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How Industrialisation Creates Economic Growth

Discuss the literature-based evidence on the nexus between the industrialisation process and the economic growth of a given country. Highlight the role that the manufacturing sector may have in terms of the economic development, with a particular reference to African countries

“If there has been a single overarching goal for economic policy in developing countries, it has been that of industrialisation”

– Dani Rodrik

Industrialisation refers to processes of economic transformation from agriculture-based markets into goods manufacturing (Chappelow, 2019). This structural change is sought to stimulate productivity and output, employment, domestic demand and consumption, and to expand exports or enhance import substitution (Chenery, 1980). To many theorists, industrialisation is a necessary transition for economic growth, evidenced by the development pathways of advanced economies since the first industrial revolution. For these theorists, manufacturers in the industrial economy use cheap labour and machines to streamline production (Littler, 1978), and build on its comparative advantages to manufacture for export or import substitution (Chenery, 1980). Industrialisation also increases the vertical and horizontal pooling of labour, production inputs, and technological spill overs, encouraging productive synergies that can lead to economic growth (McCormick, 1999). This essay investigates how industrialisation leads to economic growth, identifying theories and case examples from available discourse, before narrowing on Botswana and Zambia. These cases are used to demonstrate how industrialisation processes may lead to jobs creation and higher productivity, while creating localised challenges that could be adverse in the long run. It then moves to question the suitability of conventional industrialisation in Sub-Saharan Africa, drawing on history, leadership, and factor endowment disparities to distinguish Africa’s modern economic growth prospects from any other region’s.

The nexus between industrialisation processes and economic growth can be observed through theories by Adam Smith, Karl Marx, Walt Rostow, and more modern iterations of structural change theory. Adam Smith considered free labour and capitalistic production as essential for development, arguing that free workers are more motivated and efficient because they opt-in to the employment unlike feudal peasants, slaves, or serfs, and with their earnings become crucial economic consumers (Rioux, 2019:4). On the other hand, Marx was critical of capitalism as a permanent economy for growth, but believed in amassing wealth through industrialisation in order to finance the transition into planned economies. One such criticism is that with prolonged industrial freedom comes the freedom to choose to abandon employment, or the freedom from (or deprivation of) employment alternatives due to skills limitations; or a worker having no other commodity for sale. At the individual level, Marx refers to the ‘freedom to starve’ (Rioux, 2019:5) as an irony of liberal industrialisation.

Marx’s theory supports Smith in the suggestion that industrialisation is a great wealth generator, but contrasts as he demonstrates how over time capitalist-styled industrialisation can challenge the working class.

Rostow’s Stages of Growth Model describes the structures that an economy experiences as it changes from agrarian to industrial. He starts with the traditional society structure, then identifies a stage of preconditions for ‘take-off’ into self-sustaining growth, followed by the actual take-off period, the drive to maturity, and finally the age of high mass consumption (Todaro, 2009). It is argued that advanced countries have passed the take-off into the self-sustaining growth stage, while the less developed haven’t passed through the preconditions stage. The theory, in tandem with the Harrod- Domar Growth Model, suggests that wealth in the forms of domestic (and foreign) capital must be accumulated to finance the next stages of growth. Together with Karl Marx and Adam Smith, these theories prescribe wealth accumulation to accelerate growth, and to invest into new capital stock such as industry. Therein, the Harrod-Domar Growth Model states that any additions to capital stock will correspond with increased national output, or growth. Considering the above breakdowns of theory, it is explicable that industrialisation can increase capacity and productivity leading to increased jobs, aggregate demand, wages, disposable income, domestic investment, exports, currency strengthening, and trade presence on international markets.

In Africa, manufacturing sector expansion has failed to empirically lead to sustained, and relative, economic growth. In absolute terms, Africa has experienced GDP increases in each economy over the last 50 years, as has the majority of the world during the post-war industrialisation period. It is difficult to discern whether industrialisation is the only impetus for growth, where a “large number of factors have been proposed as possible determinants” (Smith, 2010). Joel Smith (2010) uses the Solow Growth Model to compute relative growth between 1960-2000 for both developed and developing countries, as a proportional measure to the growth experienced in advanced economies. The disparities show that the growth process during industrialisation continues to benefit new- industrialising economies less than the already advanced ones. Smith’s research takes a holistic view at what constitutes economic growth beyond absolute metrics, incorporating investment, population size, education, life expectancy, and health into one function. It finds that the only growth miracles during this period of post-colonial African industrialisation were Botswana and Ghana. Comparing the experiences of these growth miracles to those of more modest economies provides a foundation for understanding the role of industrial manufacturing on growth in Africa.

