Lesson 3 Theories of Industry Structure: 3.

1 Introduction

3.2 Hoffmans theory

3.2.1 Stages of Industrialization 3.2.2 Comments on Hoffmans Pattern 3.3 Chenarys pattern of Industrial growth 3.4 Gerchenkrons Great spurt Theory

3.5 Summary

3.1 Introduction: Many attempts were made to answer the question of whether there exists a standard pattern of industrial growth. This is not a simple question. Economists have investigated the possibilities of a regular pattern of industrialization in a number of directions; the distribution of the labor force between sectors, the distribution of output between major sectors, the distribution of output between producer goods and consumer goods and the organization of industrial production. Another historical pattern could be sought-the relation between the degree of industrialization and the level of income per head. If a strong relationship can be found between these two variables and it can be rationally explained then it would offer powerful support to arguments that industrialization is a requisite for higher in come levels in poor countries. But there is a major reason why patterns of industrial growth in under developed countries can be expected to diverge from the observed historical patterns in already industrialized countries. For instance, industrialization based upon import substitution will tend to alter the product structure if not the volume of trade between industrialized and non-industrialized countries. It would be hard to argue that the recognition of patterns of broad sectoral growth, similar for different countries over long stretches of time can be of very much assistance to the making of specific decisions in economic planning. Is it possible, therefore, to recognize a pattern of industrial growth analyzed in much greater detail which would have some use for policy making?

3.2 Hoffmann and the Growth of Industrial Economies:

One pioneer study concerns the division of industrial output between consumer and capital goods. It was made by Walter Hoffman in his book The Growth of Industrial Economies, in which he states:
Our main argument is as follows: whatever the relative amounts of the factors of production, whatever the location factors, whatever the state of technology, the structure of the manufacturing sector of the economy has always followed a uniform pattern. The food, textiles, leather and furniture industries- which we define as consumer goods industries always develop first during the process of industrialization. But the metal working, vehicle building engineering and chemical industries the capital goods industries in the consumer goods industries continually declines as compared with the net output of the capital-goods industries. This, Hoffman argues, is a gradual process but in his analysis he divides it into a number of stages which, he says can be identified for all free economies

3.2.1 Stages of Industrialization:

In stage I the ratio of consumer goods output to capital goods output is 5 to 1; stage II has a ratio of 2.5 to 1; stage III a ratio of 1 to 1; so in all these stages the output of capital goods, starting from a much smaller base rises faster than consumer-goods output until in the fourth stage capital-goods output is higher than consumer goods output. In Hoffmans frame work the pattern of industrial growth is as follows:

Stage I: domination of consumer-goods industries

Stage II: capital-goods industries become increasingly important and have an output nearly half as great as the consumer-goods industries

Stage III: Balance of consumer-goods industries and capital goods industries with a tendency for the capital-goods industries to expand rather more rapidly than the consumer goods industries. The downward movement in the ratio of the net output of consumer goods industries to that of capital goods industries is observable for a wide range of countries.

According to Hoffman the older industrial countries passed through first stage of industrialization before the end of the 19th century. These included Belgium, Great Britain, France, Switzerland and by the end of century Japan. The same stage was reached by a number of other countries in the years 1906-48: Brazil, Chile, Mexico, Argentina, India and New Zealand. Most of the more industrialized countries had already reached the second stage of industrialization by the end of the 19th century: Germany, France, Switzerland, USA, Belgium and Great Britain. Other countries had all reached this stage by 1940. some but not all of these countries had by the middle of the 20th century or earlier reached the third stage of industrialization: these were Great Britain, France, Switzerland, Denmark, Belgium, Italy, Sweden, USA, Germany, /Canada, Australia and South Africa.

There were, of course, differences in the speed with which countries moved from one stage of industrialsation to the next. In terms of the net output ratio of consumer goods to capital goods in the industrial sector.

Hoffmann identifies three groups of Countries:

Those with a sharp rate of decline (Japan, and Germany) Those with a medium rate of decline (Britain, France, Belgium, Australia and South Africa) Those with a low rate of decline (USA, Canada, Argentina, and Denmark). Countries such as the United States for which Hoffmann has data for a continuous series of years reveal the same continual decline in the ratio which the figures for years at discrete intervals also show. He does suggest that certain particular industries have normally been dominant during particular phases of industrial growth: in successive stages of development new industries will come to the fore and take the place of the original dinubabtindustry. The dominant industries have, in general, been the food and textile industries during the first two stages of development and the iron, steel and engineering industries during the third stage of development. In some cases, however, the textile industries have continued to occupy the dominant place even during the third stage of industrialization.

