Transcript Least Cost Theory

INDUSTRIALIZATION AND ECONOMIC
DEVELOPMENT
ECONOMIC DEVELOPMENT

Economic Geography: study of flow of goods
and services across space
 Look
at ways in which people provide for
themselves across the globe
 Geographic patterns of inequality at different scales
 Globalization: is a MAJOR thread throughout
economic geography….free trade, international
trade, international economic alliances, etc.
INDUSTRIAL REVOLUTION


Industry: manufacturing goods in a factory
Industrial Revolution:

Great Britain – late 1700s – diffused to W. Europe and U.S.

Technology and mechanization led to unprecedented
increase in production

Iron and textiles = 1st to industrialize
Innovations in
Machinery and
transportation…..
railroads, steam
engines, cotton gin,
Bessemer converter,
spinning jenny etc.
etc.
INDUSTRIAL REVOLUTION
WHERE IS INDUSTRY DISTRIBUTED?

For 200 yrs industry was limited to
 N.
Europe – Great Britain, France, Russia, Germany
 E. Asia – Japan
 N. America – U.S.
 These
countries dominated industrial
production/innovation until mid 20th Century
WHERE IS INDUSTRY DISTRIBUTED

In recent yrs – shift in geography of
industrialization
 Major
corporations have moved factories to LDCs
(cheap labor)
 Older industrial countries have shifted to service
based economies – research and development,
marketing, tourism, sales, telecommunications,
etc.)
 Service jobs are safer, more pay, less pollution, and
overall higher satisfaction
WHERE IS INDUSTRY DISTRIBUTED?
 BUT
service jobs require more education/training
than factory work
 i.e. difficult transition – factory lose jobs as
factories outsource, must go back to school or
switch careers in mid life
 Mill towns/factory towns – ghost towns or reinvent
themselves with new economic niche
WHERE IS INDUSTRY DISTRIBUTED?

Deindustrialization: when industrial factories
leave an area and take that region’s economic
base with them
 Ex:
Rust Belt: Great Lakes region was home to all
auto manufacturing but GM and other companies
have relocated – debilitating for the economy of the
region and the workers there
 Backwash Effect: when one region’s economic gain
is another’s loss
THE RUST BELT
RUST BELT IMAGES
WHERE ARE INDUSTRIES DISTRIBUTED
AND WHY THERE?

All industries seek to maximize profits by
minimizing production costs
Critical question: Where is the most profitable
place to locate a factory??
 Alfred Weber: Least Cost Theory: firms look at
the following to decide where to locate……..

LEAST COST THEORY

1.) Transportation Costs: must move raw
materials (inputs) to plant and finished product
to market
 Market
Orientation Firms: if finished product
weighs more or is perishable, then locate the plant
closer to the market than the raw materials….4
types of market orientation:
LEAST COST THEORY – MARKET ORIENTED
FIRMS




A.) Bulk Gaining Industry: product gains volume or weight
during production (TV, refrigerator, soft drinks)
B.) Single Market Manufacturer: product sold mainly in one
location
C. Perishability: fresh fruits, milk, bread, newspaper – must
be near market
D.Ubiquitious Industry: industry distribution is in direct
proportion to the distribution of the population (i.e. near
large metro areas with people = labor and market) i.e.
hospitals, big business
LEAST COST THEORY –
MATERIAL/RESOURCE ORIENTATION

Material/Resource Orientation: raw materials
(inputs) weigh more (or are perishable) than
the finished product so locate plant closer to
raw materials than to market. These are called
Bulk Reducing Industries: final product weighs
less than the inputs
(i.e. paper mills, steel, copper – most mining,
tomato cannery, etc.)
LEAST COST THEORY – OTHER
TRANSPORTATION VARIABLES



Footloose firms: industries w/ products that are
lightweight and valuable and can locate anywhere (i.e.
diamond of computer chips)
Spatially fixed cost: cost of product does not change
no matter where factory is located
Spatially Variable cost: price of product varies
depending on where factory is located and where
product is produced
LEAST COST THEORY – OTHER
TRANSPORTATION VARIABLES