In the following sections, a comparison between Botswana and Zambia’s growth during industrialisation periods is made. The countries gained independence in 1966 and 1967 respectively, with both economies industrialising to support resource-based manufacturing, using materials from the mining sector including coal, iron and copper ores & concentrates (Harvey, 2015), cathodes, and articles of cobalt (Zambia Manufacturing Report, 2012). The juxtaposition between these two economies demonstrates that while absolute growth metrics such as GDP, employment, and productivity increased in Botswana and Zambia, some local challenges beset their growth in relation to advanced economies. From these findings, we will deduce that the historical legacies of colonial exploits, geopolitical hegemonic power, regional trade union strength, labour relations, and international terms of trade set the course for Africa’s development apart.

Manufacturing in Botswana
Botswana experienced its first episode of rapid economic growth in the decade starting 1969, almost immediately after gaining independence (Rodrik, 2004). Its GDP growth rate increased from 2.9% to 11.7% during this decade, and through to the decade 1996-2006 Botswana was able to retain a growth rate above 5% (Khan, 2008). During this same decade it is interesting to note that of the 7 Sub-Saharan countries to keep GDP growth over 5%, Botswana had both the lowest industry and manufacturing growth (Khan, 2008). This is symbolic of a lack of diversity in the country’s economy, who was historically productive in diamond mining from the 1970s onward. Ross Harvey (2015) identifies the Tswana political elite as proponents of the lack of economic diversity. He shows the elite’s complacency with returns from the cattle economy, even once the diamond-industry income surpassed the income from ranching, as a reason not to expropriate the diamond trade or to open up additional avenues for national income. Instead, a power-sharing strategy emerged, in which the cattle-owning elite ruled “in intimate association with diamond mining” (Harvey, 2015). Out of this 2- sector structure Botswana was able to avoid large-scale corruption of state wealth, despite some adversity among its people; “lack of economic diversification, ethnic inequalities, and the historic subordination of the San” (828).

For Botswana to industrialise without corruption hampering the process, leadership from Seretse Khama on the transfer of sub-soil diamond property rights from the Bangwato tribe to the government was instrumental to Botswana’s manufacturing growth strategy. Under this same political regime, the power of chiefdoms was also consolidated into government, giving way to democratic governance over all of Botswana’s people and resources. With exceptionally high income from the diamond trade, Botswana’s democratic coalition was able to incentivise industry-supportive manufacturing, and to

redistribute rents with little resistance to the rule of law, with cooperation between different stakeholder groups leading to more income to be redistributed. Altogether this positive development trajectory was challenged by the marginalisation of minority groups, political monopoly by the ruling coalition, and the non-diversification of exports. Dutch Disease occurs when resource wealth has a negative effect on development, as capital is taken away from other domestic sectors to support the extraction of the particular resource. While export market demand for the resource increases, domestic expenditure on manufactured goods may boom. This results in currency strengthening and ultimately a crowding-out effect against the export of products from any other domestic sector. (829).

Pegg (2010) discusses how Botswana’s manufacturing sector was especially insignificant during the above period of structural change. Resultantly, Dutch Disease only occurred “mildly”, as there was no substantial manufacturing sector to crowd-out of export markets, and the state managed to save money into a development fund dedicated to fulfilling facets of the state’s National Development Plan. However, Botswana developed with increasing distribution inequalities, ranking it a staggering 0.67 on the Gini Index in 2002 (World Bank). In addition to this, the country’s small domestic market, landlocked geography, and limited entrepreneurship weakened domestic purchasing power. 70% of Botswana’s labour force was in agriculture in 2010, with just 4% of the country’s land being arable, and just 1.4% of GDP being spent on agriculture. All of these dynamics together demonstrate the important contributions of Botswana’s minerals and diamonds trade, leaving little room for manufacturing to grow beyond resource-based exports.

Manufacturing in Zambia
Despite the growth of GDP during the industrialisation period, Zambia experienced challenges that kept the economy from achieving sustainable structural change. Since gaining independence in 1967, Zambia was economically challenged by negative terms of trade, regional instability, and a plummeting copper price (Jerven, 2015). With difficulties exporting its main industrial and manufactured products, Zambia’s key industries went into peril. James Ferguson (1999) writes about the mobilisation of labour and a culture of work cyclicality that predates colonial settlers, where Zambian workers failed to become permanently urbanised because of connections with their tribal homes. In the western experience, industrialisation attracted labour from rural/agricultural settlements to urban centres, where the means of manufacturing are agglomerated. Urban spaces would then increase in population, and new economies developed as capital was free to move. Under the capitalist agenda, the free movement of labour was sustained by vast jobs creation and training, from which rural-urban migrant workers could make livelihoods in new factories, or educate

themselves and acquire new skills to establish new enterprise, thus becoming permanently urbanised. For this system to flourish, migrant labour needs to find an affordable and convenient living condition within the urban space. Alternatively, the worker will be pressured to return home.

