Industrialization and Economic Development

What is economics? Economics is the social science that analyzes the production,

distribution, and consumption of goods and services. Economics actually includes a whole bunch of things that we

generally don’t think of. Micro-economics examines the behavior of basic elements in the

economy, including individual agents (such as households and firms or as buyers and sellers) and markets, and their interactions. It thinks a lot about why people do things.

Macro-economics analyzes the entire economy and issues affecting it, including unemployment, inflation, economic growth, and monetary and fiscal policy. This is what we’re going to be talking about, and what most people think of when

you say, “Economics.”

Economics Deals with issue of scarcity

½ people in the world live on less than $2.00 a day, 20 % of worlds population lives on less than $1.00 a day

Economic geographers study locations and reason for economic patterns in world’s human landscape

Analyze patterns of economic wealth, poverty, growth and decline

Industrialization key component to understanding economic development level

Impact of industrialization on humans and environment

Basic Terms Opportunity Cost: when we make a choice to do one thing, something else

won’t get done so you do the most important thing This is very subjective and we make the choice in accordance with expected costs

and benefits Scarcity: resources are not unlimited so we develop a system to allocate all

resources Marginal: additional costs and benefits

Example: you need your car washed for $10 or it is $5 with 10 gallon gas purchase-you need gas so the marginal cost is $5.00

A marginal benefit of working at FJH is I can get free candy. Market: anywhere buyers (demand) and sellers (supply) meet

When exchanges are made under FREE CHOICE, they will benefit both parties Externalities: additional costs or benefits imposed upon a non-consenting 3rd

party Negative externalities: costs imposed, spill over or third party effects

Example: loud music, tobacco (health care) or pollution Positive externalities: benefits imposed

Examples: education, vaccines, bee keeper keeps bees for honey, but his plants also get pollenated

Economic Systems Capitalism: process of letting competitive market determine price

of goods Supply and demand Some argue that the competition inevitably creates winners and losers and

in a capitalistic society the losers are those in poverty Socialism: when the government controls basic items in an

economy Government control of food prices, transportation and energy prices to

ensure that everyone can pay for essential services Taxes usually higher to pay for services but services like health care are

usually free or are offered at minimal cost Communism: total government control of all prices in society

Former USSR tried this approach with some success (in military sectors) but left people with limited services

China is still largely a communist country, but has been returning to some capitalistic principles recently

Economic Classifications Economy defined: system of production, consumption and distribution Primary Sector: most basic components of economy

Activities revolve around getting raw materials from earth Examples: farming, fishing, raw mining

Secondary Sector: processing raw materials acquired through primary activities into finished products of greater value Activities revolve around factories and manufacturing Examples: baby food, cars

Tertiary Sector: focuses on moving, selling and trading products made in primary and secondary levels Activities involve professional and financial institutions and services Examples: carpet cleaning business, restaurant, banks, grocery stores

Quaternary Sector: involves information creation and transfer Activities assemble, distribute and process information Examples: research, universities or business operations Subsector known as Quinary Economic Activities that involve highest level

of decision making like legislature or presidential cabinet

People working in service sector

Industrialization Defined: growth of manufacturing activity in the

economy or a region and usually occurs alongside a decrease in number of primary activities within a country

Industrial Revolution Began in England in 1760s when machines replaced

human labor and new sources of energy were tapped-primarily coal

Defined by assembly-line manufacturing that tended to be located near coal fields and water sources

Allowing with manufacturing, transportation and shipping infrastructure improved

Industrial Revolution, cont. By 1960s oil replaced coal as dominant source of industrial

energy Before 1960s Russia, Venezuela and U.S were primary oil

suppliers-after 1960s Middle East moved to leader in oil market

Diffusion of Industrialization By 1825, England’s technology began spreading to North America

and Western Europe Areas with large coal deposits saw greatest amount of

industrialization Ohio and Pennsylvania in U.S., Ukraine in Russia and Ruhr region in

Germany By 1920s U.S. automobile factories changed method of assembly

lines by building out not up allowing goods to move more easily around factory (Fordist or Ford Production Method)

Weber’s Least Cost Theory of Industrial Location Answers questions like where will factories

grow? What factors affect industrial location? Alfred Weber studied locations of industrial

activities in the early 20th century-predicted where industries would locate based on the places that would be the lowest cost to them-hence the name, least cost theory

