Industry

F

Government Policies

The type and extent of government involvement plays a strong role in a country’s industrial growth. A government may take a free market approach and let industries organize and grow with minimal government intervention. At the other end of the spectrum of government planning and involvement is socialism, a system in which the means of production are, in theory, owned collectively by the whole community. For example, the centrally planned economies of the countries of Eastern Europe and the Soviet Union achieved rapid rates of industrialization. However, these centrally planned economies eventually developed a lack of dynamism and innovation that produced slower growth rates and economic crises.

After the Great Depression of the 1930s, many developing countries, particularly in Latin America, pursued economic growth in accordance with a model called import substitution industrialization. Under this model, governments bought controlling interests in energy production and other key primary industries, as well as in some manufacturing industries. These governments followed policies of favoring domestic products over imported goods in order to create favorable conditions for domestic industries to grow and to achieve technological progress. This model led to substantial industrial growth in many countries. However, inefficiency, bad decisions on providing government subsidies, and heavy debts made this model vulnerable to inflation (aggregate rise in prices) and to ups and downs in the international economy (see Inflation and Deflation).

In the later 20th century the governments of several East and Southeast Asian countries, notably South Korea, Malaysia, Indonesia, and Thailand, developed an alternative model known as government-directed industrial development. The government of Taiwan also used this model. In this model the government protected a few chosen industries that were selected for development, including export industries. The government also carefully regulated the flow of finance capital out of the country. This model seemed to stimulate industrial growth. However, these governments freed the outflow of finance capital in the 1980s and 1990s. The outflow of finance capital soon became torrential, and growth stopped. The halt in economic growth, combined with bad loans and overinvestment in certain industries, led to an economic crisis in this region in 1997.

V

Shifts in Industrial Development

Since World War II, many developed countries have shifted to varying degrees from goods-producing activities, such as manufacturing, agriculture, and mining, toward service activities. For example, the number of U.S. workers employed in manufacturing industries decreased by 9.1 percent between 1980 and 2000, while the number of workers in service industries increased by 72.8 percent during the same period.

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Initially, many service activities were created to support the manufacturing industry. For example, the transportation industry evolved in part to distribute mass-produced goods. As industrialized economies matured, rising standards of living and increasing scales of mass production led to growth in wholesale and retail trade and in financial and insurance services. In addition, higher household incomes stimulated growth of personal services, such as fast-food restaurants, hotels, recreational services, and entertainment businesses.

Since the late 1960s, communication and computing technologies have stimulated growth of service activities associated with managing information. Some economists believe developed countries such as the United States are entering an information age, an era based on gathering, managing, and disseminating information.

While developed countries are evolving from manufacturing- to service-based economies, many developing countries are acquiring manufacturing economies, in part because developed countries are transferring physical capital (or manufacturing capacity) to developing countries. Since the early 1970s, international competition, rising labor costs, and environmental regulations have prompted many companies in industrialized countries to search for new markets, lower labor costs, and less restrictive regulations in some developing countries. For example, companies from the United States and other industrialized countries have relocated manufacturing operations to countries such as Mexico, Brazil, South Korea, and Singapore, as well as to Taiwan and Hong Kong. As a result, some of these developing economies have grown dramatically. For example, between 1970 and 1980 the economies of South Korea and Taiwan grew at average annual rates of 15.6 and 13.5 percent, respectively.

VI

Economic Cycles

Industrial growth goes through cycles of expansion and contraction. Business cycles are of short duration, lasting approximately six to ten years. They may be thought of as repeated waves of growth and decline in business activity. Industrial cycles are of longer duration. They are often linked to major changes in a country’s institutions, technology, and global economic relationships. For example, in the 19th century the introduction of the locomotive and the growth of railroads in the United States triggered a cycle of industrial growth. Likewise, the government-managed export-based strategy pursued by many Asian economies in the 1980s and 1990s characterized a cycle of industrial growth followed by a recent period of economic decline. In many Asian countries, including Korea and Malaysia, economic activities were closely coordinated by the financial, industrial, and government sectors. This highly coordinated relationship produced a period of extremely high growth. However, as many of these governments eliminated regulations, such as trade restrictions and the movement of financial capital into and out of their countries, the economies became increasingly exposed to risk from outside. In particular, much of Eastern and Southeast Asia suffered a financial crisis beginning in 1997. This crisis disrupted the established relationship among the financial, industrial, and government sectors, marking the end of the Asian model of economic growth.

Economists study economic cycles to understand factors that cause industrial growth and decline. These factors may include a new technological innovation that improves manufacturing equipment and subsequently sparks an industrial cycle. Conversely, a financial crisis or stock-market crash might limit the finance capital available to businesses and subsequently limit industrial expansion (see Stock Exchange). For example, financial instability in Brazil in 1998 and 1999 prompted the government to raise interest rates. While higher interest rates encourage foreign investors to keep their money in the Brazilian economy, higher interest rates also increase the cost to Brazilian businesses of borrowing money. The higher cost of borrowing money discourages firms from pursuing additional investment, eventually stifling economic growth. As a result, the financial crisis in Brazil has raised unemployment and pushed the economy into a recession.

Other factors can influence industrial cycles. If workers successfully bargain for higher wages, industries might react by reducing production or moving to a country with lower wages. Production cuts may ultimately decrease the number of workers needed by industry, increasing the unemployment rate and reducing living standards. If unemployment levels rise, consumers may have less income with which to purchase products, hurting business profits and possibly contributing to an industrial decline.

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