Off the mark: Limits of industrialisation

The tremendous success of industrialisation in raising living standards of the developed countries during the nineteenth and early twentieth centuries has engendered a belief that industrialisation is a prerequisite of economic development. Indeed, over time industrialisation has come to be regarded as coterminous with economic development. Even agricultural development was to be pursued in the interest of promoting industrial development by providing cheap food for workers, investable surplus and a secure market for industrial products.

In a recent inaugural ceremony the top decision makers of the country expressed a firm resolve to expedite industrialisation of the country. They have set a quantitative target that the share of industry in the country's GDP should be raised to at least 40 percent. The clarion call for rapid industrialisation was no doubt motivated by the desire to reduce (or eliminate) poverty by accelerating economic growth to double digits as envisioned by the government.

The planning ministry has been entrusted to deliver plans that would achieve the broad government objectives. The ministry is now engaged in drawing up a five-year plan as well as a perspective plan that will hopefully guide the economy on to the promised growth path. An appropriate macroeconomic model will indicate resource allocation that would efficiently achieve the government targets.

Those who are engaged in the modelling exercise would certainly note that the quantitative target about the size of the industrial sector (at least 40 per cent of GDP) imposes an additional constraint in their system of equations. If the constraint is not binding then obviously the optimal solution to their model is not affected. However, if it is binding, and my hunch is that it will be binding, the trajectory of the economy will be different from what it would have been otherwise. It is also possible that there could be no viable solution that would achieve the desired growth objectives. However, this is something that the modellers will have to work out and advise the ministry. Here I would like to point out some aspects of industry size from the global economy that might be relevant.

Industry is commonly understood to mean manufacturing. This is a rather narrow definition, and with such a definition there is only one country in the world, viz. China, that has an industrial sector accounting for more than 40 percent of GDP (all data used in this paper are from the UNCTAD website). Curiously, the size of the manufacturing sector of China has remained stable at around 41 percent over the last three decades notwithstanding the massive industrial development that has catapulted it from a poor third world country to the status of an emerging economic superpower!

If we use a broader definition of industry that includes mining and quarrying, construction, and electricity, gas and water (utility) in addition to manufacturing, there are several countries (32 out of 205 listed in UNCTAD tables) where the industrial sector accounts for over 40 percent of their GDP. It may be noted that in Bangladesh's case industry is actually defined in this broad sense.

The table below shows these countries in ascending order of per capita income with the actual size of their industry and manufacturing in terms of GDP share. Bangladesh is also appended for comparison. What springs out immediately from this table is that there is no discernible relationship between the size of the industrial sector and the level of economic development as proxied by per capita income. Indeed, this is also true for the industry size and per capita income of all the countries of the world as evident from the scatter chart below. The correlation between these two variables is virtually zero (regression equations do not yield significant coefficients).

This aspect of economic development sometimes escapes attention. The size of the industrial sector is not an unambiguous indicator of the level of economic development of the country. In the table above, the country with the largest industrial sector is still categorised as a least developed country (LDC), while the country with the second largest industrial sector is one of the richest in the world.

The massive industrial development in the western world has gradually altered the structure of their economy over the last two centuries. The principal sectors of the yesteryears, viz. agriculture and industry, are no longer a large part of the economy. They have been replaced by a very rapidly growing 'service' sector. In most developed countries the service sector now accounts for more than two-thirds, and in some countries such as France, UK and USA, in excess of three-fourths, of the economy.

The emergence of the service sector has also influenced the pattern of growth of the poorer countries. The service sector now accounts for nearly one-half of the GDP in many such countries including Bangladesh. This would not have been the case in a poor country in the early years of industrialisation.

Although the list of countries with more than 40 per cent of their GDP originating from the industrial sector do not reveal any statistical relationship between the industry size and per capita income, a careful scrutiny reveals a commonality that is not immediately apparent. Most of these countries, whatever their industry size and per capita income, are resource-rich: a substantial part of their GDP is derived from minerals, especially petroleum. In other words, it is mining and quarrying or the extractive activities that make the industry size large. The size of manufacturing is actually modest in most of the poorer countries.

The discussion above does not preclude the possibility that at a lower level development there could be a positive relationship between industry size and per capita income. There is actually a very mild positive relationship between them when the per capita income is below $10,000. Bangladesh obviously falls in this category. Hence, there may be some scope of raising the per capita income by raising the industry share.

However, the increase in industry share should be market determined (or derived as the optimal solution of the planning exercise, assuming that the planners have enough information about the market and the economy); it should not be imposed as a precondition. The fact that very few 'non-resource' countries have industry share exceeding one third of GDP may be indicative that the optimal share of industry in such countries is perhaps not ordinarily above this mark. However, the actual size will depend on the particular characteristics of individual countries, and hence vary over space and time.