Industrialization Objectives
In recent years many countries have sought protection to increase their level
Gf industrialization. Their reasons are:
1. An emphasis on industrialization will increase output more than an emphasis on agriculture.
2. Inflows of foreign investment in the industrial area will promote growth.
3. Diversification away from traditional agricultural products or raw mate-
rials is necessary to stabilize trade fluctuation.
4. The prices of manufactured goods tend to rise more rapidly than the prices of primary products.
Industrial countries are generally better off economically than nonindus-trial countries. Since the Industrial Revolution in England in the late eighteenth century, a number of countries have developed an industrial base while largely preventing competition from foreign-based production. This, for example, was the experience of the United States, Japan, and the former Soviet Union. As in the infant-industry argument, the premise here is that importing cheaper products from abroad would prevent the establishment of domestic industry if free-market conditions were allowed to prevail. The industrialization argument differs from the infant-industry argument in that proponents argue that objectives will be achieved even if domestic prices do not become competitive on the world market.
Marginal Agricultural Returns
In many developing countries there are frequently surpluses of population engaged in agriculture. This is particularly true in economies such as India or Egypt, which have little additional arable land available. What this means is that large numbers of people may be able to leave the agricultural sector without greatly affecting the country's agricultural output. If these surplus workers can be employed in the manufacturing sector, their output is likely to contribute a net gain to the economy because so little agricultural production is sacrificed in the process. If the cost of the domestically produced manufactured product is higher than an imported one, sales of the imported product must be restricted to ensure survival of the domestic industry. This will result in either higher prices or taxes; nevertheless, real output should rise in the economy.
Shifting people out of agriculture is not without risk. One problem is that individuals' expectations may be raised and left unfulfilled, thus leading to excessive demands on social and political services. Indeed, one of the major problems facing poor countries today is the massive urban migration of people who cannot be easily absorbed. There is no work for them either (1) because the industrialization process has proceeded too slowly or (2) because they lack the rudimentary skills and work habits necessary for employment in manufacturing. A second problem is that agriculture may in fact be a better means of effecting additional output than industry. Not all poor countries are utilizing their lands fully, nor is industrial development the only means of economic growth. Such countries as the United States, Canada, and Argentina grew rapidly during the nineteenth century, in large part through agricultural exports, and they continue to profit from such exports. Australia, New Zealand, and Denmark maintain high incomes along with substantial agricultural specialization. A third problem is that if protection is to be given to manufacturing enterprises, policymakers must decide on which type so that the additional consumer prices and taxes are minimized. A fourth problem is that too much of a shift from rural to urban may reduce agricultural output in developing countries, thus further endangering their self-sufficiency. Interestingly, most of the world's agricultural production and exports come from the so-called industrial countries.
Promoting Investment Inflows
Import restrictions are a major impetus for
direct investment movements, particularly those regulating the purchase of
foreign-produced manufactured products. The influx of foreign firms may
hasten the move from agriculture to industry as well as contribute to growth
by adding to the stock of capital and technology per worker employed. It may also add to employment, which is an especially attractive benefit from the standpoint of most policymakers.
Diversification
Export prices of most primary products undergo great fluctuations. Whether due to such uncontrollable factors as weather affecting supply or business cycles abroad affecting demand, price variations can wreak havoc on economies that are dependent on the export of primary products. This is particularly true when an economy depends very heavily on a few commodities for employment of its population and for its export earnings. For example, the C6te d'lvoire's exports fell by a quarter over two years when cocoa and coffee prices plummeted.7 Because a large number of developing countries depend heavily on just one primary commodity, they frequently can afford foreign luxuries one year but be unable to afford replacement parts for essential equipment the next.
A greater dependence on manufacturing is, however, no guarantee of stable export earnings. The gross national product of most less developed countries (LDCs) is small; consequently, a change may simply shift dependence to one or two manufactured products from one or two agricultural ones. The basic risk of having all of one's eggs in one basket has not been removed.