3.2.2 Comments on Hoffmanns Pattern: Firstly, there are three rather minor points. One is the limitations of the statistical sources upon which Hoffmann relies; particularly for the earlier years, industrial statistics tended to be generally inadequate, and also they often not strictly comparable between different countries; at times Hoffmann is forced to estimate net output from employment figures. A second criticism which has been leveled against Hoffmanns analysis invites a similar dismissal. This is that his choice of industries for inclusion in the two industrial sectors is misleading. Hoffmann discusses in some detail the classification of industries between the two sectors and certain industries, which are hardest to classify are left out altogether. A third objection to Hoffmanns analysis which is not of fundamental significance is his attachment to the notion of stages of industrialization which are defined in terms of certain specific values of the net output ratios between consumer and capital goods. The values of the ratio which define them are purely arbitrary and it would have been just as logical to choose less or indeed many more, stages of industrialization on these criteria. It is clear that in the early years of industrialization there is no necessity for newly industrializing courtiers to follow the pattern which Hoffmann has identified.

It is interesting that China appears to have passed through all Hoffmanns stages in a single decade.
If a country is to be described as highly industrialized only on the basis of the net output ratio between capital goods and consumer goods then it is possible that a country which happens to have a high proportion of its industrial sector producing capital goods could be classified in the third stage of industrialization seven though total industrial output might be extremely small. Finally, the categories of industrial production within which Hoffman finds his broad pattern are still too broad to be of very much use to policy makers in countries wishing to industrialize. Hoffmanns pattern suggests that if governments adopt no particular policy towards industrialization, consumer goods are liable to develop before capital goods. But the out pf capital goods within the industrial sector will, in the long run, grow faster. The pattern does not tell planners whether it would be wise to leap over portions of this progression and take positive measures to establish capital goods industries in such a way as deliberately to reduce the net output ratio between the two sectors.

This is one argument against the operational usefulness of Hoffmanns patterns for industrial planning or forecasting which might be removed by the establishment of patterns of industrial growth based on much finer sectoral categories.

3.3 Chenerys Patterns of Industrial Growth:

If fact, most of the attempts to establish patterns of industrial growth are just of this kind, and the most important of these studies are those by Chenery and Taylor and by the UN Department of Economic and Social Affairs. These studies use very similar techniques which principally involve cross-section regression analysis, for a large number of countries, of the output of various industrial sectors as a function of a number of independent variables. Chenery is concerned with three major changes in economic structure as industrialization proceeds:
a rise in the relative importance of manufacturing industry; a change in the composition of industrial input; changes in production techniques and sources of supply for individual commodities In his study, Chenery estimates a linear logarithmic regression equation in which per capita value added depends upon per capita income and upon population based on his analysis he characterizes this pattern as follows:

The principal feature of this pattern is the rise in the share of industrial output as become level increases. The share of transportation and communication also doubles over this range, while primary production declines. This regression analysis confirms Kuznets conclusion that the share of services in national product does not vary significantly with the level of per capita income. Inspite of comparatively high coefficients of determination, most countries inevitably deviate to some extent from Chenerys contemporary pattern of growth. But hardly any countries deviate in value added per head in industry by more than 50 per cent from the level to be expected as a result of the regression on the level of income per head: In a steadily growing economy, industrial output will increase by this amount over a twentyyear period if per capita income grows at 1.5 % a year. In these terms, there is no country in which industrial development is either advanced or retarded by much more than twenty years. Chenery and Taylor found a better explanation of the share of industry in national product in a more recent study by using a considerably more complex regression equation: the explanatory variables, which in the earlier study were income per head and population, are in the later study income per head, population, the share of gross fixed capital formation in GNP the share of primary exports in GNP and the share of manufactured exports in GNP; in addition the equation contains one non-linear term which allows for the decline in elasticities with rising income noticed in most industrial sectors and avoids the necessity of dividing the sample by income level. Even so there are considerable contrasts in the relationship between the growth of industry and the growth of total output.

In the 1960 study Chenery proceeds to determine normal output levels from groups of industries classified according to the nature of demand for their product. There are: investment and related products intermediate goods

consumer goods
This is a similar type of calculation to that made by Hoffmann, but at least one of the minor objections to Hoffmanns analysis is overcome by Chenery through a more satisfactory division of industries.

3.3.1 Chenery reaches the following conclusions: The difference in growth elasticities between investment goods and consumer goods is almost as great as the difference between agriculture and industry. Upton this point Chenerys results, while statistically more sophisticated do no more than duplicate the conclusions of Kuznets about changing economic structure on the one hand, and those of Hoffmann about changing relative output of investment and consumption goods on the other.
The original conclusions are contained in the two further sections of Chenerys 1960 analysis on the causes of industrialization and on the detailed composition of output between industries within the manufacturing sector, and also in Chenery and Taylors division of countries into size categories.

