrialize and grow. The reason is when domestic markets are small, world trade is not free, and sales are low in volume and not sufficient to incorporate advanced technologies, which constrain industrialization. Development takes place when the goods or service produce to industrialization is jointly used by various segments of the society. For instance, when infrastructures like railroads are used by various industrializing firms, it helps to defray the costs and bring the particular infrastructure to profitability. This means that infrastructure can develop only when many sectors industrialize and become its users. This approach is essential for any economy to develop (Murphy, Shleifer, & Vishny). In Europe, a major wave of economic expansion started around 1900. Investment was controlled by the imperial centre in London, which created a modern, open, and integrated system for trade in agricultural products and industrial commodities. Trade gradually expanded but even during that period, trade depended on effective industrialized means of transport – in steamships (Linden, 1996). Those days steamships were considered industrialized, but ultimately what implies is that development in trade was possible because of industrialization even during that period. Urbanization has been a major feature of economic change in China since reforms started in 1978. The rural economy transformed from rural agriculture to commercial agriculture and industrial activities like constructions, transportation and services (Eng, 1997). Urban development is shaped by the interplay between the interests of the dominant players in the economic game. The local governments exert significant influence over the allocation of resources and economic opportunities. Besides, foreign direct investment is essential. Decentralization realigns the interest of the local government as strategic changes are required in the policies for the development of the local economies. Multinational companies, when entering another country have to pay a processing fee to the local government, which is a major source of revenue for the nation. Rent for the use of industrial sites by the foreign companies is also another important source of revenue. These resources are spent in developing and improving the infrastructural facilities for the nation. In Guangdong (China) for instance, in 1990, nearly one-third of the hotels were catering to foreigners and most were joint ventures with foreign capital. All these development due to FDI and industrialization have made China the world’s sixth largest economy by GDP and in purchasing it is second to the United States (Python). China favors inward investment from foreign firms as the Chinese economy is progressively liberalized. China comprises one-fifth of the world’s population and is set to be one of the largest economy. China attracts the highest Foreign Direct Investment (FDI) in the world. When Chinas economy was growing there was increased domestic pressure for lower foreign inputs and improved access to foreign markets. Governmental and legal reforms took place in China at a very fast pace after its World Trade Organization (WTO) entry (China Daily, 2002). This gave Chinas economy a boost and its macroeconomic situation improved. This was precisely the time when the world economy was stagnant and China became the fourth largest trade body in the world. This brought in a lot of foreign direct investment as multinationals gained confidence after its accession to WTO. China’s economic growth has exceeded 8.4% annually in the last five years (Deutsche Post). According to Zhuang Jian, an Asian Development Bank economist, two factors determine if a country will attract FDI – commercial profitability of the investment projects and a politically stable environment (China Daily, 2006). Rules and regulations have to be more transparent to attract more FDI and this holds good for any economy. More opportunities have been created in the transport sector after WTO entry. Trade and economic initiatives by the government have stimulated growth in the logistics market. Rural areas are being developed and capital intensive, manufacturing and services industry coming up. It is only when the local government decided to liberalize policies, that industralization advanced and development took place. Corporate giants like General Motors (GM) brought R&D functions into China through joint venture (Hara & Nakanishi, 2004). Today GM has local production, has established an R&D function, as well as developed its own sales channels to create a local sales function. Changes in government policies bring FDI to the nation for industrialization which in turn means development of the nation as a whole. Namibia suffers from features of dual economy of inequality of income and wealth. While it has a GDP of $1.9 billion, the GDP per head of 55 per cent of the population is a mere $85 a year (Elkan, Amutenya, Andima, Sherbourne & Linden, 1992). Its manufacturing industry accounts for only 5 per cent of GDP and consists mostly of processed food, bottled and other beverages, furniture, and some of the simpler forms of engineering. Agriculture and minerals remain the main source of income. The industrial establishments are small and only a few employ over 100 people. Because of lack of domestic industries, imports are high and consist of consumer goods, investment goods and food. Most people in this country are engaged in small-scale agriculture and the living standards are