Terms of Trade
Terms of trade refers to the quantity of imports that a given quantity of a country's exports can buy. The prices of raw materials and agricultural commodities have not risen as fast as the prices of finished products. As a result, over a period of time it will take more primary products to buy the same amount of manufactured goods. Further, the demand for primary products does not rise as rapidly, so most LDCs have become increasingly poorer in relation to developed countries. This condition supposedly warrants the protection of emerging manufacturing enterprises that replace traditional products.8 The declining terms of trade for LDCs have been explained in part by lagging demand for agricultural products and by changes in technology that have saved on utilization of raw material. A further explanation sometimes offered is that, because of competitive conditions, savings due to technical changes that lower production costs of primary products are largely passed on to consumers, whereas cost savings in manufactured products go to higher profits and wages.9
Import Substitution Versus Export Promotion
By placing restrictions on imports a country may produce goods for local consumption that it formerly imported. This is known as import substitution. In recent years many countnes have questioned whether import substitution is the best way to develop new industries through protection. If the protected industries do not become efficient, consumers may have to pay high prices or taxes for an indefinite period of time to support them. In addition, since capital equipment and other supplies usually must be imported, foreign-exchange savings are minimal. These countries have witnessed the rapid growth of countries such as Taiwan and South Korea, which have achieved a favorable balance of payments and rapid economic growth by promoting export industries, a process known as export-led development. For these reasons, some countries are now trying to develop industries for which export markets should logically exist, such as the processing of raw materials that they are currently exporting. This change affects international companies' operating in these countries, too: They are increasingly required to export from the countries where they are producing, whereas formerly they could sell all their outputs in each country where they produced.
In reality, it is not easy to distinguish between the two types of industrialization, nor is it always possible to develop exports. Industrialization may initially result in import substitution, yet export development of the same products may be feasible at a later date. The fact that a country concentrates its industrialization activities on products for which it would seem to have a comparative cost advantage does not guarantee that exports can be generated. There are a variety of trade barriers, to be discussed later in this chapter, that are particularly problematic to the development of manufacturing exports from nonindustrialized countries.
Gf industrialization. Their reasons are:
1. An emphasis on industrialization will increase output more than an emphasis on agriculture.
2. Inflows of foreign investment in the industrial area will promote growth.
3. Diversification away from traditional agricultural products or raw mate-
rials is necessary to stabilize trade fluctuation.
4. The prices of manufactured goods tend to rise more rapidly than the prices of primary products.
Industrial countries are generally better off economically than nonindus-trial countries. Since the Industrial Revolution in England in the late eighteenth century, a number of countries have developed an industrial base while largely preventing competition from foreign-based production. This, for example, was the experience of the United States, Japan, and the former Soviet Union. As in the infant-industry argument, the premise here is that importing cheaper products from abroad would prevent the establishment of domestic industry if free-market conditions were allowed to prevail. The industrialization argument differs from the infant-industry argument in that proponents argue that objectives will be achieved even if domestic prices do not become competitive on the world market.
Marginal Agricultural Returns
In many developing countries there are frequently surpluses of population engaged in agriculture. This is particularly true in economies such as India or Egypt, which have little additional arable land available. What this means is that large numbers of people may be able to leave the agricultural sector without greatly affecting the country's agricultural output. If these surplus workers can be employed in the manufacturing sector, their output is likely to contribute a net gain to the economy because so little agricultural production is sacrificed in the process. If the cost of the domestically produced manufactured product is higher than an imported one, sales of the imported product must be restricted to ensure survival of the domestic industry. This will result in either higher prices or taxes; nevertheless, real output should rise in the economy.