By cause of industrialization Chenery means three sources of demand for industrial products: the substitution of domestic production for imports; growth in final use of industrial products; Growth in intermediate demand stemming from 1 and 2. Chenery further explains 70 per cent of industrial growth through the regression on levels of income per head. Among the other factors at work he attached most importance to scale effects resulting from differences in the size of countries and to the effects of different resource endowments. In the Chenery and Taylor study the importance of both size and resource endowments are brought out much more specifically by division of the sample into three groups of countries: Large Small industry oriented Small primary oriented This desegregation allows for a much more discriminating cross section regression analysis from which Chenery and Taylor derive three quite distinct patterns of growth. For the large country the proportion of industry in national product rises rapidly then levels off to reach a peak. There are few countries which deviate significantly lower than average share of industry and others have a noticeably higher share. The pattern of growth for the small industry-oriented country is very similar to the large country pattern in terms of the effects of levels of income. But other variables in the regression equations have a very different effect; not surprisingly, for small countries changes in the composition of exports between primary products and manufactured goods make a considerable difference in the composition of output as a whole; the share of investment however is less significant since most capital goods are imported.

They also show the relationship between income per head and the share of twelve manufacturing industries in GNP for the three groups of countries. One interesting common feature of these patterns is the tendency for the share of individual industries to fall or to rise more slowly, after high levels of income are reached in large countries. This tendency is not noticeable for the smaller countries, though there are in fact very few small countries with high income levels. A common pattern for small primary oriented countries is an accelerating increase in the output of several industries as a share of national output as higher levels of income are reached for almost all industrial sectors the differences between shares of national output at high levels of income are much closer for the three categories of country than they are at low levels of income. Since at low levels of income small industry-oriented countries are almost certain to be specializing in a few industries rather than to have a full industrial structure, then as incomes rise we find the share of some industrial sectors in national product falling. The hope, which dictated such detailed examination of Chenerys conclusions, was that an analysis of patterns of industrial growth based on a more detailed breakdown of sectors and industries would have more relevance to polcy making than the broader patterns identified buy other writers. But the main aim in developing countries is to raise income levels as rapidly as possible and the association which Chenery finds tells us very little about the factors causing the rise in income itself. Nevertheless, he claims, growth is likely to be accelerated by anticipating derivable changes in resource use, and retarded by institutional arrangements or government policies that inhibit such changes.

3.3.2 concluding Remarks on Chenery Theory:

Six conclusions are regarded by Chenery as most significant for policy for resource allocation:
There is a well-defined normal pattern of growth from which deviations are smallest for services, agriculture and most manufactured consumer goods

The divergences are greatest in machinery, transport and intermediate goods where resource endowment and economies of scale are most clearly reflected in variations in the proportion of imports and domestic production; but for these sectors the disaggregated Chenery and Taylor study produces more consistent patterns.
Lagging sectors in a country where the industrial structure deviates from the normal pattern are likely to grow more quickly to catch up Economies of scale are probably highly important to industrial production and regional groupings would therefore facilitate industrial growth for all but the largest of developing countries There is a significant difference in the pattern of industrial growth in the 20th century compared with that in the 19th when export markets were more easily available to industrializing countries. Now he claims, import substitution is of overwhelming importance. Although Cheneys study concentrates on similarities, it also reveals the substantial variation that exists and the need to separate particular from universal factors. An analysis of the part played by comparative advantage and other particular factors in a given country must therefore be added to knowledge of general growth patterns to arrive at the best allocation of resources.

3.4 Gerschenkrons Great Spurt Theory: Alexander Gerschenkron an economic historian examined the traditional economies of Europe as they attempted to achieve industrialization. According to Gerschenkron, all nations were backward once. To move from the traditional levels of economic backwardness to a modern industrial economy required a sharp break with the past, or a great spurt of industrialization. Given a countrys degree of economic backwardness on the eve of its industrialization, the course and character of its industrial development tended to change in a number of respects. Gerschenkron summed up these changes into the following generalizations. 3.4.1 Generalizations: The more backward the countrys economy the following features are possible: The more likely was its industrialization to start discontinuously as a sudden great spurt proceeding at a relatively high rate of growth of manufacturing output. The more pronounced was the stress in its industrialization on bigness of both plant and enterprise. The greater was the stress upon producers goods as against consumers goods. The heavier was the pressure upon the levels of consumption of the population. The greater was the part played by special institutional factors designed to increase supply of capital to the nascent industries, and in addition, to provide them with less decentralized and better informed entrepreneurial guidance; the more backward the country, the more pronounced was the coerciveness and comprehensiveness of these factors. The less likely was its agriculture to play an active role by offering to the growing industries the advantages of an expanding industrial market based in turn on the rising productivity of agricultural labor.

