Industrialization - a Key to Economic Development of a Country

Introduction

Industrialization is a key to the economic development of a country. This is especially true for an underdeveloped economy like India, where industrialization creates opportunities for absorbing excess manpower and ensures the availability of mass consumption goods for a vast population. The process of industrialization aids in harnessing and transforming raw resources into useful consumer products, effective means and tools of production, and the development of infrastructure. The industrial sector has a relatively high marginal propensity to save and invest, contributing significantly to achieving a self-sustaining economy with continued high levels of investment, increased levels of income, and employment (State Industrial Profile of Jammu and Kashmir, 2016).

The Role of Industrialization

The transition of an economy from being primarily agrarian to one based mainly on manufacturing and industry is a hallmark of industrialization. It is generally perceived as a sign of a growing economy and is associated with income growth, urbanization, and improvements in health, lifespan, and standard of living for the populace. Industrialization is considered crucial for the dynamics and competitiveness of every economy. Its unique characteristics make the sector an “engine of growth” (Paskal, 2015). For over three centuries, industrialization has driven economic growth and improved living standards and continues to play a vital role in developing countries. India, for example, is striving to enhance its manufacturing sector to improve living standards and increase the share of manufacturing in its economy from 16 percent to 25 percent by 2022 (Manyika et al., 2012).

Global Perspectives on Industrialization

Virtually every country that has experienced rapid growth in productivity and living standards over the last 200 years has done so by industrializing. Countries that have successfully industrialized—by turning to the production of manufactures and leveraging scale economies—are the ones that grew rich, such as eighteenth-century Britain or twentieth-century Korea and Japan. Yet, despite the evident gains from industrialization and the success of many countries in achieving it, numerous other countries remain unindustrialized and poor. What is it that allows some countries to industrialize while others do not? And can government intervention accelerate the process? Among the many causes of underdeveloped countries' lack of growth, a particularly significant and frequently discussed constraint on industrialization is the small size of the domestic market. When domestic markets are small and world trade is not free or costless, firms may not generate enough sales to make the adoption of increasing returns technologies profitable, stalling industrialization (Kevin, 1989).

Empirical and Theoretical Arguments

Adam Szirmai (2009) has articulated why industrialization is considered the engine of growth. There are powerful empirical and theoretical arguments in favor of industrialization as the main engine of growth in economic development. These arguments can be summarized as follows:

• There is an empirical correlation between the degree of industrialization and per capita income in developing countries.
• Productivity is higher in the industrial sector than in the agricultural sector. The transfer of resources from agriculture to manufacturing provides a structural change bonus.
• The transfer of resources from manufacturing to services provides a structural change burden in the form of Baumol’s disease. As the share of the service sector increases, aggregate per capita growth tends to slow down.
• Compared to agriculture, the manufacturing sector offers special opportunities for capital accumulation in developing countries. Capital accumulation can be more easily realized in spatially concentrated manufacturing than in spatially dispersed agriculture. This is one of the reasons why the emergence of manufacturing has been so important in growth and development. Capital intensity is high in mining, manufacturing, utilities, and transport. It is much lower in agriculture and services. Capital accumulation is one of the aggregate sources of growth. Thus, an increasing share of manufacturing will contribute to aggregate growth.
• The manufacturing sector offers special opportunities for economies of scale, which are less available in agriculture or services.
• The manufacturing sector offers special opportunities for both embodied and disembodied technological progress (Cornwall, 1977). Technological advance is concentrated in the manufacturing sector and diffuses from there to other economic sectors such as the service sector.
• Linkage and spillover effects are stronger in manufacturing than in agriculture or mining. Linkage effects refer to the direct backward and forward linkages between different sectors. Linkage effects create positive externalities to invest in given sectors, and spillover effects refer to the disembodied knowledge flows between sectors. Spillover effects are a special case of externalities that refer to externalities of investment in knowledge and technology. Linkage and spillover effects are presumed to be stronger within manufacturing than within other sectors. Linkage and spillover effects between manufacturing and other sectors such as services or agriculture are also very powerful.
• As per capita incomes rise, the share of agricultural expenditures in total expenditures declines, and the share of expenditures on manufactured goods increases (Engel’s law). Countries specializing in agricultural and primary production will not profit from expanding world markets for manufacturing goods. These arguments are frequently mentioned in the literature and are often considered self-evident, though recent literature increasingly questions whether manufacturing will continue to be the engine of growth. We examine the empirical support for these arguments. In doing so, we may find that some of the arguments need to be qualified. They should also be considered in a temporal perspective. The applicability of different arguments may well differ in different historical contexts. The sources of growth change over time (Szirmai, 2009).

It is argued that productivity is higher in the manufacturing sector than in the agricultural sector (Fei & Ranis, 1964). The transfer of resources from agriculture to manufacturing (i.e., industrialization) provides a structural change bonus. This is a temporary effect, lasting as long as the share of manufacturing is rising. Similarly, the transfer of resources from manufacturing to services provides a structural change burden in the form of Baumol’s disease (Baumol, 1967). Furthermore, compared to agriculture, the manufacturing sector is assumed to offer special opportunities for capital accumulation. Capital accumulation can be more easily realized in spatially concentrated manufacturing than in spatially dispersed agriculture. This is one of the reasons why the emergence of manufacturing has been so crucial in growth and development. Capital intensity is high not only in manufacturing but also in mining, utilities, construction, and transport. It is much lower in agriculture and services. Capital accumulation is one of the aggregate sources of growth. Thus, an increasing share of manufacturing will contribute to aggregate growth. The engine of growth hypothesis implicitly argues that capital intensity in manufacturing is higher than in other sectors of the economy. However, Szirmai (2009) has shown that this is not always the case.