Industrialization is a key to economicdevelopment of a country. This is true for an underdeveloped economy like Indiawhere the industrialization produces avenues for absorbing the excess manpowerand also ensures availability of mass consumption goods for a vast population.The process of industrialization helps in harnessing and transforming the rawresources into useful consumer products and effective means and tools ofproduction and in the development of infrastructure. The industrial sectorpossesses a relatively high marginal propensity to save and invest, contributessignificantly to the achievement of a self sustaining economy with continuedhigh levels of investment, increase in levels of income and employment (State Industrial Profile of Jammu and Kashmir2016).
The transition of an economy from primarily agrarian to one based mainly on manufacturingand industry. Industrialization is generally thought to be a sign of agrowing economy, and is associated with income growth, urbanization, and improvements in health, lifespan, and standardof living for the populace. Industrialization is considered to beimportant for the dynamics and competitiveness of every economy. Its specificuniqueness makes the sector important as an “engine of growth” (Paskal). Industrializationhas played a key role to drive economic growth and the living standards formore than three centuries and even continuously playing a same crucial role indeveloping countries. Even India continuously is trying to build itsmanufacturing sector to raise the living standards and also to increase theshare of manufacturing in its economy from 16 percent to 25 percent by 2022(James Manyika et al.
2012).Virtuallyevery country that experienced rapid growth of productivity and livingstandards over the last 200 years has done so by industrializing. Countriesthat have successfully industrialized-turned to production of manufacturestaking advantage of scale economies- are the ones that grew rich, be theyeighteenth-century Britain or twentieth-century Korea and Japan. Yet despitethe evident gains from industrialization and the success of many countries inachieving it, numerous other countries remain unindustrialized and poor. Whatis it that allows some but not other countries to industrialize? And can governmentintervention accelerate the process? Of the many causes of lack of growth ofunderdeveloped countries, a particularly important and frequently discussedconstraint on industrialization is the small size of the domestic market. Domesticmarkets are small and world trade is not free and costless, firms may not beable to generate enough sales to make adoption of increasing returnstechnologies profitable, and hence industrialization is stalled (Kevin 1989).
Adam Szirmai (2009) has explained whyindustrialization is considered to be the engine of growth. There are powerfulempirical and theoretical arguments in favor of industrialization as the mainengine of growth in economic development. The arguments can be summarized asfollows: 1.
there is an empirical correlation between the degree ofindustrialization and per capita income in developing countries. 2.Productivity is higher in the industrial sector than in the agriculturalsector. The transfer of resources from agriculture to manufacturing provides astructural change bonus. 3. The transfer of resources from manufacturing toservices provides a structural change burden in the form of Baumol’s disease.
As the share of the service sector increases, aggregate per capita growth willtend to slow down. 4. Compared to agriculture, the manufacturing sector offersspecial opportunities for capital accumulation in developing countries. Capitalaccumulation can be more easily realized in spatially concentratedmanufacturing than in spatially dispersed agriculture.
This is one of thereasons why the emergence of manufacturing has been so important in growth anddevelopment. Capital intensity is high in mining, manufacturing, utilities andtransport. It is much lower in agriculture and services. Capital accumulationis one of the aggregate sources of growth. Thus, an increasing share ofmanufacturing will contribute to aggregate growth. 5.
The manufacturing sectoroffers special opportunities for economies of scale, which are less availablein agriculture or services. 6. The manufacturing sector offers specialopportunities for both embodied and disembodied technological progress(Cornwall, 1977). Technological advance is concentrated in the manufacturingsector and diffuses from there to other economic sectors such as the servicesector. 7.
Linkage and spillover effects are stronger in manufacturing than inagriculture or mining. Linkage effects refer to the direct backward and forwardlinkages between different sectors. Linkage effects create positive externalitiesto invest in given sectors and spillover effects refer to the disembodied knowledgeflows between sectors. Spillover effects are a special case of externalitieswhich to refer to externalities of investment in knowledge and technology.Linkage and spillover effects are presumed to be stronger within manufacturingthan within other sectors. Linkage and spillover effects between manufacturingand other sectors such as services or agriculture are also very powerful. 8.
Asper capita incomes rise, the share of agricultural expenditures in totalexpenditures declines and the share of expenditures on manufactured goodsincrease (Engel’s law). Countries specializing in agricultural and primaryproduction will not profit from expanding world markets for manufacturinggoods. These arguments are frequently mentioned in the literature and are oftenconsidered self-evident, though the recent literature increasing questionswhether manufacturing will continue to be the engine of growth. We examine theempirical support for these arguments.
In doing so, we may find that some ofthe arguments need to be qualified. They should also be considered in atemporal perspective. The applicability of different arguments may well differin different historical contexts. The sources of growth change over time (AdamSzirmai, 2009). It is argued that productivity is higher inthe manufacturing sector than in the agricultural sector (Fei and Ranis, 1964).The transfer of resources from agriculture to manufacturing (i.
e., industrialization)provides a structural change bonus.This is a temporary effect, i.e., it lasts as long as the share ofmanufacturing is rising.
Similarly, the transfer of resources frommanufacturing to services provides a structuralchange burden in the form of Baumol’s disease (Baumol, 1967).Next,compared to agriculture, the manufacturing sector is assumed to offer special opportunitiesfor capital accumulation.Capital accumulation can be more easily realized in spatially concentratedmanufacturing than in spatially dispersed agriculture. This is one of thereasons why the emergence of manufacturing has been so important in growth anddevelopment. Capital intensity is high not only in manufacturing but also inmining, utilities, construction and transport. It is much lower in agricultureand services. Capital accumulation is one of the aggregate sources of growth.
Thus, an increasing share of manufacturing will contribute to aggregate growth.The engine of growth hypothesis implicitly argues that capital intensity inmanufacturing is higher than in other sectors of the economy. However, Szirmai(2009) has shown that this is not always the case (Adam Szirmai and Bart Verspagen, 2011).