Industrialization and Economic Development

Industrialization is the process of manufacturing consumer goods and capital goods and of creating social overhead capital in order to provide goods and services to both individuals and businesses. As such industrialization plays a major role in the economic development of LDCs (Less Developed Country).

Industrialization is a pre-requisite for economic development as the history of advanced countries shows. For development, the share of the industrial sector should rise and that of the agricultural sector decline. This is only possible through a policy of deliberate industrialization. As a result, the benefits of industrialization will “trickle down” to the other sectors of the economy in the form of the development of agricultural and service sectors leading to the rise in employment, output and income.

In overpopulated LDCs there is overcrowding on the land, holdings are subdivided and fragmented, and farmers practice traditional agriculture. For rapid development, LDC’s cannot afford to wait for changes in farm practices to take place. Therefore. LDCs must begin with industrial development to supply fertilizers, farm machinery and other inputs so as to increase efficiency on the farm. Again, industrialization is necessary in order to provide employment to the underemployed and unemployed in the agricultural sector. In overpopulated LDCs, large number of people are underemployed or disguised unemployed whose marginal product is zero or negligible. They can be transferred from agriculture to industry with little or no loss in agricultural output. Since the marginal product of labor is higher in industry than in agriculture, transferring such workers to the industrial sector will raise aggregate output. Thus overpopulated LDCs have no choice but to industrialize.

Industrialization is also essential in LDCs because it brings increasing returns and economies of scale while agriculture does not. “These economies reside in training, stimulating communication, interaction within industry (inter-sectoral linkages), demonstration effects in production and consumption, and so on. Rural society tends to be stagnant, urban society dynamic. Since industrialization brings urbanization, it is superior to the stimulation of agriculture.”

Further the LDCs need industrialization to free themselves from the adverse effects of fluctuations in the prices of primary products and deterioration in their terms of trade. Such countries mainly export primary products and import manufactured goods. The prices of primary products have been falling or remaining stable due to protectionist policies of advanced countries, while the prices of manufactures have been rising. This has led to deterioration in the terms of trade of the LDCs. For economic development, such countries must shake off their dependence on primary product. They should adopt import substituting and export-oriented industrialization.

The case for industrialization in the LDCs also rests on the psychological boost which such a polio provides in their citizens in marching towards modernization. Industrialization is viewed as a mater of pride by every LDC, for it implies using the new technology, new and diverse skills, larger enterprises and more large cities. Moreover incomes rise rapidly in the industrial sector which are saved and invested for creating more demand for goods and services. Since industrialization is followed by urbanization, employment opportunities and incomes increase.

People enjoy the fruits of modernization in the form of a variety of goods and services available in urban centers due to industrialization. These also affect the rural sector through the demonstration effect. Thus industrialization tends to raise the living standards and promotes social welfare.

Finally, industrialization brings social transformation, social equality, more equitable distribution of income and balanced regional development in the process of economic development. The policy of industrialization followed by the LDCs in the early phase of their development has not brought the expected economic and social benefits. It has failed to reduce in equalities of income and wealth, unemployment, and regional imbalances. Even the pace of development has been uneven with the neglect of the growth of other sectors.

Moreover, industrialization has created such serious problems as: (1) rural stagnation, (2) the mushrooming growth of the urban underclass, (3) education poorly geared to the development needs, (4) organizational power failures in government bureaucracies, and (5) excessively high rates of growth of the population and the labor force. Therefore, economists have veered round to the view that there is no basis for the argument that development should be launched with industrialization. Rather, the process of development should be interwoven with the harmonious growth of agriculture and industry. In fact, in most LDCs successful industrialization has been supported by sustained agricultural development.