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Industrialization: A Standard Pattern

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1966
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George B. Baldwin

ONLY THE MOST FARSIGHTED economists worry very much about the industrial future of the Eskimos or the bushmen of the Kalahari Desert. But it is not difficult to predict the kinds of industries that these peoples will start first, and the patterns and sequences of their subsequent development. Both the Eskimos and the Kalahari bushmen will industrialize according to a pattern that has happened so many times in so many other countries that it can now be called the standard pattern of industrial growth.

The process of industrialization has no beginning and no end, but some places are nearer the beginning than others. Even today Eskimos and bushmen do quite a lot of manufacturing in the literal, Latin, meaning of the word; that is to say, they make things by hand. But although handicraft industries exist in all primitive societies and survive long into the period of modern or factory-scale industrialization, nobody looks to handicrafts for economic salvation. Most people regard the growth of modern factory-scale industry as almost synonymous with economic development.

The notion of a standard pattern of industrial growth applies only to economies where the lion’s share of industrial investment is in private hands and where the bulk of demand comes from a relatively free market not dominated by government restrictions or massive government purchasing. A majority of developing economies are like this, and thus qualify as “standard pattern” countries. And little wonder: the classical pattern of industrialization is implicit in free markets because these reflect certain universal characteristics of human wants and of each society’s ability to satisfy those wants out of domestic resources and production. So it is hardly surprising that the first industries are those that satisfy man’s needs for food, clothing, and shelter.

There are three broad classes of industry that spring up as a country enters upon modern manufacturing. They are essential consumer goods, capital goods needed for construction activities, and natural resource export industries.

Essential Consumer Goods

These goods consist of things people have to buy to keep alive and to satisfy minimum standards of health. The most obvious items are food and clothing. The types of food-producing and textile industries established earliest are, quite naturally, those that cater to the most elementary needs of large numbers of the population—e.g., flour mills, sugar mills, tea factories, vegetable oil mills, jam factories, small fruit and vegetable canneries, milk pasteurization plants, date-packing plants, fish canneries, and simple pharmaceuticals. Cigarettes and matches may not qualify as “food or drink” for some, but they do for many, and tobacco and match factories are often among the earliest industries. So are soft-drink factories and breweries.

Few needs are more essential to man than covering his nakedness and keeping warm. These needs call for the building of textile plants—usually spinning first, then weaving, and, close behind, bedding (sheeting and blankets), thread, toweling, knit goods (such as socks and underwear), and simple drapery and upholstery fabrics. Shoes are another item of factory-made clothing that appears early, especially if tanneries already exist, as they often do.

It is hard to say where “essential consumer goods” stop and “nonessentials” begin. What we really mean by “essentials” are the things people must buy to stay alive. Many a rich man’s essentials are a poor man’s luxuries. In any society, if there are enough people with incomes above the poverty line, there will be sufficient purchasing power to justify some consumer industries that might not look essential to the great mass of consumers. Ready-made clothing, paper, book publishing, tinned goods, cosmetics, fancy bakery products, and tennis shoes are examples. But the largest category of middle-class “essentials” consists of consumer durable goods: radios, refrigerators, air coolers, fans, hurricane lamps, bicycles, automobile batteries, tires, and even automobiles. The demand for such goods clearly depends on the distribution of income in a country; the ability to satisfy these demands by setting up domestic industries instead of relying on imports is rarely found at the earliest stage of industrialization. But if a demand exists, it is surprising how early some types of industries spring up—often before the lower limit of a “minimum economic size” plant is reached. Many examples are found in the chemical, automotive, electrical equipment, and steel industries.

This is not to suggest that all the “standard” industries will show up early in the industrial structure of all countries, or that no other industries will. The two main factors which determine what essential consumer goods industries will be started first in any country are its agriculture and its climate. It may be taken as a general rule that in countries where cotton is grown, cotton textile factories will appear earlier than other industries. The Kalahari bushmen are more likely to develop a textile industry than are the Eskimos.

Capital Goods Needed for Construction

Sometimes one reads that developing countries should stay away from investment in capital goods industries until manufacturing is well developed. This is not necessarily good advice; it all depends on the kinds of capital goods industries. Cotton baling machines are capital goods; so are wire, electrical insulators, transformers, motors, bench lathes, and drill presses. But the relatively simple mechanical industries from which such products come (and which may spring up fairly early) are not characteristic of the main kinds of capital goods industries first off the mark.