Transportation – ship, rail, truck, or air?
LEAST COST THEORY - TRANSPORTATION
 Longer
distance is cheaper per mile
 Ships best for longest distances
 Air – most expensive but fastest
 Break of Bulk Points: cost of transport for some
inputs is cheaper than another type of transport –
so you use multiple methods of transport. BBP =
transfer point (usually a seaport or airport)
LEAST COST THEORY - AGGLOMERATION

Agglomeration: when many companies of the
same industry cluster together in a small area
to draw from the same set of collective
resources (i.e. computer companies in Silicon
Valley, motion picture industry in LA, fashion in
Paris)
WITH A PARTNER:

What are some other examples of
agglomeration that you can think of?
LEAST COST THEORY - AGGLOMERATION

Multiplier Effect: as more firms from same
industry locate in an area, more resources
become available and cements that region’s
specialty even more (ex: CA became known for
high tech firms, it attracted more computer
experts, which attracted more high tech firms,
etc.)
LEAST COST THEORY - AGGLOMERATION

Ancillary Activities: agglomeration results in
ancillary activities – i.e. the supporting cast.
Economic activities that surround/support the
primary industry of the region. These can
include a range of activities – shipping, food
services, etc.
LEAST COST THEORY - AGGLOMERATION

Agglomeration leads to regionalization: unique
specialization from region to region

Deglomeration: opposite of agglomeration –
when a firm leaves an agglomerated region to
start up in a new place
LEAST COST THEORY – AGGLOMERATION
REGIONAL SPECIALIZATION – SILICON VALLEY
LEAST COST THEORY –
LABOR


Labor intensive industry = one where the cost of labor
is a high percentage of production (ex: textiles)
Outsourcing: move production abroad for cheap labor.
You’re willing to pay more for transportation b/c of
cheap labor. Outsourcing usually goes to semiperiphery – cheap labor, decent infrastructure, no
environmental regs
LEAST COST THEORY –
LABOR

Textiles has followed cheap labor – originally in
NE because of cheap immigrant labor, late
1800s/early 1900s moved to SE to avoid
unions, post WW II moved overseas to LDCs in
Asia (50s in Hong Kong and Japan, 70’s in
China and Korea, today in Indonesia,
Bangladesh
LEAST COST THEORY – OTHER THINGS A
FIRM MAY CONSIDER……

Land:




Factories today usually rural or suburban
Need large tracts of land (1 story – more efficient)
Amenities – climate, cost of living, re opportunities (i.e. Sun
Belt)
Communities engage in bidding wars – zoning, tax breaks,
environmental conditions, etc. to offer most attractive
package (i.e. Dell in NC)
LEAST COST THEORY – OTHER THINGS A
FIRM MAY CONSIDER….

Capital
 Money
available to expand or open new factories
 May go to area where banks are willing to make
high risk loans (i.e. Silicon Valley)
FACTORY WORK

Fordism: mass production and assembly lines
(each worker assigned one specific task to
perform repeatedly). Started by Ford in early
20th Century
FACTORY WORK

Post-Fordism: more flexible – work in teams
and often master a wide array of tasks
WEBER’S FACTORS TO CONSIDER =
SITE AND SITUATION FACTORS

Site Factors: land, labor, capital

Situation Factors: transportation costs – i.e.
relative location to inputs/raw materials and to
market
SUMMARY OF LOCATION PRINCIPLES
Access to materials for production
 Adequate supply of cheap labor
 Proximity to shipping and market
 Decrease production costs (cheap land, cheap
labor, and favorable government policies)
 Natural factors, climate
 Firm’s history and personal inclinations

INDUSTRIAL PROBLEMS

Over production – global capacity to produce
manufactured goods has increased more
rapidly than demand
 Consumption
 No
leveled off since 1970s because
population increase
 Wages have not risen as fast as prices
 Market Saturation: everyone already has one (TV, cars,
microwaves, etc.)
 Higher quality goods last longer
INDUSTRIAL PROBLEMS IN MDCS

