Industrial development and economic
growth: Implications for poverty
reduction and income inequality
Matleena Kaniivilä*
Presented By:
Rabeya Sultana Papri
Student No.: MSS 141504
Masuma Sultana
Student No.: MSS 141525
Economics Discipline
Khulna University
Khulna
1.Introduction
During recent years, the share of poor people in the global
population has declined due to rapid economic growth in
population-rich countries like China and India. Countries like
East Asia are Catching up to industrialized countries. On the
other hand, countries like Sun-Saharan Africa are lagging far
behind and in such countries, the share of poor people has
increased.
Industrial development has had an important role in the
economic growth of countries like China, the Republic of Korea
(Korea), Taiwan Province of China (Taiwan) and Indonesia.
Along with accelerated growth, poverty rates have declined in
many countries. Some countries have managed to achieve growth
with equity, whereas in others inequality ha remained high.
2. The role of structural change in
economic growth
According to the neo-classical growth model which is
developed by Robert Solow (1956), capital accumulation is a major
factor contributing to economic growth. Productivity is measured as
an increase in output per worker which results from increases in the
amount of capital per worker or capital accumulation. This capital
intensifying will continue until the economy reaches its steady state
point. At this point the rate of technological process is assumed to
be constant and not impacted by economic incentives.
Romer (1986, 1990) and Lucas (1988) initiated Endogenous
Growth theory, and they focuses on explaining the Solow residual.
According to them, technological change is the endogenous variable
of the model and is the result of allocative choices of economic
agents and is driven by R&D activities which are fuelled by private
firms’ profit motive inventions and these are also nonrivalrous in
nature.
2. The role of structural change in
economic growth (Contd.)
This new knowledge can supplement the productivity of
exiting knowledge and yield increasing returns to scale. Thus, the
marginal productivity of capital does not decline with increasing
GDP per capita and incomes need not converge across countries.
Some Essential Sources of Structural Change:
i. Technological change and innovation
ii. Research and development
iii. Changes in domestic demand
iv. Trade and
v. Specialization
3. Economic growth and the poor
For achieving a reduction in absolute poverty rapid
economic growth is often essential. But growth associated with
increased income inequality does not automatically address the
whole poverty problem.
The Traditional Economic View:
According to traditional economic view, highly unequal
income and wealth distribution is a necessary condition for
continued and rapid economic growth.
The New Political Economic View:
The new political economic view links greater inequality to
lower future growth paths, and considers it an impediment to
poverty-reducing growth, as the elasticity of poverty with respect to
growth is found to decline when inequality increases.
3. Economic growth and the poor
(Contd.)
There was a widespread move towards greater
egalitarianism during the 1950s and 1960s in many developing
countries. After that, inequality remained high in many places
because of the persistence of the traditional causes like high land
concentration, unequal access to education and other public
services, and the dominance of the mining and plantation sectors.
4. Impact of industrialization and
trade on the poor
Capital intensive location of industrial facilities:
Industrial development is an essential element for economic
growth and long term poverty reduction. How the poor benefit from
growth is mostly depends on the pattern of industrialization. Use of
capital intensive methods instead of labor intensive ones tends to
increase income disparities. Location of industrial facilities also has an
impact on poverty reduction and inequality. As industries are often
concentrated in urban areas, it creates regional inequality between urban
and rural areas.
Degrees of Economic Openness:
The degrees of economic openness of a country can have an
important influence on its pattern of specialization and industrialization.
A country should specialized according to the resource availed to it. A
labor abundant country should be specialized in labor intensive
industrialization process so that the inequality in that country could
decline because of increased demand of labor.
4. Impact of industrialization and
trade on the poor (Contd.)
Trade and Investment Liberalization
Trade and investment liberalization can decrease absolute
poverty and inequality. The impact of trade liberalization varies
between countries depending for instance on factor endowments
and liberalization creates both winners and losers. Similarly, to
international trade, the impact of foreign direct investment on
income inequality varies between countries.
5. Industrialization, economic growth,
poverty reduction and inequality:
Country examples
5.1 China
China adopted a development strategy after the World
War II that included deliberative insulation from the world
economy, industrialization and dominance of the state. Since the
reforms, growth has accelerated and in the 1980s and 1990s
growth rates were highest in the world, 9.9 percent and10.3
percent respectively. Growth was especially high in industry.
5.1 China (Contd.)
Reforms Taken by China:
China takes following reforms to accelerate its growth:
i. Rapid Industrialization
ii. Increased trade openness and export
iii. Gradual liberalization of financial markets
iv. Technology and know-how import
v. Utilization of labor force
vi. High domestic saving rate
vii. Deregulating and facilitating labor market
viii. De-collectivized agricultural land
ix. Privatization of land use rights
x. Rural infrastructural development
xi. Reduced mandatory delivery to the government
xii. Creating pricing system and market institution
xiii. Reducing state’s role in resource allocation
5.2 India
Like China, India chose economic development strategy
after Second World War by near autarky, industrialization and the
dominance of the state in the economy. Development was
considered synonymous with industrialization and industry was
concentrating mainly on basic goods like steel and machinery.
India takes several policies and reforms to accelerate its
economic growth.