The key to the first-stage capital goods industries is construction: development always means a great surge in construction of all kinds, everything from roads, ports, and housing to airports and irrigation works. A simple list of the bricks, plywood, tiles, and so on required by burgeoning construction activity suggests the industries—relatively simple industries—that spring up to produce them. The more obvious products go mainly into the shell of structures—the walls, foundations, roofs, and so on. But the inevitable construction boom also generates large demands for things that go inside the new structures, such as furniture and appliances. So a lot of fairly early manufacturing, including the first mechanical and metal working industries, grows up to satisfy demands indirectly generated by the construction boom. Typical products include home and office furniture, water and space heaters, air coolers, cooking utensils, lamp bulbs, and electric switches. True, some of these items are consumer durable goods, not capital goods. However, the demand for both stems from new construction.

Furthermore, a large proportion of the demand generated by construction is urban; development without an urban construction boom is extremely rare. This linkage between construction and industrialization deserves more attention than it has yet received.

There are some capital goods industries that do not show up early—those that require large-scale production, exceptionally high quality of finished product, or continuing research and development. This is why, for example, the manufacture of earth-moving equipment, printing machinery, and electronic computers appears late rather than early. Exceptions will almost invariably be government-owned plants, often launched for reasons that purely market considerations would not justify (e.g., defense, prestige, assumed foreign exchange savings).

Natural Resource Export Industries

The third great class of industries found early in industrialization arises from the export of rich natural resources for sale in world markets. Oil, minerals, and timber are the leading examples. The market is abroad, and both the capital and management come from abroad. The home country benefits from employment and, especially, from large foreign exchange earnings and tax payments. These benefits stem entirely from the country’s good fortune in having a natural resource wanted by world markets. Initially these extractive enterprises are “enclave industries,” islands of activity only weakly connected to the rest of the economy except for their financial contribution. It is in this class of industry that the Eskimos are likely to get their start—in Arctic oil or the iron mines of Labrador and Northern Quebec.

The most fundamental common characteristic of the three classes of first-stage industries is their dependence on domestic raw materials. The earliest industries depend on the availability of primary raw materials—those that come from the ground, from nature. The consumer goods industries are based on agricultural raw materials; the capital goods and natural resource export industries depend mainly on nonagricultural or inorganic raw materials (timber is the main exception). So the early industries are those that depend heavily on natural resources—including land capable of supporting a reasonably efficient agriculture.

Two other features that most of these industries have in common are a fairly simple technology and capital requirements moderate enough to lie within the means of domestic sources, even after allowing for possible foreign help. (Some of the natural resource export industries are obvious exceptions.)

1. Forward Linkages Starting From A Sugar-Crushing Mill

Subsequent Growth

The ways in which industry spreads out from its initial beachheads, gradually accounting for a higher proportion of employment, output, and income in the economy, also form a pattern with classical characteristics. Typically, industry has three main axes of expansion.

Horizontal expansion, the straightforward duplication of existing units—setting up a second, third, or fourth spinning mill or sugar factory or oil producer.

Vertical expansion, the gradual addition of new production units based on close technical and economic relationships to existing units. These are the familiar forward and backward “linkages.” The way in which such extensions find their way into the list of “candidate projects” and then become actual new ventures is simple but important: it is always the technical linkage between A and B which suggests to someone already making A that he should also make B. This is obvious to any businessman or engineer who understands the physical flows of production into and out of an existing factory. What he has to decide—if he has a calculating eye on integrating production—is when it will pay to do it. This is exactly the same question faced by planners responsible for establishing new industries in a developing country: when can they justify domestic production of raw materials and parts that were formerly imported (“backward linkage”) and when is it feasible to do more local processing of goods that are now exported in a semifinished state (“forward linkage”)? This “linkage” path of industrial growth accounts for a far greater portion of industrial investment than most people realize. This is because so much of it occurs as extensions of existing enterprises and involves intermediate goods—two aspects of investment that are not very “visible.”

Exogenous growth is the name of new industries that neither duplicate nor stand in a close technical relationship to any existing ones. When the time is ripe, these industries spring up from outside the system, that is to say, exogenously. Common examples are a country’s first paper mill, its first chemical fertilizer plant, or its first automobile assembly plant. When these exogenous projects are well chosen, they eventually set in motion further expansion based on the principles of horizontal and vertical growth explained above.

2. Forward And Backward Linkages Found In The Cotton Textile Industry

3. Likely And Unlikely Backward Linkages In The Bicycle Industry

Diagrams 1-3 illustrate the types of industrial growth described above. In Diagram 1 we begin with an exogenous industry, the country’s first cane sugar mill, producing an essential consumer good based on agriculture. Because it is a success, several other entrepreneurs decide to do the same thing, and over the years the sugar industry expands horizontally. But as soon as the first few entrepreneurs get to know their operations, develop self-confidence, and accumulate more capital, some of them are bound to begin branching out into related lines.