Must protect markets from new competitors

Trading Blocs: industrial competition in MDCs
is between blocs, not countries
 NAFTA,
EU, ASEAN
 Cooperation within bloc, competition between
 Seek complementary trade within bloc
INDUSTRIAL PROBLEMS IN MDCS

Transnational Corporations – locate aspects of
production in various countries. i.e. take
advantage or regional diff in wages, tax laws,
labor laws, natural resources, etc.
 Ex:
Nike – HQ in Oregon, but factories span the
globe
INDUSTRIAL PROBLEMS IN MDCS

Most transnational corporations are
conglomerate corporations: firms that consist
of many smaller firms that serve different
functions (ex: GM – many smaller firms that
operate all over the world, and produce a wide
variety of goods and services
INDUSTRIAL PROBLEMS IN LDCS
Distance from markets – far from wealthy
consumers in MDCs
 Poor infrastructure (roads, technology,
communication, etc.)
 Cheap labor = best drawing card for industry.
International division of labor: low paid, low
skilled work done in LDCs, high skilled work in
MDCs

INDUSTRIAL PROBLEMS IN LDCS

Export Processing Zones: zones officially
designated for manufacturing – have
accessible facilities, lax environmental
regulations, and tax exemptions, cheap labor.
Ex: Maquiladoras along US/MX border.
 Pros
– jobs for MX, cheap labor for US.
 Cons – often plagues with high crime, government
corruption, pollution
INDUSTRY TODAY…..
Outsourcing
 Export processing zones - maquiladoras
 Tourism
 All of these exploit LDCs/periphery.
Neocolonialism: economic and political
controls are exercised by developed states over
the economies and societies of independent
countries in the developing world

DEVELOPMENT
Development: process of improving material
conditions of people with diffusion of
knowledge and technology – continuous
process of trying to improve health, living
conditions, and prosperity
 Wallerstein’s World Systems Model

 N/S
Divide (see handout)
DEVELOPMENT VARIES ACROSS SPACE


Development can be broken into economic, social, or
demographic factors
Human Development Index (HDI): created by UN to
look at all 3





Life exp, education (literacy rate and amount of education),
income (GDP)
Highest possible – 1.0 (100%)
Norway – highest - .944
U.S. never first, but always high
Lowest - sub Sahara Africa (Sierra Leone .275)
ECONOMIC FACTORS OF DEVELOPMENT

GNP and GDP (omits investments abroad)
GNP (Gross National Product): the market value of all
the products and services produced in one year by
labor and property supplied by the residents of a
country
 GDP (Gross Domestic Product): the market value of all
officially recognized final goods and services produced
within a country in a given period of time

Per capita (divide by population)
 Annual per capita GDP more than $20,000 in
MDCs and @ $1,000 in LDCs – this gap is
widening

ECONOMIC FACTORS OF DEVELOPMENT

Types of jobs….
 Primary
activities: with land – fishing, farming
 Secondary: manufacturing, industry
 Tertiary: service
 Quaternary:
research and development –
generating/exchanging knowledge (teaching, banking,
law, accounting, etc.)
 Quinary: high tech scientific research
TYPES OF JOBS/ECON ACTIVITIES
ECONOMIC FACTORS OF DEVELOPMENT


All countries have all types of economic activities. The
higher up you go, the more education required and
the better pay. MDC’s mostly in tertiary or higher.
LDC’s mostly in primary. Semi-periphery mostly in
secondary.
Human Resources and productivity increase in MDCs
(workers produce more w/ less effort)….higher
education, skilled, machinery and technology
ECONOMIC FACTORS OF DEVELOPMENT

Energy Consumption per capita – correlates
with technology and development
 MDCs
=10X more per capita than LDCs
 MDCs consume more energy than they produce
 MDCs use coal, natural gas, hydropower
 LDCs use firewood, dung, peat, and domestic fuels
to cook and keep warm
 Wood – 60% of fuel use in LDCs and 90% in
poorest countries
SOCIAL INDICATORS OF DEVELOPMENT