Shifting people out of agriculture is not without risk. One problem is that individuals' expectations may be raised and left unfulfilled, thus leading to excessive demands on social and political services. Indeed, one of the major problems facing poor countries today is the massive urban migration of people who cannot be easily absorbed. There is no work for them either (1) because the industrialization process has proceeded too slowly or (2) because they lack the rudimentary skills and work habits necessary for employment in manufacturing. A second problem is that agriculture may in fact be a better means of effecting additional output than industry. Not all poor countries are utilizing their lands fully, nor is industrial development the only means of economic growth. Such countries as the United States, Canada, and Argentina grew rapidly during the nineteenth century, in large part through agricultural exports, and they continue to profit from such exports. Australia, New Zealand, and Denmark maintain high incomes along with substantial agricultural specialization. A third problem is that if protection is to be given to manufacturing enterprises, policymakers must decide on which type so that the additional consumer prices and taxes are minimized. A fourth problem is that too much of a shift from rural to urban may reduce agricultural output in developing countries, thus further endangering their self-sufficiency. Interestingly, most of the world's agricultural production and exports come from the so-called industrial countries.
Promoting Investment Inflows
Import restrictions are a major impetus for
direct investment movements, particularly those regulating the purchase of
foreign-produced manufactured products. The influx of foreign firms may
hasten the move from agriculture to industry as well as contribute to growth
by adding to the stock of capital and technology per worker employed. It may also add to employment, which is an especially attractive benefit from the standpoint of most policymakers.
Diversification
Export prices of most primary products undergo great fluctuations. Whether due to such uncontrollable factors as weather affecting supply or business cycles abroad affecting demand, price variations can wreak havoc on economies that are dependent on the export of primary products. This is particularly true when an economy depends very heavily on a few commodities for employment of its population and for its export earnings. For example, the C6te d'lvoire's exports fell by a quarter over two years when cocoa and coffee prices plummeted.7 Because a large number of developing countries depend heavily on just one primary commodity, they frequently can afford foreign luxuries one year but be unable to afford replacement parts for essential equipment the next.
A greater dependence on manufacturing is, however, no guarantee of stable export earnings. The gross national product of most less developed countries (LDCs) is small; consequently, a change may simply shift dependence to one or two manufactured products from one or two agricultural ones. The basic risk of having all of one's eggs in one basket has not been removed.
Terms of Trade
Terms of trade refers to the quantity of imports that a given quantity of a country's exports can buy. The prices of raw materials and agricultural commodities have not risen as fast as the prices of finished products. As a result, over a period of time it will take more primary products to buy the same amount of manufactured goods. Further, the demand for primary products does not rise as rapidly, so most LDCs have become increasingly poorer in relation to developed countries. This condition supposedly warrants the protection of emerging manufacturing enterprises that replace traditional products.8 The declining terms of trade for LDCs have been explained in part by lagging demand for agricultural products and by changes in technology that have saved on utilization of raw material. A further explanation sometimes offered is that, because of competitive conditions, savings due to technical changes that lower production costs of primary products are largely passed on to consumers, whereas cost savings in manufactured products go to higher profits and wages.9
Import Substitution Versus Export Promotion
By placing restrictions on imports a country may produce goods for local consumption that it formerly imported. This is known as import substitution. In recent years many countnes have questioned whether import substitution is the best way to develop new industries through protection. If the protected industries do not become efficient, consumers may have to pay high prices or taxes for an indefinite period of time to support them. In addition, since capital equipment and other supplies usually must be imported, foreign-exchange savings are minimal. These countries have witnessed the rapid growth of countries such as Taiwan and South Korea, which have achieved a favorable balance of payments and rapid economic growth by promoting export industries, a process known as export-led development. For these reasons, some countries are now trying to develop industries for which export markets should logically exist, such as the processing of raw materials that they are currently exporting. This change affects international companies' operating in these countries, too: They are increasingly required to export from the countries where they are producing, whereas formerly they could sell all their outputs in each country where they produced.
In reality, it is not easy to distinguish between the two types of industrialization, nor is it always possible to develop exports. Industrialization may initially result in import substitution, yet export development of the same products may be feasible at a later date. The fact that a country concentrates its industrialization activities on products for which it would seem to have a comparative cost advantage does not guarantee that exports can be generated. There are a variety of trade barriers, to be discussed later in this chapter, that are particularly problematic to the development of manufacturing exports from nonindustrialized countries.
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