low. Even most of the food consumed by the high-income consumers is imported from South Africa. Namibia being an exporter of diamonds and uranium, it brings in government revenue and foreign exchange earnings but does not provide income earning opportunities. Namibia is still treated as a developing nation and this further emphasizes the fact that without industrialization no development can take place. Development measured as output per capita is low when productivity is low. Increasing productivity requires accumulating capital at a pace faster than population growth. After this reaches the optimal stage, it is the technical changes which lead to efficient use of capital. The late developing countries (LDC) faced limitations when they tried to access global markets (Veloso & Soto, 2001). Their borders were closed to imports which forced them to produce locally. They borrowed technology from the developed nations and the low wage helped to offset productivity differences. This automatically fostered industrialization. Even though industries like textiles, paper, refining, steel, and automotive were developed in the LDCs, differences can be seen even amongst these countries. For instance, Mexico started its industrial drive before Taiwan, but the latter nations have overtaken them in every respect. This was because of the differences in incentives, infrastructure and institutions that play a critical role in the development process. In the case of automotive industry, Taiwan had a better technological infrastructure than Mexican firms. Secondly, Taiwan was directly exporting original equipment and other parts while Mexico had accelerated increase in imports of parts which weakened the automotive chain. The incentive structure was the same in both the countries. The automotive policy in Taiwan provided both protection (local content requirements and tariffs) and promotion (tax subsidies and technological assistance) while in Mexico the industry relied only on protection. Both the nations were attempting industrialization but development took place only in Taiwan. This means that while development is impossible without industrialization, industrialization does not necessarily mean development. For development to occur, the incentives, the government intervention, restrictions, tariffs and regulations are equally important. East Asian nations like Korea, Taiwan, Singapore, Malaysia and Hong Kong have recorded large and rapid increase in per capita GDP since the end of Word War II. Powell (2004) believes that industrial planning played a major role in the success of these nations. Industrialization differs from creation of right industries. Planned promotion of industries can enhance consumer welfare than unplanned growth. The government agencies have to identify which industries can best promote growth. Capital accumulation is essential but the government must direct the composition of capital in the economy. The market process generates the knowledge necessary to have an efficiently functioning economy. This knowledge reveals which industries desire which inputs. The government institutions rely on this information without proper verification. The government conceives of this as a technical or engineering problem. This does not really determine or satisfy the consumer wants and in words of Amartya Sen discussed above, it does not make people richer and fuller social persons, which means it does not mean development. This intervention does not solve the economic problem of the nation. Many nations follow the policy of raising import tariffs to promote domestic industries. Furthermore development in many nations does not translate into consumer well-being, the prerequisite for development. For instance, Japan’s GDP per capita was $37,522 in 2000, but its purchasing power was only $25,280 (World Bank 2003, cited by Powell). Besides, industrial planning can also decrease the standards of living to some extent. This is demonstrated by the statistics while Japan’s per capita was 140.6 percent of the U.S. GDP per capita in 2000, Japanese citizens only owned 45.1 percent of the number of radios per person and 84.9 percent of the number of televisions per person (World Bank 2003, cited by Powell). When Philippines was in the grip of crisis, the nationals surmised that industrialization was the main engine in genuine economic development (PCR, 1986). Industrialization alone can absorb the ever-increasing surplus labor and basic industries are needed like production of metals, chemicals, and instruments. Instead of heavy industries, light industries, essential for immediate consumption were felt necessary. This would reduce dependence on US and other nations and bridge the gap between heavy industries and agriculture. Thus, they too felt that development means satisfaction of consumer wants and a fuller richer life. They felt that economic planning was essential rather than depending on the blind forces of the market. This would only give a lop-sided growth to the economy and also make it vulnerable to the US transnational corporations. Industrialization in Britain began in the eighteenth century for a number of reasons. The private sector was hard-working, risk-taking and inventive (Emazyne, n.d.). Added to that was the government support. Industrialization could not begin and grow without individual business owners who took a chance on something new. Government support was there in terms of road improvement and canal construction. The social and political