5.2 India (Contd.)
Reforms Taken by India
i. Import substitution
ii. Licensing of industrial activity
iii. Capital goods import
iv. Rational tax system
v. Relax industrial regulation
vi. Allocative role of the government
vii. Relaxation of licensing system controlling internal production
viii. Currency devaluation
ix. Relaxation of restrictions on the inflow of foreign capital and
technology transfer
x. Abolition of quantitative restrictions on raw material imports,
intermediates and capital goods
xi. Reduce tariff level
xii. Relaxation of rules restricting large companies
xiii. Simplification of exchange control
5.2 India (Contd.)
Reforms Taken by India (contd.)
xiv. Breaking public sector monopolies
xv. Reduce foreign currency debt dependence
xvi. Tax reforms
5.3 South Korea
During the last 40-45 years, economic growth in South
Korea has been rapid. Due to rapid industrialization, the
country was able to achieve remarkable growth with steep
reduction in poverty and inequality. Growth in manufacturing is
high in this country. But growth in agricultural value added has
been continuously declining and thus, employment in this
sector also declines. Employment in industrial sector has had an
inverted U shape from during the last 25 years.
5.3 South Korea (Contd.)
Reforms Taken by South Korea
i. Trade reforms
ii. Export promotion
iii. Direct export subsidies
iv. Tax exemption
v. Low interest export loans
vi. Duty free access to imports
vii. Protection of infant industries
viii. Investment programmes to promote heavy industries
ix. Direct government controls in banking sector
x. Tax incentives
xi. Trade protection
xii. Land reform
5.4 Taiwan Province of China
Taiwan has experience rapid economic growth over the
past half century. Economic growth has been heavily based on the
growth of manufacturing sector and export oriented. The country
specialized in labor intensive production and later shifted towards
capital intensive and high-tech production.
5.4 Taiwan Province of China (Contd.)
Reforms Taken by Taiwan
i. Import substitution
ii. Excessive use of tariff and non-tariff barriers on imports
iii. Selective credit policies
iv. Push for exports of manufacturing
v. Sectoral industrial policies
vi. Promotion of state owned firms
vii. Set up industrial parks
viii. Duty free import materials
ix. Establishment of institutions designed to identify, transfer,
diffuse and absorb foreign industrial technology and
innovation
5.5 Indonesia
Indonesia’s growth was very rapid from the late 1960s
until the Asian crisis of 1997.During that 30 years period, the
country moved from a predominantly agricultural production
base to a more industrialized base economy. Rapid economic
growth has benefited a large share of the population as poverty
fell form more than 70 percent in the mid 1960s to 11 percent in
1996. The Asian crisis in 1997 caused an increase in poverty
rates.
5.5 Indonesia (Contd.)
Reforms Taken by Indonesia
i. Shift from a closed economy and heavily interventionist policy to
more market oriented economy
ii. Restoration of external stability, fiscal constraints
iii. Restoration of banking system
iv. Liberalization of the investment regime included incentives and
assurances to new foreign investors
v. Simplification of export and import procedure
vi. A unified and fully convertible fixed exchange rate
vii. Price control were eliminated
viii. Balanced budget policy
ix. Import substitution and public financing
x. Erection of barriers to import
xi. Allowing foreign banks to open offiecs
5.6 Mexico
During the 1980s and 1990s, Mexico faced several
economic crisis. The service sector is the largest contributor to
Mexican economy and accounted 70 percent in 2005. The
contribution of agriculture was minor in GDP and it was only 4
percent in 2005. The share of manufacturing has been relatively
constant over the years and 18 percent in GDP at 2005. A
remarkable part of Mexico’s production of manufacturing for
export is currently occurring in maquiladoras (in bond assembly
for re-export plants).
Mexican economic policy was based on importsubstituting industrialization. The strategy included high
protective tariffs and other import barriers, especially to
consumer goods. Industrial expansion was promoted through
public investment in energy and transportation infrustracture.
5.7 Brazil
Economic performance in Brazil has been volatile like other
Latin American countries. The contribution of the industrial sector
(manufacturing, construction, mining and utilities) has remained
constant over the past three decades. Manufacturing is the single most
important sub-sector of industry and accounts for nearly two-thirds of
industrial GDP. Through small contribution to GDP, agriculture is still
an extremely important sector for Brazil. The share of service sector
increases and it is about 60 percent in GDP. The government has
liberalized the service sector especially the telecommunication, financial
services, and port and airport services. Public banks private
participation and foreign investment has increased over the years.
In Brazil, poverty reduction was significant especially in the
1990/1999 period with poverty rates falling by 10 percent. Since then
poverty rates remained unchanged at least through the early 2000s.
6. Conclusion
The extent to which industrial development effectively
decreases poverty and inequality depends on the pattern of
industrialization. The degree of policy freedom left to developing
countries is narrower than it was some decades ago, even if some
well-planned government intervention may seem justified based
on the success stories of the earlier decades. The government still
have a primary role in promoting sustainable economic growth
and especially poverty-reducing growth. But government’s role in
skill formation, technology support, well-functioning institutions,
innovation financing, infrastructural development, and provision
of variety public goods are notable. Rapid economic growth tends
to decrease poverty. Rapid growth may increase income inequality
but it is inevitable. Promotion of job creating industries and SMEs
and supporting the creation of domestic linkages an reduce
inequality.
Thank You All