Industiallization. Most rich countries today have undergone a process of industrialisation – a reallocation of productive resources from (typically small-scale) agriculture to large-scale manufacturing. Yet, many countries today that are yet to industrial

These are notes in development economics, the topic is industriallization

1. ECON8440 DEVELOPMENT ECONOMICS Lecture 4: Industrialisation

2. Motivation Most rich countries today have undergone a process of industrialisation – a reallocation of productive resources from (typically small-scale) agriculture to large-scale manufacturing . Yet, many countries today that are yet to industrialise. What determines whether and when a country industrialises its economy? Should government policy be used to trigger or accelerate industrialisation?

3. Rosenstein- Rodan (1943) Krugman (1994):

4. Rosenstein- Rodan (1943) If the domestic market is small, … world trade is not free or costless, then firms may not be able to generate enough sales to adopt technologies that have increasing returns to scale . If multiple sectors adopted increasing returns technology simultaneously , this could generate enough income to drive up demand for goods in other sectors, thus enlarge markets , and make industrialisation profitable . Empirical evidence that growth in domestic demand is the most important determinant of growth in output (discussed in Murphy, Shleifer & Vishny 1989).

5. Murphy, Shleifer & Vishny (1989) A Model with Aggregate Demand Spillovers across Sectors Consumption:

6. Murphy et al., cont’d. Budget Constraint: Note: Because we are dealing with a representative consumer, s/he receives aggregate profits in the economy.

7. Murphy et al., cont’d. Production:

8. Murphy et al., cont’d. Industrialisation:

9. Murphy et al., cont’d. Profits from Industrialisation: Note: Because of Cobb-Douglas utility, the consumer spends the same share of income on each good. Since each good has zero weight in the budget, the expenditure can be written as y.

10. Murphy et al., cont’d. Aggregate Income under Industrialisation in n sectors:

11. Murphy et al., cont’d. Differentiating w.r.t. n we obtain where (profits of last firm to invest)

12. Murphy et al., cont’d. Multiplier Effect from Investment:

13. Murphy et al., cont’d. Unique Nash Equilibrium:

14. Murphy et al., cont’d. The model does not generate the “big push” story because …

15. Murphy et al. cont’d. A Model with a Factory Wage Premium Basic Idea:

16. Murphy et al. cont’d. A Model with a Factory Wage Premium Utility: Labour Endowment: L (same as before)

17. Murphy et al. cont’d. A Model with a Factory Wage Premium Production: Same as before but monopolist’s fixed cost equals F(1+v) i.e. ( F units of labour). Pricing: Monopolist charges 1 per unit of output – same logic as before. Wages:

18. Murphy et al. cont’d. A Model with a Factory Wage Premium Monopolist’s Profits:

19. Murphy et al. cont’d. A Model with a Factory Wage Premium Assumption:

20. Murphy et al. cont’d. A Model with a Factory Wage Premium No Industrialisation Equilibrium:

21. Murphy et al. cont’d. A Model with a Factory Wage Premium Industrialisation Equilibrium:

22. Murphy et al. cont’d. A Model with a Factory Wage Premium Intuition:

23. Murphy et al. – Summary Formalisation of the “Big Push” theory of development Aggregate demand spillovers are not sufficient to justify a “big push”. Unique Equilibrium Murphy et al. develop three alternative models which generate multiple equilibria and a big push is justified: Model with Factory Wage Premium Dynamic Model of Investment Model of Investment in Infrastructure

24. Empirical Tests Is it possible to formulate an empirical test for (some aspect of) Rosenstein- Rodan’s theory or for the Murphy et al. models? A critical assumption in the theory is that domestic demand is the basic driver behind industrialisation. More loosely, we can say the theory predicts a positive relationship between initial income and subsequent economic growth. However, a variety of different growth theories may predict such a relationship.

25. Ades and Glaeser (1999)

26. Ades and Glaeser , cont’d.

27. Ades and Glaeser , cont’d.

28. Ader and Glaeser , Results

29. Ades and Glaeser , Conclusion

30. The Big Push in Policy Description in Adelman (2000):

31. The Big Push in Policy cont’d. Adelman (2000), cont’d.:

32. The Big Push in Policy cont’d. Rodrik (2007) One Economics Many Recipes : “Few people seriously believe any more that state planning and public investment can act as the driving force of economic development … At the same time, it is increasingly recognized that developing societies need to embed private initiative in a framework of public action that encourages restructuring, diversification, and technological dynamism.”