3.4.2 Common Characteristics of Nations: Gerschenkron pointed towards three common characteristics of nations on the threshold of industriailsation. a) There is sufficient supply of resources on which to base production. There may be some scarcities and obstacles. But these are not so serious as to obstruct development. b) There are quite a large number of populations which is beginning to understand the potential benefits of industrialization. A substantial group of people are actively trying to seek new opportunities for greater prosperity. c) There is tension between the existing economic institutions and he groups who want new and progressive arrangements. The tension is the greatest in nations which start late on the path of development. This is because the existing economic relations in such countries are extremely backward relative to those of more developed countries.

3.4.3 How to Bring About the Great Spurt: Severe tensions between economic backwardness and the urgency of development necessitate a big spurt of industrial development in many directions. According to Gerschenkron, for industrialization the existence of certain necessary conditions was not required for industrialization, as put forth by Rostow. As pointed out earlier, countries categorized into three groups on the basis of the degree of economic backwardness; they are:

Advanced Moderately backward Very backward

For a great spurt of industrialization, he noted that advanced nations start their first stage of development with the factory in the organizational lead; moderately backward nations with banks, and extremely backward with governments. But it should not be inferred from this that industrialization is dependent upon the creation of these preconditions. In fact, one precondition can be substituted buy another precondition. Further, preconditions can always be created even during the course of industrialization.

Further he stated that massive industrialization required sacrifices from the people. Incomes had to be used for capital investment rather than for consumption. Small family plots had to be consolidated into larger and more efficient farms. Workers had to move from rural areas into cities near factory jobs. According to him, the greater the degree of backwardness, the greater the role of the state in the spurt towards industrialization. First, in an extremely backward country income being very low, the demand for consumer goods is also very low. This, in turn, limits the derived demand for capital goods. In the absence of profit motive, the state has to play a major role towards industrialization. Second, these countries lack in such sources of capital as foreign capital banks, capital markets, etc., accordingly, it devolves upon the state to create financial institutions for providing capital for industrialization. Besides, for a great spurt in industrialization, Gerschenkron emphasized the adoption of capital intensive techniques. According to him, in an extremely backward country, there would be a very big technological gap between its techniques of production and those of developed countries. It can, therefore, industrialize by adopting the most advanced capital intensive techniques of the latter countries.

In his study, he measured economic development with the help of index numbers. His study revealed that the series aggregated by pre-industrialization weights grow much faster than the series aggregated by weights in post-industrialization.

His explanation of a quantity index being biased upwards, in binary comparison of pre and post industrialization weighted with base year prices, has been called the Gerschenkron Effect. The divergence between the base-year weighted quantity index and the current year weighted index would be greater, the greater the extent of the opposite movements of relative quantities and prices during industrialization.
Finally, Gerschenkron pointed out that the greater spurt in industrialization could take place if five pre requisites were fulfilled. First, either the old framework in agricultural organization should be abolished or the productivity of agriculture be increased. Second influential modern elite should be created which is interested in economic change in the economy. Third there should be provision for material social overhead capital. Fourth there should be a value system which favors economic change. Fifth an effective entrepreneurship should be available.

Summary Many attempts were made to answer the question of whether there exists a standard pattern of industrial growth. This is not a simple question. Economists have investigated the possibilities of a regular pattern of industrialization in a number of directions; the distribution of the labor force between sectors, the distribution of output between major sectors, the distribution of output between producer goods and consumer goods and the organization of industrial production. One pioneer study concerns the division of industrial output between consumer and capital goods. It was made by Walter Hoffman in his book The Growth of Industrial Economies, in which he states: Our main argument is as follows: whatever the relative amounts of the factors of production, whatever the location factors, whatever the state of technology, the structure of the manufacturing sector of the economy has always followed a uniform pattern. The food, textiles, leather and furniture industries- which we define as consumer goods industries always develop first during the process of industrialization. But the metal working, vehicle building engineering and chemical industries the capital goods industries in the consumer goods industries continually declines as compared with the net output of the capital-goods industries. Chenery is concerned with three major changes in economic structure as industrialization proceeds: (a) a rise in the relative importance of manufacturing industry; (b) a change in the composition of industrial input; (c) changes in production techniques and sources of supply for individual commodities. In his study, Chenery estimates a linear logarithmic regression equation in which per capita value added depends upon per capita income and upon population. Alexander Gerschenkron an economic historian examined the traditional economies of Europe as they attempted to achieve industrialization. According to Gerschenkron, all nations were backward once. To move from the traditional levels of economic backwardness to a modern industrial economy required a sharp break with the past, or a great spurt of industrialization

Short answer type questions 1. What is the pattern of industrialization? 2. Explain the crux of the Hoffmanns Analysis. 3. What do you mean by Great Spurt? Long answer type questions 4. Examine the Stages of Industrialization given by Hoffmann. 5. Summarize the generalizations of Gerschenkron