Industrialisation In Developing Countries Economics Essay
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Published: Mon, 5 Dec 2016
Industrialisation represents a process that involves economic and social change. The impact of this process is the transformation of a society from the pre-industrial stage into industrial stage. Industrialisation is therefore part and parcel of the complex modernisation process. With industrialisation, socio-economic development is attributed to great advancement in technological innovation. This technological innovation that necessitates industrialisation rests in the area of large-scale energy production as well as metallurgy production. From a broad perspective, industrialisation is the organisation of an economy in a manner that allows for large-scale manufacturing. This presentation is going to assess the industrialisation experiences in South Korea and Brazil.
South Korea is generally considered as one of the most successful newly industrialized countries. The country is the third most important exporter of manufactured goods among the least developed countries. The South Korean experience differs, to some extent, from the general model of industrialization that is based on export of manufactured commodities.
In the period that immediately followed the Korean War, the domestic market was the major foundation on which industrial expansion was based. There was very active encouragement of import substitution industrialization, particularly in the production of consumer commodities. Exports, during that period, represented a small part of the Gross national Product at only 3.3 % in 1960. These exports represented 95% of non-manufactured commodities. Between the years 1955 and 1960, the Gross National product per capita rose at an annual rate of 0.7 per cent. The change of government in 1960 marked the completion of the initial import substitution industrialization. Between the years 1960 and 1965, several economic reforms were initiated, all geared towards the promotion of export. By 1965, this policy had already been fully executed (Lee, 1968). This policy promoted and enhanced export activities within an economic atmosphere that represented a true free-trade regime. All the economic indicators, in the following ten years, scored significant high rates of increase. Between 1965 and 1970, exports grew at a yearly compound rate of 36%. Between 1970 and 1975, exports grew at an yearly rate of 25%. Consequently, the share of Gross National product increased to 30.2 % in 1975 from an earlier rate of 8.5% in 1965. The part that represented export manufactures stood at 74% by I975. The manufacturing sector represented 14 per cent of the Gross National Product in 1965. However, in 1975, it represented 32% of the Gross National Product. Therefore, the yearly growth rate in per capita income rose by 2.1 per cent in the ten years that preceded 1965 (Rhee, 1994).
It is good to note that the significant expansion of the economy was based on the role that the central authorities played in actively promoting and encouraging exports. The government employed several interventionist measures, though on a remarkably selective basis, throughout the decade and the outstanding feature of this period was export promotion rather than general trade liberalization.
Between 1960 and 1965, many incentives were proffered to export producers. By 1967, these incentives included exemption from tariffs on imported capital goods; indirect exemption from tax on exports and intermediate inputs; low charges on overhead inputs like electricity and transport; reduced taxation on export earnings, among other kinds of incentives. Additionally, export performance schemes were put in place which gave importers licenses as well as export targets, in specific markets, to individual companies. Devaluation on the rate of exchange was effected in 1964 and the system of multiple rates of exchange, that was there previously, was abolished. The incentives which these measures offered to export were maintained throughout the next ten years by occasional devaluations and adjustments in the allowances which counteracted the impact of domestic inflation in relation to the world rate.
Gradual relaxation of controls on import characterized the whole era of import promotion. However, the government maintained a wide range of import quotas and several other restrictions, all of which were aimed at promoting import substitution in certain sectors. The most fundamental were in the primary producer and the sectors that in between.
Throughout the era of export-based growth, South Korea depended heavily upon foreign borrowing for the capital that was much required for investment and to cater for current account which hardly went out of deficit. Consequently, outstanding external financial obligations and yearly debt servicing rose substantially. However, the ratio of debt servicing payments to exports went down from a high of 22% in 1971 to as low as 105 in 1976. Though exports continued to increase between 1973 and 1978, the costs of imports were, at the same time, increasing significantly (Osaka, 1997). The investment level was nonetheless maintained and the deficit of the balance of payments was confronted by even more borrowing. Thus, serious debt servicing problems arose.