MDCs use money for schools, hospitals, that
provide better education and healthier longer
lives – this is cyclical because better educated
and healthier population can be more
productive and make more money
SOCIAL INDICATORS OF DEVELOPMENT

Education: MDC’s have greater quantity and
quality of education
 Student
– teacher ratio (2X as many students to 1
teacher in LDC)
 Literacy Rate (over 95% in MDCs, less than 35% in
LDCs)
 Average student attends school 10 yrs in MDC and
a few yrs in LDCs (varies)
SOCIAL INDICATORS OF DEVELOPMENT

Health
 MDCs
– better ratio of people to hospitals, doctors,
and nurses
 MDC consume greater calorie consumption. In
LDCs many get less than daily recommended
allowance
 Different problems……MDCs – problems with
obesity, elderly population, etc.
DEMOGRAPHIC INDICATORS OF
DEVELOPMENT
Life Expectancy: average # of yrs a newborn
can expect to live (early 40s in LDCs, 70s in
MDCs)
 Infant Mortality: die before 1st b-day (less than
1% in MDCs, 10% in LDCs)
 CBR – higher in LDCs but dropping
 Maternal Mortality Rate –higher in LDCs

GENDER ISSUES IN DEVELOPMENT

Gender inequality exists in every country

Two composite measures to look at……
GDI GENDER RELATED DEVELOPMENT
INDEX

GDI: looks at same measure as HDI but to
highlight disparity between men and women
 Complete
equality is 1.0
 Penalized for greater difference between men and
women
 Highest GDIs in Europe and N. America; lowest in
Sub Sahara Africa
 Even in MDCs women’s average income is less than
men’s
GDI
 In
LDC’s women less likely to attend school and
have lower literacy rates (99/100 women to men in
MDC high school; 60/100 in LDC high schools)
(remember this affect on population growth)
 Globally
women outlive men, but outlive men much
longer in MDCs than in LDCs (mostly because of
maternal mortality rate)
GENDER EMPOWERMENT MEASURE (GEM)
Measures economic and political power
 4 factors….

 Income
 Professional
jobs
 Managerial jobs
 Elected positions (no country has a national
Congress w/ majority women…highest in Europe
with @ 30%....U.S. has @ 15%)
Every nation has a higher GDI and lower GEM
i.e. means women possess a greater share of a
nation’s resources than power over allocation
of those resources
 Even in MDCs women’s average income is less
than men’s…WHY?

LDCS OBSTACLES TO DEVELOPMENT



While LDCs have improved, gap between MDC and
LDC has increased.
WHY? Circular/cumulative causation: process where
tendency for economic growth are self-reinforcing….i.e.
it takes money and development to foster money and
development
Solution? LDCs must develop at a faster rate, but
how? Two prominent options….
SELF SUFFICIENCY/BALANCED GROWTH
APPROACH – CHINA AND INDIA
Country should invest = across all sectors of
the economy and all regions
 Limit imports (tariffs)
 Internal businesses encouraged to produce for
own people; not export

PROBLEMS WITH SELF-SUFFICIENCY
MODEL
Protects inefficient businesses in own country
(protect from international competition, but has
little incentive to improve quality or lower price)
 HUGE government bureaucracy to manage
economy – leads to abuse and corruption –
Government red tape

OPTION TWO – INTERNATIONAL TRADE
MODEL
Develop through international trade (look
outward). Look outward. Identify a unique
economic asset and export globally. Use funds
and profit to finance other development
 Done in Arabian peninsula and E/SE Asia

W.W. ROSTOW – DEVELOPMENT MODEL

Rostow advocated international trade approach
with a 5 step model towards development. He
created the model in the 1950s and based it
on the pathway the U.S. and Europe followed:
 Stage
1: Traditional Society: country dominated by
primary economic activities – low production, low
tech, low per capita income
ROSTOW – INTERNATIONAL TRADE


Stage 2: Preconditions to Takeoff: preconditions to
economic development are commercialization of AG
and exploitation of raw materials
Stage 3: Takeoff: foreign investment jump starts
econ. Rapid growth in a limited number of sectors;
other sectors still dominated by traditional methods.
Country uses profits to pour into infrastructure (roads,
canals, etc.)
ROSTOW – INTERNATIONAL TRADE
Stage 4: Drive to Maturity: Development and
modern technology diffuse to wider variety of
the economy. Workers become more skilled
and specialized
 Stage 5: high levels of mass consumption and
per capita income. Shift from heavy industry to
services and producing consumer goods.

