Industrialization

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Process of converting to a socioeconomic order in which industry is dominant. The changes that took place in Britain during the Industrial Revolution of the late 18th and 19th century led the way for the early industrializing nations of western Europe and North America. Industrialization entailed both technology and profound social developments. The freeing of labourers from feudal and customary obligations created a free market in labour, with a pivotal role for the entrepreneur. Cities attracted large numbers of people, massing workers in new industrial towns and factories. Later industrializers attempted to manipulate some of the elements: the Soviet Union eliminated the entrepreneur; Japan stimulated and sustained the entrepreneur's role; Denmark and New Zealand industrialized primarily by commercializing and mechanizing agriculture.

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The process by which manufacturing industries develop from within a predominantly agrarian society. Characteristic features of industrialization include the application of scientific methods to solving problems, mechanization and a factory system, the division of labour, the growth of the money economy, and the increased mobility of the labour force—both geographically and socially. One problem is that these are features of capitalism, and capitalism is not the same thing as industrialization, although it was the first instrument of industrialization. Industrialization is generally accompanied by social and economic changes, such as a fall in the birth rate and a rise in per capita GNP. Urbanization is encouraged and groups of manufacturing towns may form. Within the developed world, the growth of the factory system led to the separation of home and workplace with major repercussions for urban social geography. Initially there is an emphasis on primary and secondary industry, but as industrialization continues, there is a shift to tertiary industry.

Some writers argue that the term may also be used to describe the methods used to increase productivity in areas other than manufacturing, such as agriculture or administration. Although industrialization is often seen as a solution to problems of poverty in the Third World, its effects may well not benefit any but a small sector of society. Furthermore, the pollution associated with industrial activity may cause serious difficulties.

The concept of industrialization implies the movement of an economy from a primarily agricultural basis to a mixed or industrial/service basis with an accompanying increase in output and output per capita. Although the early stages of industrialization require systemic and policy measures to steer resources into the productive process, eventually the growth of output must be generated through the growth of productivity. During the process of successful industrialization, measurement of the importance of the agricultural and industrial sectors, characterized for example by output shares in GDP, will indicate a relative shift away from agricultural production towards industrial production along with the sustained growth of total output. The analysis of these changes differs if cast within the framework of neoclassical economics (and its variations) as opposed to the Marxist-Leninist framework. Much of our analysis of the Russian economy during the Tsarist era and the subsequent events of the Soviet era have focused on the process of industrialization under varying institutional arrangements, policy imperatives, and especially changing ideological strictures.

To the extent that Lenin and the Bolshevik Party wished to pursue the development of a socialist and ultimately a communist economic system after the Bolshevik revolution of 1917, the relevant issue for the Bolshevik leadership was the degree to which capitalism had emerged in prerevolutionary Russia. Fundamental to industrialization in the Marxist-Leninist framework is the development of capitalism as the engine of progress, capable of building the economic base from which socialism is to emerge. Only upon this base can industrial socialism, and then communism, be built. From the perspective of classical and neoclassical economic theory, by contrast, the prerequisites for industrialization are the emergence of a modern agriculture capable of supporting capital accumulation, the growth of industry, the transformation of population dynamics, and the structural transformation of the Russian economy placing it on a path of sustained economic growth.

While there is considerable controversy surrounding the events of the prerevolutionary era when cast in these differing models, the level of economic development at the time of the Bolshevik revolution was at best modest, and industrialization was at best in early stages. From the standpoint of neoclassical economic theory, structural changes taking place were consistent with a path of industrialization. However, from a Marxist-Leninist perspective, capitalism had not emerged. The relevance of disagreements over these issues can be observed if we examine the abortive period, just after the Revolution of 1917, of War Communism. While indeed an attempt was made during this period to move towards the development of a socialist economy, these efforts contributed little, if anything, to the long-term process of industrialization.

Although during the New Economic Policy (NEP) a number of approaches to industrialization were discussed at length, the outcome of these discussions confirmed that ideology would prevail. The Marxist-Leninist framework would be used, even in a distorted manner, as a frame of reference for industrialization, albeit with many institutional arrangements and policies not originally part of the ideology. While the institutional arrangements based upon nationalization and national economic planning facilitated the development and implementation of socialist arrangements and policies, priority was placed nonetheless on the rapid accumulation of capital, a part of the process of industrialization that should have occurred during the development of capitalism, according to Marx. Thus, while an understanding of the elements of Marxism-Leninism is useful for the analysis of this era, most Western observers have used the standard tools of neoclassical economic theory to assess the outcome.