Despite all the industrialization achievements by South Korea, the country started to experience a downward trend in export growth. To a great extent, this has been occasioned by the persistent decline in the world economy. Since South Korea’s exports are largely concentrated upon labour-intensive consumer commodities, the country continues to encounter with the ever increasing competition from the rest of the developing countries. The country is, therefore, losing out its considerably large market base to countries such as Hong Kong, Taiwan, China, Singapore, among others (Tae, 1972). In view of this, the government has recognized the need to raise the proportion of exports that are less labour-intensive. This is aimed at promoting local linkages as well as maintaining export growth. The government is also undertaking investments aimed at import-substitution of both intermediate as well as capital goods.
Clearly, the industrialization experience of South Korea has impacted positively on the country’s economy. The industrialization process has generated massive revenues for the country. At the time the country was experiencing its take-off in 1963, the per capita Gross National Product stood at $100. This gradually multiplied to reach $9,800 in the year 2002 (World Bank, 1993)
In order for us to effectively assess Brazil’s industrialization experience, our point of departure should be in the country’s colonial period (1500-1815). During that period, there were many attempts that were made in order to initiate a cumulative process of industrialization. However, the goal of embarking on industrialization was constantly hindered by the array of restrictions brought about by the Portuguese colonial policy. The economic principle of Mercantilism, as held by the Portuguese, can be blamed for the failure of Brazil to embark on industrialization at early stage. The Portuguese were against any possibility of an industrialized Brazil damaging the Portuguese domestic industry. Therefore, no industries managed to take root in Brazil for the reason that the Portuguese wanted to keep off competition for the products that they were selling in Brazil (Colistete, 2001).
Efforts at industrialization were also attempted, between 1822 and 1889, during the era of the Empire of Brazil. During the governance of Dom Pedro II, businessmen attempted at initiating industrialization by investing heavily on railroads, shipyards as well as banks. Consequently, beverages, textiles and tobacco industries were among the industries that experienced considerable but irregular expansion (Dean, 1969). Since the Brazilian economic policy favoured agriculture, foreign competition on the international market would only discourage any further investment in the industrialization sphere. Therefore, the efforts of these businessmen would eventually prove unsuccessful.
After the fall of the Empire of Brazil, what happened on the industrialization process was not different at all. Growth in the manufacturing sector did not bring about any major structural transformation. This means that, practically, industrialization in Brazil did not achieve any significant change on the Brazilian economy as a whole, not even at the period that followed the Brazilian Empire.
Significant steps towards comprehensive industrialization of Brazil began with the process of trying to address the economic crisis of 1930s. A lot of damage had been done on the economy of Brazil as a result of too much concentration on the production of coffee. The prices of coffee on the international market had drastically declined thus occasioning the damage on the Brazilian economy. Both the amount of Latin American coffee exports and the unit price of coffee dropped tremendously such that its total value for the years between 1930 and 1934 was 48% below the level it had been in the years between 1925 and 1929 (Hofman, 2000). The Great Depression as well as the surplus capacity of production of coffee in Brazil conspired to aggravate the condition of the Brazilian national economy. The situation took the government of Brazil over ten years to resolve. Brazilians became increasingly desperate in their attempt to forge an economic remedy for this problem.
Since Brazil was not alone in the economic suffering that was occasioned by the global economic crisis, other Latin American countries were on the path of searching for a solution. In his search for a remedy to this problem, Raul Prebisch, gave forth an acerbic criticism to the prevailing liberal doctrines. His arguments offered the intellectual base for the principles of import substitution industrialization (ISI). This became the dominant policy that prevailed from then into the 1980s. This is an economic, as well as a trade policy, which is anchored on the premise that countries must attempt at reducing their foreign dependency through domestic production of industrialized goods (Bulmer, 1994).
Brazilian leaders had a couple of choices in reacting to the global economic crisis that was being experienced at the time. The first choice was to reinforce the ties with the already existing industrialized and developed countries in order to secure and preserve a strong share of the market. The other choice was to focus on industrialization. The object of investing in industrialization was to gain greater economic autonomy and to establish job opportunities for the working population. Brazil opted for the second choice which effectively set the country on the industrialization path. The Brazilians reckoned with the important fact that the country could no longer continue relying solely on the export of primary products and that it is very important to promote and encourage economic diversification. Therefore, comprehensive industrialization was able to happen in Brazil.