CRITICISMS OF ROSTOW


Not all countries will pass through stages
consecutively
Model doesn’t account for….







Global politics
Colonialism
Physical geography
War
Culture
Ethnic conflict
All of these may affect progression and cause different
pathway
EXAMPLE OF INTNL TRADE MODEL

4 Asian Tigers/Dragons: S. Korea, Singapore, Taiwan,
Hong Kong



all poor in natural resources
Promoted development by focusing on a handful of
economic goods (especially clothing and electronics). i.e.
find comparative advantage – produce item for which you
have the greatest advantages in comparison to other
countries
Low labor allowed them to sell products cheaply in MDCs
MAP – ASIA 
India – China – initially
self/sufficiency and
balanced growth model

4 Asian Tigers –
International Trade
Model
4 ASIAN TIGERS

South Korea

Taiwan

Hong Kong

Singapore
PROBLEMS WITH INTERNATIONAL TRADE
MODEL

May hinder other LDC’s from following this
path….
 1.)
Uneven resource distribution: many country's
niche faced lower price on world market (ex:
Zambia and copper – world prices for copper have
been dropping)
 2.) Market stagnation: market for consumer goods
slowing down in general
PROBLEMS WITH INTERNATIONAL TRADE
MODEL

3.) Increased dependence on MDCs: takeoff
industries force LDCs to decrease production of
food, clothing, or other necessities for own
people

Conclusion….international trade model is
widely accepted alternative to self-sufficiency
model
STATISTICS……

World Bank – since 1990 per capita GDP has
increased more than 4% annually in countries
with international trade model and less than
1% in countries with self-sufficiency model
STATISTICS…..

1960-1990…..
 India’s
GDP increased by 4%/year on self
sufficiency model
 Thailand’s by 8%/year (international trade)
 Taiwan’s by 8%/year (international trade)
 S. Korea’s by 9% /year (international trade)
 Since
1990s India switched to international trade
and GDP has increased by 6%/year
WTO – WORLD TRADE ORGANIZATION

Established in 1995 – promotes international
trade model. Works to decrease barriers to
international trade by….
 Eliminating
restriction on trade (no tariffs, no
quotas on imports, no subsidies on exports)
 Enforcing trade agreements (rules on arguments
and accusations)
WTO
Liberal critics – say WTO is anti-democratic and
promotes interests of large, wealthy,
transnational corporations
 Conservative critics – says WTO compromises
governments of countries because it can order
changes in subsidies, taxes, etc.
 ALWAYS protestors outside WTO meetings

WTO
$$$$$ FOR DEVELOPMENT??

1.) Loans – usually from World Bank or
International Monetary Fund (both controlled by
MDCs)
 Together
loan @ 50 billion/year
 Idea – borrow $$ to improve infrastructure to
attract businesses/investment
 Many infrastructure projects fail – don’t work, don’t
pay off, or businesses still do not come
$$$$ FOR DEVELOPMENT?

(Loans)
 Debt
is greater than annual income in 30 countries
 Many LDCs cannot even pay interest on loans,
much less the principal
 Result….many MDC’s becoming more hesitant to
grant loans
$$$$ FOR DEVELOPMENT??

2.) Foreign Direct Investment – Transnational
Corporations: flow of money and investment from one
country to another through private corporations
(increasing trend in late 20th C)


BUT only ¼ of foreign investment went from MDC to LDC
(most goes from MDC to MDC)
Of all money from MDC to LDC, ½ of that goes to Brazil,
China, MX