Lecture 21 Don DeVoretz

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Lecture 21Don DeVoretz

• Industrialization
• A Strategy for Development ?

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Debate 1 Multinationals

• Pros and Cons of Multi-nationals
• The argued benefits from Multi-national
  Corporations operating in your country are
• fill savings gaps, provide foreign exchange,
  government revenue, management skills and
• technology which all will lead to further growth.

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Debate 1 cont

• The counter arguments are that
• capital is raised locally,
• little profits are reinvested, and tax avoiding
  transfers
• Which point of view appears appropriate for your
  country?
• What is the evidence to support above?
• How would you gain the required evidence to
  support one view or the other?

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Debate 2 Infant Industry

• Korea used both the Infant Industry technique and
  then followed it by an outward looking
  export-oriented strategy. Korea was successful
  because it could enjoy at first the gains from
  import protection before switching to an export
  strategy because it was a political ally of the
  west.
• Jamaica, which followed a similar strategy,
  failed because they did not get favored treatment
  by developed countries since it had a socialist
  government.

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Debate 2 Infant Industry

• Which view do you agree with?
• What are the essential ingredients in the infant
  industry argument to insure that gains are
  available in short-run ?
• What policies must be in place to insure an
  export oriented policy both at home and in the
  developed countries ?

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Industrialization as a Pathway

• A. History
• U.K. Industrialization lead to economic
  development
• 1. But was this the entire story ?
• No, Enclosures and Corn laws
• 2. Industry was a leading sector
• Textile exports, steel etc. and caused backward
  and forward linkages.

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Modern Evidence

• 1.Share of industrial value added in GNP to Yp
• 2. Evidence for large countries 4x Yp raises
  industrial share by 20
• 3. Only 1/2 of variation in valued added share of
  industry explained by level of Yp
• 4. Variations around sc line explained y
• i. Import substitution
• ii. Resource endowment

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Industrialization and Employment

• 1. Elasticity value industry employment /
  industry value added .6
• or a 10 increase in Yp leads to a 6 growth in
  employment.
• 2. This implies that productivity rose by 4 per
  annum or
• trade off between higher wages but less
  industrial employment

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D. Industrial Structure

• Backward Integration
• rise in final or consumer demand feeds
• back to producer goods.
• Turning point is 2,500 in Yp
• Forward Linkage
• Textiles to cloth
• .A necessary condition is that textiles must be
  produced below world cost
• Policy to achieve above is infant industry
  tariff.

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Investment Choices and Industry Choice of
Technique

• 1. Context
• Workers in rich country paid 10X that of poor
  country.
• . Capital costs in poor country twice of rich
  country.
• . Textile is of equal quality in both countries.
• 2. Three Technologies
• defined by capital-labour ratios
• .T1 capital/labour ratio 80/223.6
• . T218.1
• .T3400/580
• thus, T3 is 22 times more capital intensive than
  T1

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Choice of Three Techniques

• Tech 1 Tech 2 Tech 3
• A. Inputs (M )
• 1.Equip 80 200 400
• 2.labour 22 11 5
• 3. Other 11.4 9.3 6.7
• Which technique to choose and why ?
• What is the effect on employment ?
  

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Factor costs Rich and Poor Countries

• Rich Poor
• 1. i rate .05 .10
• 2. wages/yr 15 1.5

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PV of Cost of T1-T3 Rich

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

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PV of Cost of T1-T3 Poor

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

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LAC
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What are Scale Economies

• 1. What are scale economies?
• a. Scale economies are declining Lac curves.
• b. Declining LAC arise due to
• a. fixed costs research,
• b. spreading of capital,
• c. greater scale implies greater specialization
• d. quantity discounts
• 2. What role do they play in an investment
  decision ?
• Crucial to being competitive.

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Second Criterion Product Choice?

• Want to experience large scale economices quickly
  ? Why?
• Small Domestic markets ?
• Concepts MES
• MES minimum efficient scale
• increase in ac _at_1/2 MES
• Tells you how steep your cost increase is on
  short run Average cost curve
• MES as of market

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Product Choices Why No Beer ?

• rise in LAC
  MESas of market
• 1. Bread 15
  1
• 2. Beer 9
  3
• 3. footwear 2
  .2
• 4. dyes 22
  100
• 5. sulfuric acid 1
  30
• 6. polymers 5
  33
• 7. cement 9
  10
• 8. steel 8
  80
• 9. machine tools 5
  100
• 10. Electric motors 15
  60
• 11. Autos 6
  50
• 12. bicycles 1
  10
• 13. diesel engines 4
  10

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Conclusions

• Beer and Bread No major scale economies and too
  quickly realized. Thus, all countries are
  efficient. Cant compete by scale
• Steel and Machine tools,
• Huge scale economies,
• First there is efficient and tough for others to
  compete

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Technical Choice and Scale

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

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End of Show