Weber’s Assumptions The cost of transportation is determined by the weight of the

goods being shipped and the distance to the market The heavier the good and/or the farther the distance, the more

expensive it is to ship Industries are competitive and aim to minimize their costs

and maximize their profits Markets are fixed location Labor exists only in certain places and is not mobile Physical geography (land quality) and political-cultural

landscape are uniform across the model’s space (no mountains, lakes or rivers would get in way of transportation)

Location of industry is driven by four factors; transportation, labor, agglomeration and deglomeration

Transportation and Distance Industries want to locate where transportation costs are minimized and must

consider two factors Distance to market and weight of goods

Early factories located near energy resources but electricity enable factories to locate far from energy sources without incurring high costs

Spatially variable costs: costs that vary or change depending on the space in which it is located Example: companies using perishable raw materials may want to locate near

perishables to limit loss and minimize transportation costs Weight-losing processes: manufacturing processes that create a product lighter

and the raw materials going into it-example paper plant Material orientation: when weight losing industries locate near the raw resource supply

Weight-gaining processes: take raw materials and create a heavier final product-example beverage companies Market orientation: when weight gaining industries locate near the place where heavier

product will be sold to limit transportation costs Spatially fixed costs: when costs remain the same no matter where a company

chooses to locate-example computer chips Can also be known as Footloose industries because they are not bound to locational

constraints

Other transportation issues Space-time compression: effort to increase efficiency of time in delivery

process by diminishing distance obstacles Most effective way to do this is with modern technologies

Truck: very mobile and efficient but weather, slower traffic, use of fossil fuels and maintenance costs are all disadvantages

Trains: most efficient and most cost-effective but can’t cross oceans and have high start up costs

Airplanes: fastest way to get products to market, can access isolated areas and have high flexibility in route but are most expensive and experience weather delays

Pipelines: highly efficient but can only move liquid or gas and are very expensive to create and many fear spills harming the environment Most famous in U.S. is Alaskan Pipeline

Ships: most energy efficient transportation but are slowest, can’t take perishable goods, have high terminal costs with port facilities and are weather dependent Panama and Suez canal have increase efficiency of ships

Agglomeration Defined: advantages and savings made when industries clump together

for mutual advantages Example: factories in the same area share costs associated with resources

such as electrical lines, roads, pollution control, etc. Agglomeration economy: when agglomeration has positive effects for

both the clustered industries and consumers of their products Example: high-tech corridor (place where technology and computer

industries agglomerate) in California’s Silicon Valley-companies located here to benefit from shared resources like highly trained workforce, similar support businesses

Negative consequence of agglomeration is called backwash effect Example: out-migration of talented computer engineers and other skilled workers

who migrated to Silicon Valley Locational interdependence: states that industries choose locations based

on where their competitors are located to maximize their dominance in the market Example: large numbers of gas stations near a freeway exit

Agglomeration of major shopping areas

Deglomeration Defined: the “unclumping” of factories because of the

negative effects of higher costs associated with industrial overcrowding

Happens when a region becomes too clustered or too crowded-can cause excessive pollution, traffic congestion, lack of resources and labor, etc

Criticism of Weber Doesn’t identify the fact that markets and labor are often mobile Doesn’t address labor variations in age, skill sets, gender, language

and other traits Doesn’t address some transportation costs not being directly

proportional to distance

Other things businesses look at… Situation: relationship a location has with locations

around it Creates basic industries (focal point of a cities economy)

and nonbasic industries (secondary businesses that sprout after the city has already established its basic industry) Multiplier effect: expansion of the economic base of a city as a

result of nonbasic and basic activities located there

Industrial Cost: costs of doing business Fixed costs: do not fluctuate based on quantity ordered Variable costs: fluctuate based on the volume of orders

Globalization Spatial interaction has occurred throughout history at

many different levels Tribe to tribe; village to village; empire to empire

Globalization defined: increasing sense of interconnectedness and spatial interaction among governments, cultures and economies

Example: Starbucks or McDonalds Many countries see this as the “Americanization” of

world culture with some areas seeking to “purify” this new culture

Multinational Corporations (MNC) Defined: businesses with headquarters in one country and production

facilities in one or more other countries Sometimes referred to as transnational corporations – but more often TNCs

are countries that are from a country but emphasize a global perspective Usually they are conglomerate corporations where one massive

corporation owns and operates a collection of smaller companies that provide it with specific services in its production process Example: owning a bottling company and a food-coloring company

