MIT 11 481J - INTERDEPENDENCE AND INDUSTRIALIZATION (20 pages)

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INTERDEPENDENCE AND INDUSTRIALIZATION



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INTERDEPENDENCE AND INDUSTRIALIZATION

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Pages:
20
School:
Massachusetts Institute of Technology
Course:
11 481j - Analyzing and Accounting for Regional Economic Growth
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MIT OpenCourseWare http ocw mit edu 11 481J 1 284J ESD 192J Analyzing and Accounting for Regional Economic Growth Spring 2009 For information about citing these materials or our Terms of Use visit http ocw mit edu terms INTERDEPENDENCE AND INDUSTRIALIZATION ALBERT O HIRSCHMAN THE STRATEGY OF ECONOMIC DEVELOPMENT NEW HAVEN CT YALE UNIVERSITY PRESS 1958 p 98 119 Interdependence Used to explain inter industry production relations illustrated through linkages The degree of interdependence is measured by Backward Linkages Proportion of output that represents purchases from other industries Link from an industry to its suppliers Forward Linkages Proportion of total output that goes to other industries Link from an industry to its users not final demand Assumptions Assumptions Input coefficients are fixed or needed inputs increase monotonically with outputs If a required input is not supplied from domestic sources it can be imported Maximizing Linkage Effects Development policy must attempt to enlist these well known backward and forward effects but it can do so only if there is some knowledge as to how different economic activities score with respect to these effects p 100 Importance vs Strength of Linkage Effects Importance of effect The net output x of new industries n that might arise Strength of effect The probability p that the new industries will actually come into being Total linkage effect Summation of product of x s and p s Satellite Industries Satellite Industry When the probability p that a new industry will come into being is high but its net output x is small Can be established through backward or forward linkages CEMENT MASTER Joint Linkage Effects AA B According to Hirschman This mechanism may go far toward explaining the acceleration of industrial growth p 104 A Mental Experiment For development we re interested in finding the most efficient sequence for industrialization p 105 Takes an example of averaged degrees of interdependence of various industries from Chenery and Watanabe ranked by their combined score of backward and forward linkages Warns that excessive reliance should obviously not be placed on these ranking p 108 A Mental Experiment Continued Intermediate Manufacture Backward and forward linkages both high e g Iron and Steel Nonferrous Metals Paper and Products Coal Products Final Manufacture Backward linkage high forward linkage low e g Grain Mill Products Lumber and Wood Products Intermediate Primary Production Forward linkage high backward linkage low e g Metal Mining Petrol and Natural Gas Coal Mining Agriculture and Forestry Final Primary Production Backward and Forward linkages both low e g fishing transport services trade Backward Linkage at Work To start industrialization then a country must set up one of two kinds of industries Those that transform domestic or imported primary products into goods needed by final demands or Those that transform imported semi manufactures into goods needed by final demand Hirschman explains how underdeveloped countries often set up last industries first and then work their way backward from final touches stages to domestic production of intermediate and finally to that of basic industrial materials p 112 This import substitution lead growth however has its risks Defense of the Status Quo The chances that domestic production will arise when domestic demand reaches a certain threshold needs to be weighed against the counter forces of industrialists that are comfortable with the status quo Conclusion Excessive gradualism in introducing industry by successive small bits of value added may not pay off Much is to be said for biting off as large pieces of value added at a time as the underdeveloped country can possibly digest p 119 Critiques 1 Linkage Supply Chain and Leakage The three dimensions of linkage The strength of linkage measures the dependence of an industry on other industries The length of linkage the geographic distance between supplier and purchaser associated with transportation cost The stability of linkage whether the producer purchaser partnership is reliable associated with risks contractions mutual trust etc Supply chain reduces the importance of length while enforces stability 1 Linkage Supply Chain and Leakage Improved supply chain management Improved Infrastructure More freedom in choosing suppliers and customers Reduced importance of geographic proximity Leakage of economic growth Even if a sector with strong linkages is established it is difficult to capture all induced economic growth within the region 2 Intermediate Demand and Final Demand No final demand no intermediate demand Final demand not fully captured in linkage analysis Sector with strong linkages Accelerator of economic growth Important cause of failure in the practice of Growth Pole Theory 3 Linkage Analysis on Plant Scale Important question for local government How much economic growth can a new plant induce in the region Drawbacks of current linkage analysis and I O tables Analysis on industry scale too general too be informative Analysis on plant scale limited practice in very few nations Failure to support well rounded cost benefit analysis in project appraisal Limited usefulness for decision makers in local government 4 Policy Implication for Developing Countries Over optimism about the implant of final industries and import substitution Applicable in developing countries with regional advantages such as Low labor cost Ocean shipping access Potential domestic input suppliers Large local market Not applicable in other developing countries because Not attractive to final industries no cost saving or profit generating incentives Insufficient capacity of import substitution Marginalization in global economy doomed destiny Thank you Questions and Comments


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