Contradictive to the western model, anthropologists Moore and Vaughan (cited in Ferguson, 1999) noted Southern African workers’ preference to circulate, with shorter spells of wage labour and longer times with their families at home. To mitigate this, authorities in the Copper belt began to insert stabilising barriers to workers spending time at their tribal homes, and encouraging workers to settle in urban spaces. Workers were offered more favourable living conditions and were also able to move their families into urban areas. This ushered an era of unsustainable “one-way rural-urban migration” where families encroached at a rate higher than expected (Ferguson, 1999). Ferguson writes about 50 advanced mining workers who retired or were dismissed from mines, of which 47 made plans to return to their rural existence. He found that 2 were ready to launch new rural farms, and the last was off to join family in Lusaka. Years later later he reconnected with 21 of these families, who he tracked and visited 17 of back in their home villages. Through this experience he found a striking willingness among workers to migrate from urban to rural (even among the most permanently urbanised), away from the urban economy, where these workers recall “humiliating and dangerous rural retreats”. Temporary urbanisation describes the process of urban migration, ending in a dilemma where “the advantages to the couple of staying on in town as against taking up residence in the rural areas would have diminished… after the man had turned 45, he was likely to have left town for good” (Mitchell, 1987). Zambia’s industrial workers were pressured by this reality, and a period of de-urbanisation followed.

Between 1970 – 1990, Zambia found it better to cope with decline by retaining low technology, which created “more jobs for each thing produced”, low investment; “high labour to capital ratio and more jobs for each dollar invested”, and the use of indigenous resources and domestic capital (Potts, 2008). By the 1990s, Zambia’s adherence to the structural adjustment regime marked a new economic optimism. Its democratic government imposed market-friendly policies and embraced the international buzz that placed it together with South Africa as “the vanguard of a much-hyped African Renaissance of capitalist development” (Ferguson, 1999). According to the Zambian Manufacturing Report, Zambia adopted policies in favour of non-traditional agriculture (floriculture), which Ferguson suspects was an accelerator of deindustrialisation and disinvestment.

Conclusion

Dani Rodrik argues that industrialisation was the dominant development plan for poor countries, only offset by the 1980s debt crisis, when stabilising policy became the focus (Rodrik 2019:309). Poorer states who were vulnerable during this crisis already accumulated significant debt financing to bolster their industrialisation, while suffering from the leadership and reform challenges mentioned in the Botswana and Zambia cases. In Africa, the debts were accrued by newly independent governments who took loans from the IMF and other international investment entities to rebuild their economies (Hawksley, 2009). An agenda of foreign ownership of capital, precarious labour relations, protectionist terms of trade, lobbying and corporate-political relations, and other exploits that enhance western economic hegemony continue to exploit developing economies.

When considering comparative advantages, for many of these states the best thing to do is to invest in resource extraction and mining and resource-based manufacturing for export. Consumer goods and additional industrial manufacturing can be invested into using income from the primary export market, as it has been shown that prioritising manufacturing can cause premature instability. Paradoxically, Botswana experienced higher sustained economic growth than Zambia by keeping a weak manufacturing sector, in a period where Zambia’s growth of industry and manufacturing surpassed Botswana’s.

There are domestic and international constraints to consider when analysing structural change and its suitability. Resource endowment, population size, governance, access to external capital and innovations, and terms of trade all determine a country’s ability to turn its historical legacy into sustained development and economic growth (Todaro and Smit, 120-121). In Africa’s case, challenges in managing these constraints have shown that industrialisation and manufacturing are not the only ways to achieve economic development. However, several states have preferred to use service-led growth when transitioning from subsistent agriculture.

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https://www.investopedia.com/terms/i/industrialization.asp

– Jim Chappelow defines industrialisation

https://www.investopedia.com/terms/v/verticalintegration.asp

– Will Kenton defines vertical integration (2019)

https://www.investopedia.com/terms/h/horizontalintegration.asp

– Will Kenton defines horizontal integration (2019)

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