Read the following passage and answer questions. which follow: Industrialization and growth From the global perspective. there seems to be a close association across countries between living standards and the share of resource devoted to industrial activities. at least up to a certain point. In very poor countries there is virtually no industrial activity at all. while the middle- and high-income countries devote 20-40 per cent of resources to industry. Only three countries in the world have become rich on agriculture alone : Australia. New Zealand and Canada. In all other countries. living standards have risen rapidly only as resources have shifted out of agriculture into industry and sophisticated services. Furthermore. research also shows a close association across countries between the growth of industry and the growth of GDP: or more precisely. that GDP growth is faster the greater the excess of industrial growth relative to GDP growth: that is. when the share of industry in total GDP is rising the fastest. Figure shows this relationship across 131 developing countries over GDP is rising the fastest. Figure shows this relationship across 131 developing countries over the period 2000-2005, with GDP growth measured on the vertical axis and the growth of industry.

Association between growth of industry and growth of GDP

 

on the horizontal axis. The scatter points represents the individual country observations. A line through the points with a slope less than unity shows that the greater the excess of industrial growth over GDP growth. the faster GDP seems to be. The point where this line cuts the 45-degree line gives the average growth rate that divides countries into those where the shares of industry is falling and are growing slowly. and those where the share of industry is rising and are growing fast. A linear equation fitted to the scatter points in Figure gives the following regression result : g =2.529+0.394x r° =0.507 The equation says that the country with industrial growth one percentage point above the average for all countries will have GDP growth of 0.394 percentage points above the average. and the point where the regression line cuts the 45-degree line is approximately 4.5 per cent. This rate of industry growth separates the slow-growing countries from the faster-growing countries. The question is : what is special about industry. and particularly manufacturing industry, which accounts for these empirical associations. and which makes industry ‘the engine of growth”? Since differences in the growth of GDP are largely accounted for by differences in the rate of growth of labour productivity. there must be an association between the growth of industry and the growth of labour producitivity. This is to be expected for two main reasons. First. if there are increasing returns to scale in industry. both static an dynamic. a relation is to be expected between the growth of industrial output and the growth of labour productivity in industry Static economies of scale refer to the economies of large-scale production whereby the mass production of commodities allows them to be produced at a lower average cost. Dynamic economies of scale refer to the induced effect that output growth has on capital accumulation and the embodiment of new technical progress in capital. Labour productivity also increases as output growth through ‘learning by doing’. Second. if activities outside industry. such as agriculture and petty services. are subject to diminishing returns. with the marginal product of labour less than the average product. then if resources are drawn from these activities into industry as industry expands. the average product of labour will rise in non-industrial activities. These relationships between industrial growth. productivity growth and GDP growth are known in the growth and development literature as Kaldor’s Growth Laws. named after the famous Cambridge economist (Lord) Nicholas Kaldor. who first enunciated them in the 1960s (Kaldor. 1966. 1967)