MNC can also include companies that own completely unrelated businesses Example: owning a movie studio, TV production and a bottling company

Usually locate headquarters in core countries and build production facilities in peripheral countries

Outsourcing: practice of MNCs to relocate a piece (or all) of its manufacturing operations to factories in other countries Companies outsource to take advantage of lower labor costs, lower tax rates

and cheaper land prices in countries outside the United States

What brings economic success? Environmentally friendly activities: really becoming

more of an issue that in past Political support: local politicians zone areas

allowing factories and businesses to be created Societal acceptance: companies must sell product

people want that doesn’t violate cultural standards Economic support base: worker training and

experience

New Industrial Countries New Industrial Countries (NIC) are states that have climbed

the economic ladder and established and industrialized economy based on manufacturing and global trade

Traditional MNCs were found in U.S., Canada, Germany, U.K., France and Japan

Asian Tigers Four countries that became NICs in late 20th Century Taiwan, South Korea, Hong Kong and Singapore These four countries with China make up the core of Asian economic

growth Also known as the Pacific Rim economic region

Other Global Industrial Zones NE U.S. and SE Canada

Sub regions include New England, Mid-Atlantic, Eastern Great Lakes, Western Great Lakes and the South

Russia and Ukraine Ukraine is agricultural, Russia is industrial on the European side

Central and Western Europe Britain, Germany, France and Ireland

China Beijing (majority of natural resources), Hong Kong (trading; one of

Asian Tigers) and Shanghai (largest city, Yangtze River, massive industrial parks)

Japan Technological leader with highly educated work force

The Rust Belt Greatest amount of

industrial area in the United States

Has seen huge factories shut down within last two or three decades creating the name

Has created crumbling infrastructure and environmental problems

Russia and Ukraine

China’s economic zones

Four Tigers

Foreign Direct Investment Defined: Less-developed countries actively solicited foreign

corporations’ investment in their countries to improve economic development

Countries can provide Special Economic Zones: regions offering special tax breaks, eased environmental restrictions and other incentives to attract businesses-China is great example

Export-processing zones: regions that offer tax breaks and loosened labor restrictions to attract export-driven production processes like factories producing goods for foreign markets

Free-trade zones: regions where duties and tariffs are waived by governments wanting to encourage MNCs to invest in their countries

In 1982, global total of foreign direct investment flows was nearly $57 billion. By 2000, number had grown to $1.3 trillion (20 times larger than 1982)

Maquiladoras Established in Mexico Special economic zones on its northern boarder with the U.S.

where MNCs can outsource labor to take advantage of labor costs in Mexico that are far below those required for U.S. workers to manufacture the same products-tax breaks also provided

Created program to create jobs for Mexican farmers no longer able to make a living

Today nearly 500,000 Mexicans work in maquiladoras creating overpopulation and pollution problems

Program supposed to be phased out as part of NAFTA

Maquiladoras and Economic Growth

International Division of Labor Defined as the material production of a society – in other

words, what type of jobs to people have and what sector are they in

Happened with the rise of globalization and assembly-line concept developed during Industrial Revolution

Breaks up the manufacturing process by having various pieces in another country

In some cases, MNCs have a total yearly sales larger than the GNP of the countries they are in

Many MNCs have considerable power in less-developed countries because of economic importance

Free trade vs. Fair trade Currently, there is a large debate over whether foreign direct investment

is helping increase economic development or is causing exploitation by profit-driven MNCs

Many human right advocacy groups claim MNCs are not paying workers in the periphery a living wage

Free trade: idea of allowing MNCs to outsource without any regulation except for basic forces of market capitalism Critics argue free trade only protects interests of MNCs and does nothing to

protect workers rights Fair Trade: idea of creating policies that favor oversight of foreign direct

investment and outsourcing to ensure workers throughout the world are guaranteed a living wage for their work Currently women’s rights is big topic in this issue because many believe that

women typically work in sweatshop-like conditions of outsourced factories

Privatization Defined: selling of publicly operated industries to market-

driven corporations Proposed as solution to increasing economic efficiency in less-

developed countries Problem is privatization can cause social hardship for families

that once depended on government-owned and operated resources being sold off to profit-driven corporations

Many fear the movement of foreign companies into local economies threatens survival of local businesses driven out of the market by larger MNCs

Advocates of structural adjustment believe idea that long-term economic benefits to countries will outweigh the immediate and often difficult side effects of making the economic changes