Their initial branching will take them into forward linkages. Those who began only with crushing will doubtless move forward by adding refining capacity. No matter how much salable sucrose is crystalized out of the liquors, there will always be a residue of molasses. This usually starts out as a waste product, often dumped into rivers. With some additional investment, much of the molasses waste can be converted into ethyl alcohol. The latter can be upgraded into either potable or industrial alcohol, or the ethyl alcohol can be used directly as a fuel; some countries “dilute” gasoline with ethyl alcohol to save on foreign exchange. With relatively little extra expense, the final residue can be upgraded into an animal feed—if a market exists or can be created.

There are other lines of forward integration that a sugar company may pursue—e.g., the manufacture of food products based heavily on sugar as a raw material or the use of the cane residue (bagasse) for making paper, fiberboard, or particleboard. Even these products need not be the end of the process, as Diagram 1 suggests. How far and how fast the process will be carried, and whether it will occur within a single firm or as separate enterprises by different entrepreneurs, is unimportant. But there can be no doubt that the process does occur as described. It is, in fact, the main explanation of how the industrial sector “fills up”—becomes increasingly dense—as development proceeds.

Cotton Textile Industry

Diagram 2 illustrates a somewhat more complex expansion path, frequently found in the cotton textile industry. Wherever cotton is grown there will be cotton ginning; organizers of the first spinning mills are likely to have a background either in ginning or in the marketing of imported yard goods. The chain of successive forward and backward linkages represented in Diagram 2 is a composite of three actual family complexes, one in India, one in Iran, one in Peru. None of the family complexes displays the complete network but all show a high proportion of it. More important, the complete network is found in each of these countries, even if all units are not under common ownership and control. If a country is well launched on a textile industry, a knowledge of these technical and economic relationships allows one to project such an expansion path with a high degree of confidence. The main question marks will concern timing. Thus, the start of a textile industry carries within itself the seeds of a much larger “tree.”

Bicycle Assembly

An industry that generates only backward linkages is illustrated in Diagram 3. The assembly of bicycles frequently appears fairly early, as part of the much wider transport revolution. It usually begins by importing nearly all the needed parts and materials—steel tubing, wheels, spokes, ball bearings, tires, tubes, chains, sprockets, gears, handle-bar grips, seats, nuts, bolts, washers, screws, pedals, bells, lights, batteries, paint, brake cables. A bicycle is a “final good”—nothing more happens to it before it reaches the ultimate user—so the only linkages possible are backward linkages. Which of the originally imported parts and materials are likely to tempt a bicycle manufacturer into new investments in these related industries? Probably only a few—because the making of many of these items requires a project bigger than he needs to meet his own requirements. He could, for example, make his own nuts, bolts, and washers because these can be made economically by investing in not-too-expensive machine tools. He could stop importing steel frames (or perhaps tubing) and install a machine that makes tubing by butt-welding flat strips of coiled steel (“skelp”). But a tube-forming machine would be very uneconomic unless it could be kept busy throughout the working day, and one bicycle plant might not be a big enough outlet, even if the machine spent part of its time making tubular furniture.

It is highly unlikely that the manufacturer would try to make his own chains or gears; if so, he would do it in a completely separate enterprise that would serve many other outlets. He would not be tempted to manufacture tires and tubes, or paint, or dry-cell batteries, or ball bearings, or steel. The bicycle factory would be so small a customer of a minimum-sized plant in any of these other industries that the technical and economic relationship between the two would be weak. These latter products will be taken up—as “exogenous” industries—only when the number of potential customers for their products provides a market large enough to support a minimum-sized plant.

* * *

The “standard pattern” of how modern industry starts and grows can be found in country after country—wherever the economy is not subject to strong central control. Where the latter exists, the pattern may be different. But since neither the Eskimos nor the Kalahari bushmen are likely to develop strong central controls over their economies, a very safe bet is that the growth of their future industrialization will once again trace out a standard pattern.

(For a more academic study of this subject, read W. G. Hoffmann’s historical study of European industrial development, The Growth of Industrial Economies, Manchester University Press, 1958, 183 pp. Or read the excellent review of postwar industrialization in the first three chapters of the United Nations 1961 World Economic Survey.)

IFC Annual Report

On June 30, 1966, the International Finance Corporation completed ten years of operations. As an affiliate of the World Bank, the Corporation’s primary purpose has been to further economic development by helping to promote the growth of the private sector of its member countries, especially in the less developed areas. A special section of the 1965/66 Annual Report describes IFC’s evolution as an agency for risk financing of private ventures and shows how, within the World Bank Group, it has become the main instrument for dealing with private enterprise, regardless of which member of the Group provides the financing.

The Report indicates how IFC’s investment patterns may develop now that substantial additional funds have been made potentially available to the Corporation by the World Bank. Copies of the Report may be obtained free of charge in English, French, German, or Spanish from either:

International Finance Corporation

1818 H Street, N.W.

Washington, D. C. 20433

U.S.A.

International Finance Corporation

4, Avenue d’Iéna

Paris 16e

France

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