When the Second World War came to an end, it brought about a reintroduction of economic liberalism after the overthrow of Getúlio Dorneles. The reserves of foreign exchange that had been accumulated at the time of the war allowed for a reduction in trade restrictions. Nonetheless, trade liberalization was not to stay for long. Persistence of high inflation rates and a low demands further increased imports and brought about a depressed exports. Again, this resulted in a crisis of balance of payments.
Brazil’s economic growth in the post-war period was anchored on rapid industrial expansion. Between 1945 and 1975, industries grew at an average rate of 8.8 per cent annually. On the other hand, industrial sector’s share of Gross Domestic Product increased from 24.1% in 1950 to a high of 40.9% in 1980. Modern industries that included transport equipments, industrial chemical and electrical appliances performed particularly well. Consequently, traditional manufacturing industries went on a downward spiral. This was particularly experienced with textile and food industries (Shapiro, 1994).
The enormous industrial growth, as well as structural transformations, in Brazil was kindled by a sophisticated mix of economic policies. Such policies comprised of direct control on foreign exchange, fiscal subsidies, quantitative restriction on imports and multiple exchange rates. Despite the numerous policies that Brazil adopted in the post-war period, their rationale was clear already manifest in 1950s. Protection of domestic industries had to be kept on high standard both to address the imbalances of balance-of-payments and to promote import substitution of all kinds of goods which could be easily replaced by those of local production (Baer, 2001).
However, in the early 1990s, policy makers in Brazil took up liberalization measures aimed at integrating the Brazil market into the world economy. These attempts at globalization expanded with the economic stabilization in 1994 and the growth of antitrust culture which was not known before until then. Nonetheless, the internationalization of the economy of Brazil has its origins heavily rooted in the time of import substitution industrialization (Baer, 1972).
When one takes a close look onto the industrialization experiences of both South Korea and Brazil, several similarities of the two industrialization models adopted in the two countries are portrayed. The industrialization process in the two countries actively began after the Second World War period. In South Korea, the war period saw a lot of influx of war refugees into South Korea. The local market expanded as a result of their influx. Demand for jobs in the existing industries also increased. However, there was a general availability of cheap labour as a result of the high number of unemployed immigrants. This helped to prop South Korea’s industries and the country was able to initiate its export-based industrialization.
Another similarity of the industrialization experience in both South Korea and Brazil is the emphasis that these countries put on protection of the local industries, both governments came up with several policy measures that targeted the protection of the budding industries from foreign competition.
In the two industrialization experiences, the governments used a range of incentives such as exemption from export taxation, reduced tariffs on intermediate goods among other forms of incentives. All these incentives encouraged investors to heavily invest in domestic manufacturing industries and this put the industrialization process in these countries on course.
Another similarity in the two industrialization experiences is the use of external borrowing as a key source of the much needed investment capital. Both the government of Brazil and South Korea borrowed investment capital from foreign countries in order to meet their budgetary deficits that always existed. Therefore, the two countries incurred a lot of foreign debts and considerable balance-of-payments deficits.
There also exist differences in the industrialization experiences of both Brazil and South Korea. The major difference between the two industrialization experiences rests in the type of industrialization models adopted by each country. In South Korea the industrialization process emphasized on kind of industrialization that was export-based. The government of Korea concentrated much on promoting the industrial production of consumer goods for export. Therefore, the main emphasis was on investing in industries that produced consumer goods for export. On the other hand, Brazil adopted an industrialization model that is known as import substitution industrialization. Therefore, the country’s aim was to reduce its foreign dependency by promoting local production of industrialized goods. The trade and the economic policies that Brazil adopted were all geared towards minimizing the country’s reliance on imported goods by starting industries that produced the same goods.
In South Korea, the industrialization process concentrated on export goods that were labour intensive. On the other hand, Brazil mainly focused on industries that produced goods that were less labour intensive. In Brazil, agricultural-based industries were more dominant than they were in South Korea.
In summary, it can be argued that the industrialization models that South Korea and Brazil adopted did well for their economies. In both countries, industrialization brought with it economic benefits such as an expanded Gross National Product that translated in improved standards of life of people in the two countries. Employment opportunities for the working population increased as a result of increased industrial activities. Therefore, the two countries have been able to consolidate their economies on firm industrial foundations. However, the countries continue grappling with the issue of trying to reduce their foreign debts.
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