Nongovernmental Organizations (NGOs) Defined: aid organizations that assist in boosting economic

development and human rights throughout the world’s peripheral regions

Always non-profit Many thousands exist around globe Deal with myriad of causes like women’s rights, health care,

eradication of poverty, animal rights, education, etc. Often supply resources and money to local businesses and

causes advancing economic and human development Have worked to combat HIV/AIDS and hunger Examples: Doctors without Borders or Save the Children

Sustainable Development Defined: rate of growth and resource consumption

that can be maintained from one generation to another

Many feel with will protect future generations from us consuming all Earth’s resources

In 1992, UN Commission on Sustainable Development called for conservation and careful use of resources Focused on caring for soil, protecting species from

extinction and reducing air pollution Recycling and alternative sources of fuel seen as

important as well

Globalization and Sustainability With increased industrialization and economic

interaction, many wonder if this increased rate of production and development can be sustained

Fossil fuels and natural resources (including land) are being depleted

Travel availability are altering landscapes to fit what tourists want Ecotourism: tourist operations that aim to do as little harm

to the environment as possible Costa Rica is excellent example

Levels of Development Developed Countries

Highest level of development including high GDPs, high literacy and education levels and high levels of industrialization

Middle Income Countries Middle levels of development where the urban areas look

more developed and the rural areas look more developing Developing Countries

Lowest level of development with low GDPs, low literacy and education levels and low levels of industrialization

UN Human Development Index Defined: uses a formula to measure development that can be

used to compare the various development levels of regions and countries

Based on idea that development is a process of expanding choice

Factors three areas into measurement: life expectancy, average educational levels and standard of living

Economic component of the HDI is GDP (gross domestic product) GDP: value of total outputs of goods and services produced in a

country, usually over a one year period Per-capita GDP is simply the GDP divided by the population Developed countries have per-capita GDP greater than $20,000;

developing countries have per-capita GDP less than $1,000 GNP: value of all goods and services owned and produces by a

country overseas

World Human Development Levels

Uses for the GDP Gives PPP (purchasing power parity)-a measurement tool for

calculating the exchange rates required for each currency to buy an equal amount of goods Example: GDP per capita in sub-Saharan African countries is at or

below $750.00 but with the PPP, buying power is closer to $4,000.00.

Puts number comparisons into perspective Doesn’t reflect inequality among people in a country HDI highest score is 1.000 with the lowest .000. In 2006

lowest country was Niger with score of .311, highest country was Norway with score of .965. U.S. ranked 8th among 177 countries

GDP levels across the world

Other indicators of development Because of problems with GDP, we often use other measures to analyze

economic development. These include… Access to raw materials Amount of consumer goods Amount of technology in the country/region Number of TVs and radios per person Women’s rights and level of equality Expendable income: the amount of money left over after all bills have

been paid Big Mac Index: compares price of Big Mac throughout the world

In Thailand, costs $1.78 where GNP per person is $8,440 In United Sates, costs $3.22 where GNP per person is $42,000 This shows the Big Mac is an expensive meal in Thailand

The Development Gap Defined: the widening difference between development

levels in more-and less- developed countries More-developed countries are improving their development

levels faster than less-developed countries with this difference widening

In last 10 years, GDP tripled in more-developed countries but only doubled in less-developed countries

Natural population increase fell by 85% in more-developed countries but only by 5% in less-developed countries

North-South Gap: more-developed countries located in Northern Hemisphere and less-developed countries primarily located in Southern Hemisphere

Development Gap Countries

This map shows what happens to the world if you remove the countries producing the bottoms 5% of the worlds GDP. (realize this is ONLY 5% of the worlds GDP!)

Structuralists vs. Liberal economic development theories

Structuralist theories Argue less developed countries are locked into

vicious cycle of entrenched underdevelopment by global economic system that supports unequal structure

Dependency theory: argues that political and economic relations among countries limit the ability of less-developed countries to modernize and develop

Uses Immanuel Wallerstiens world-systems analysis (we will learn more about this later) but basically states there are core, periphery and semi-periphery countries

Use Europe’s colonial occupation of Africa as reason for Africa’s poverty

Offers little hope for less-developed countries because the dominance of more-developed countries is highly linked to continued economic and political inferiority of less-developed countries

Major criticism is it doesn’t allow for cultural geographic differences

Liberal Theories: The Rostow Modernization Model

Claim that development is process through which all countries can move

Assumes all countries follow similar path of development toward becoming modernized