systems were flexible. Britain excelled in iron and textiles production. After mid-century Britain produced more than two-thirds of the worlds coal and more than half of the worlds iron and cloth. Industrial development encouraged urbanization and by 1850 more than half of the population lived in cities and worked in industries. The British enjoyed the highest per capita income in the world and was way above others in terms of economic and material strength. This signifies the industrialization is essential for development and it fulfils all the criteria for development. It also evidences that development is impossible without industrialization. South Korea and Taiwan are examples of how industrialization has led to sustained development. The industrialization of these two nations coincided with the new policies of export promotion. In 1960, South Korea devalued its currency, liberalized import controls and introduced a number of export-promotion schemes (Trinidade, 2004). Exports of manufactures grew from a negligible amount in the 1950s to an average of 22% of GDP in 1973-75. Experts do not see this as development but as ‘export oriented industrialization strategy. In such a scenario, complementary industries existed causing multiplicity of equilibria and underdevelopment traps. Besides, industrialization was only in imitating foreign goods and not creating any new goods. Full know-how was not transferred and only a few essential parts were produced. It was basically industrialization through export promotion. Such a policy helps in breaking the vicious circle of underdevelopment trap and then transforms into a virtuous circle. Export promotion first encourages production solely for the export market and induces the producers to invest. Both South Korea and Taiwan were endowed with a highly educated, inexpensive, labor force and had low agricultural productivity. Such industries faced coordination problems as they were labor-intensive. While the governments of both these nations had the right investment subsidies in place, their focus was export promotion. This cannot actually be termed as industrialization even though development was there to some extent. Government intervention has played a major role in protecting domestic industries. Only after the industries reached a certain level of maturity, they were subjected to gradual liberalization. At the same time, forced trade liberalization imposed on the third world during the colonial era, led to de-industrialization and underdevelopment. Their process of industrialization began when they regained their political autonomy. Brazil experienced de-industrialization. Even though it was exporting in 1990s, it experienced little growth and it was accompanied by terms of trade losses, decline in real wages, stagnant per capita consumption and capital formation (Shafaeddin, 2006). Mexico, on the other hand, has been a champion of liberalization and experienced the fastest growth rate of exports of manufactured goods during 1980-2000 but it has not registered any development and growth. Mexico has not been able to consolidate and upgrade its industrial infrastructure even after two decades of liberalization. It has concentrated on exports. In Korea, trade liberalization was a part of the long-term trade and industrial policies. Korea exposed its industries to competition from imports gradually after the industry reached a maturity stage while Mexico liberalized almost industries across-the-board irrespective of their stage of development. Brazil too demonstrates that liberalisation can be effective to make an industry competitive when it is near the stage of maturity. In conclusion, research suggests that industrialization differs from the right industries. Merely setting up industries does not lead to development. Development means fulfilling the wants of the people and makes them fuller social beings. In countries like South Korea and Taiwan, it was basically export promotion without any development within the nation, which cannot be termed as industrialization. Just as import substitution is not industrialization, having a higher GDP also does not imply development as in the case of Japan it has been seen that the purchasing power had diminished. In Mexico, even though the automotive industry existed, but imports weakened the industrialization. Britain demonstrates how development can be achieved with industrialization. This requires the right economic planning, the government policies to be in place, with the right incentives, and selection of the right industries. When trade is liberalized for industrialization, development inevitably takes place. This is because the government manages the markets to ensure that the incentive structure faced by the private sector reflects development goals. The government strategy has to be open, coherent, targeted, cumulative and continuous. It has to support by way of technology and subsidies and protect through regulations. Liberalization should be gradual to ensure industrialization has reached the maturity level. Premature liberalization could lead to de-industrialization. There should be an open system with incentives left to the market forces, and then industrialization takes place leading to development. References: China Daily (2002), WTO Entry Boosts Chinas Economy, 05 Dec 2006 China daily (2006), FDI reaches US$25.91b in 1st 5 months, 05 Dec 2006 Deutsche Post World Net (n.d.), DHL Express China Market Business Update, 06 Dec 2006 Read More