It is important to understand that while there is now nearly universal agreement on the significance of industrialisation, there is still much debate related to the proper pattern of industrial development. Historically, industrial development has proceeded in three stages. In the initial stage, industry is involved with the processing of primary products: milling grain, extracting oil, tanning leather, spinning vegetable fibres, preparing timber and smelting ores. The second stage consists of the conversion of materials making bread and confectionery, footwear, metal goods, cloth, furniture and paper.
The third stage comprises of the manufacture of machines and other capital equipment to be utilised not for the direct satisfaction of any instant want but in order to enable the future process of production. Hoffmann grouped all industrial output into two categories, consumer goods and capital goods output and grouped various stages with relation to the ratio of consumer goods output to that of capital goods productivity. “In stage one the consumer goods industries are of overwhelming importance, their net output being on the average five times as large as that of capital goods industries.” This ratio is 2.5:1 in the second stage and declines to 1:1 in the third stage and still lower in the fourth stage. Both these kinds of classifications stress on the increasing role of the capital goods industries in the economy as industrial development occurs.
You may already be aware that although the general development of industry itself has advanced from consumer goods to the capital goods, there are several variations of this pattern, both with relation to time taken to attain later stages and in terms of comparative importance of each of the stages. Soviet pattern of industrialisation includes a straight jump from the first to the third stage while British pattern is that of a slow evolution. Likewise, underdeveloped countries may also develop a different pattern of industrialisation appropriate to their economic conditions. It has been advised that the pattern of industrialisation in under-developed countries should be directed primarily by considerations arising from the comparative scarcity of capital. Since labour is comparatively plentiful and capital scarce, the development of labour-intensive consumer goods appears quite legitimate. But, the basic premise of this approach is inappropriate. The issue is not how to economise the utilisation of capital (this has to be done as an inevitable situation) but how to increase its supply. As most underdeveloped countries do not produce these goods at home, the only option to increasing their supplies is via imports. This relies upon the rate of growth in exports of primary commodities as well as manufactured goods. As it has been indicated above, the countries are confronting an “export lag” in their exports of primary commodities. Consequently, you must take into consideration that primary commodity exports do not appear to be a reliable source of foreign exchange earning so as to increase the import of capital goods.
The option to the increase of exports of primary products from under-developed countries would be to establish export promoting manufacturing industries. However, the main trouble is that in producing goods of this sort, say textiles, the advanced industrial countries themselves are probably to have an overpowering comparative advantage. This does not essentially mean that export promoting industries should not be developed; it only depicts that specialisation in some industries for export is not an alternative for the growth of a diversified domestic industry. In case, however, the growth in foreign exchange earnings cannot be reinforced by the promotion of export industries, the spread of import replacing consumer goods industries can issue foreign exchange for imports of capital goods. Import substitution is of two kinds:
(a) the substitution of home produced goods for imported goods, and
(b) the substitution of capital goods imports for consumer goods imports.
Hence, if a country cannot increase its export earnings adequately, it can still increase its import of capital equipment by decreasing its imports of consumer goods. This process of import substitution, itself develops import demand for specific ancillary goods which are required for the production of those consumer manufactures. We are hence confronted with a problem of choice between expansion of export-oriented industries or of import substitution industries. The capital accessible for investment in an under-developed economy being restricted, the allotment of funds to an export project decreases the scope of investment oriented towards import-substitution. In case export-oriented industries are successful in inspiring exports, they raise the supply of foreign exchange and if import substitution is effective, it issues foreign exchange so that the influence of these alternatives on the supply of foreign exchange is similar.