Similar to demographic transition model that predicts countries will move through stages of structural change to attain development

5 total levels More developed countries exist in stages 4-5

while less-developed countries exist in stages 1-3

Rostow’s Stages of Development Stage 1: traditional where economic activities focus on subsistence with outcome

of activity consumed primarily by those producing the product-sees large amount of national wealth allocated to tasks that are not economically productive like building temples or a military Example: subsistence agriculture

Stage 2: preconditions to take off where small groups of people initiate innovative economic activities that pave the way to economic development-these people invest in new technologies and infrastructure- causes some surpluses for trading Example: better water systems and modes of transportation

Stage 3: takeoff where small number of new industries that the elite invested in during stage 2 begin to show rapid economic growth-industrialization increases but some areas remain dominated by traditional activities like agriculture Example: Industrial Revolution

Stage 4: drive to maturity where diffusion of advanced technology moves beyond just the few initial industries-other industries experience rapid growth, workers become more skilled and specialized and the economy begins to diversify

Stage 5: high mass consumption where economy shifts from dominance of secondary manufacturing jobs to dominance of service-sector tertiary jobs- most incomes fairly high and people become mass consumers of produced goods

Criticisms of Rostow Some feel the model isn’t applicable to all countries

because model is based on European and Anglo-American development patterns

Does not account for road blocks to development like postcolonial dependency on former colonizer that many countries experience while struggling to develop their economies

Considers each country an independent agent rather than one that interlocks with other countries

Reducing the Development Gap There is much debate on how to reduce the development gap

Example of gap: African women’s chances of dying in childbirth is 1 in 16 while in the industrial world, chances are 1 in 2,800

Popular method developed in the 1900s is the self-sufficiency model Defined as ability to provide for a countries own people, independent from

foreign economies Country should spread its investments and development equally across all

sectors of its economy and regions Rural areas develop along with urban areas Poverty reduced across the entire country

Favors closed economic state Imports are limited and heavily taxes so local businesses can flourish without

competing with foreign countries China, India, eastern Europe and Africa are using this approach to improve

development in their regions This system can and does create corruption and inefficiency limited develop

Example: Indian government paid failing businesses to stay open and continue rather than face competition that could improve product and by extension, business success

Reducing the Development Gap with International Trade This approach encourages international trade Pushes a country to identify its strengths in the world then channel

investment toward those strengths Argues that to compete internationally, a country must find out what it

can offer the world and then capitalize on that good or service Argue that eventually a country will develop a comparative advantage

(when the country is better at producing a particular good or offering some service than another country) over the rest of the world in producing that good or service

This comparative advantage can fill the market’s need for a good or service at a lower production cost than other places can

Example: Japan invested money and power into developing a comparative advantage in high-technology products

Eastern Europe

Western Europe

America

South America

Australia

India

Nepal

Mongolia

Africa

What does this population pyramid suggest about the future for developing nations?

Services Defined as any activity that fulfills a human

want or need and returns money to those who provide it

In the modern economy, most people work in the service industry!

Where services are located and why they grow where they do is a major part of geography

Types of Services Consumer Services: provides services to individual

consumers who desire and can pay for them Retail Services: about ¼ of all jobs in U.S. – this is shopping Personal Services: 1/5 of all jobs in U.S. – these improve quality of

life like health care or education Business: facilitate other businesses

Producer services: provide services to help people conduct other business like financial, real estate, law or management

Transportation: businesses that distribue and diffuse services – includes information services like broadcasting and publishing

Public: provides security and protection for citizens and businesses Includes police, fire, public schools, etc. About 10% of American workers are in public services

Where are services located? Central Place Theory: defined as a market center for

the exchange of goods and services by people attracted from the surrounding areas

Central places compete with each other to provide services

A.K.A. the Christaller model Primarily deals with question of How far will you

drive to receive a particular service? Ex. Pizza vs. Neurosurgeon

The Informal Sector Many countries do not know and/or report data from their

informal sector in GDP Defined: network of business transactions that are not

reported, therefore, not included in the country’s GDP and official economic projections

Examples: babysitting, street vendors, drug trafficking In many less developed countries, this sector is prominent in

overall economic activity Why does the informal sector exist?

Good produces in informal sector may be meeting need the formal sector has ignored

Good produced here may be in high demand because they are inexpensive-the negative to this is people who work in this sector rarely make enough to meet basic needs

Often this sector involves illegal immigrants