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Why the process of industrialization in developing countries might require government intervention Essay

Every Less Developed Country (LDC) seeks industrialization, or structural change as it is otherwise called, as this can lead to a higher GDP per capita, which can lead to a higher quality of life in the LDC’s. In fact growth in GDP per capita (p. c) is seen as an indicator of industrialization.

It can often be difficult for the population of a country to bring about industrialization in an efficient and well directed manner by themselves, it is here that the government can play a huge in role in managing the whole process of structural change, indeed industrialization may not occur at all if the government does not intervene or at the very least that it will progress very slowly.

There are many situations which create necessity for intervention, the most cited reason is market failure, this can mean that the market is too small and therefore investment is needed, however it can be less clear cut, it can cause development to be unsustainable, for example if natural resources are depleted at faster rates than they are replenished development becomes unsustainable. Also a market that is too small may lead to a co-ordination problem between local firms.

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If firms invest at the same time all firms will make a profit, this sort of situation would help to break the vicious circle (Fig 1) most LDC’s find themselves in. Investing simultaneously would cause the average costs of all firms to fall, assuming external economies of scale and would lead to a virtuous circle. (Fig 2) However no firm finds it profitable to invest at the same time, hence the government needs to intervene to help this process.

Two ways of doing this are by investing in industries themselves or by encouraging Foreign Direct Investment (FDI). Another type of investment, that of investment into economic infrastructure is another way of directing and promoting structural change. Economics infrastructure may be defined as ‘ the underlying amount of physical and financial capital embodied in roads, railways and other forms of transportation and communications plus public services such as health care and education.

It is widely believed that the improvement of economic infrastructure is essential in the process of industrialization, roads and other means of transport, along with electricity and water supplies facilitate and help to integrate the economic activities of a society. For example a tractor may help to increase the vegetable output of a farm but with out adequate transport facilities to get the extra output to markets it may not add anything to the national food production. However it is another area of investment in economic infrastructure that is going to be concentrated on here, along with FDI, the area of education.

Most economists believe that that a countries development is determined more by its human resources than by its natural resources, the main mechanism for developing human resources is through education. Governments investing in education in an attempt to aid structural change and economic growth hope to impart the knowledge and skills required to allow individuals to act more efficiently as economic agents as well as values idea and attitudes which could be helpful in promoting the country’s development interests.

Although it is quite hard to show quantitatively the relationship between investment in education and economic development, it is logical to assume that by creating a more skilled workforce through education that productivity may increase leading to a decrease in underemployment, it is also obvious that the expansion of formal education leads to the creation of job opportunities for teachers and other school workers as well as creating jobs for the construction sector.

Education helps to combat the ‘brain drain’ phenomenon, where skilled workers migrate internationally in search of higher wages and a better standard of living. As an example of the effect of investment on economic growth we can look at Botswana. Before independence Botswana suffered from an appalling lack of investment in anything, except perhaps diamond mining. (Botswana is called ‘the gem of Africa’) yet since its independence in the 60’s it has invested wisely in infrastructure as well as adopting other prudent pro-development policies such as a comparative advantage trading policy.

Since then Botswana has experienced rapid economic growth and has had enjoyed the highest rate of per capita growth of any country in the world. The link between investment in education and a growth in GDP p. c can be shown from the use of several sets of statistics. For example the adult illiteracy rate in Botswana has continued to fall over the past decade. Adult illiteracy is defined as the percentage of people over the age of fifteen who are unable to read and write a short simple statement about everyday activities, similarly the youth illiteracy rate is the same thing for people aged between 15 and 24.

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