During the command era (after 1929), industrialization was initially rapid, pursued through a combination of command (nonmarket) institutions and policies within a socialist framework. The replacement of private property with state ownership facilitated the development of state institutions, which, in combination with command planning and centralized policy-making, ensured a high rate of accumulation and rapid expansion of the capital stock. In effect, the basic components of industrialization traditionally emerging though market forces were, in the Soviet case, implemented at a very rapid pace in a command setting, effectively replacing consumer influence with plan prerogatives. The pace and structural dimensions of industrialization could, with force, therefore be largely dictated by the state, at least for a limited period of time. Private property was eliminated, national economic planning replaced market arrangements, and agriculture was collectivized.

For some, the emergence of Soviet economic power and its ultimate collapse presents a major contradiction. While there is little doubt that a major industrial base was built in the Soviet Union, it was built without respect for basic economic principles. Specifically, because the command economy lacked the flexibility of market arrangements and price messages, resources could be and were allocated largely without regard to long-term productivity growth. The command system lacked the flexibility to ensure the widespread implementation of technological change that would contribute to essential productivity growth. Finally, and significantly, the socialization of incentives failed, and the consumer was largely not a part of the industrial achievements. Even the dramatic changes of perestroika during the late 1980s were unable to shift the Soviet economy to a new growth path that favored rational and consumer-oriented production.

Industrialization in the post-1990 transition era was fundamentally different from that of earlier times. First, the ideological strictures of the past were largely abandoned, though vestiges may have remained. Second, to the extent that the command era led to the development of an industrial base inappropriate for sustaining long term economic growth and economic development, the task at hand became the modification of that industrial base. Third, the modification of the industrial base required the development of new institutions and new policies capable of implementing necessary changes that would place the contemporary Russian economy on a long-term sustainable growth path. It is this challenge that separated the early stages of industrialization from the process of industrialization during transition, since the latter implies changes to an existing structure rather than the initial development of that structure.

The process of industrialization is necessarily modified and constrained by a variety of environmental factors. In the case of Russia, those environmental factors should be largely positive insofar as Russia is a country of significant natural wealth and human capital.

Bibliography

Gregory, Paul R., and Stuart, Robert C. (2001). Russian and Soviet Economic Performance and Structure, 7th ed. New York: Addison Wesley Longman.

Millar, James R. (1981). The ABCs of Soviet Socialism. Urbana: University of Illinois Press, 1981.

Nove, Alec. (1981). The Soviet Economic System. London: Unwin Hyman.

—ROBERT C. STUART

Manufacturing in the Middle East, with a legacy of state-led industrialization, remains underdeveloped and ill prepared for the challenges of globalization.

The countries of the Middle East and North Africa have failed to develop viable manufacturing sectors and industrialize in a way comparable to more dynamic countries in Southeast Asia and Latin America. After decades of state-led industrialization efforts, most economies of the region remain dependent on primary produce exports, labor remittances, and foreign aid, while few manufacture
goods that are competitive in international markets. Indeed, without tariff and quota protection and subsidies, most of the existing industries that have been established would fail to compete successfully in their own domestic markets. As a result, the economies of the region remain unprepared to meet the challenges posed by economic globalization and will be hard-pressed to provide sufficient employment and wealth generation for the growing populations of the region.

Overview

From the perspective of global economic history, the Middle East would appear to have the necessary prerequisites for successful industrialization given its manufacturing inheritance, artisan skills, and availability of finance. In the early postwar period, expectations for industrial modernization were high, yet half a century later the region's industrial sectors appear to be mismanaged and technologically deficient. Although conditioned by the experience of colonialism, this fate was not predetermined by geography, religion, or culture. For most economies of the region, it has rather been the result of authoritarian regimes failing to overcome the legacies of inward-oriented, state-led industrialization efforts through market reform and technological innovation. Meanwhile, economies across the region have been sustained by oil incomes, labor remittances, and strategic aid flows while suffering the strains of regional insecurity, leading to high spending on imported military equipment and diverting investment away from the region.

The Middle East has a strong preindustrial manufacturing tradition, for the ancient cities of the region served not only as centers of commerce but also as bases for handicraft manufacturing. The skills of Arab and Jewish craftsmen from Andalusia to Baghdad were renowned throughout the medieval world. Later in the sixteenth century, cities such as Isfahan in Iran had more skilled artisans than Paris, with more than half a million workers engaged in manufacturing.

In the eighteenth and nineteenth centuries, European capitalist penetration and various forms of direct and indirect colonialism led to the dislocation of indigenous economic patterns, while defensive modernization efforts, such as that of Muhammad Ali in Egypt, failed to sustain local industrialization. With the inability to protect local markets, European industrialization resulted in the relative deindustrialization of the Middle East. Small-scale artisan and domestic manufacturing for local consumption, however, continued and in some cases expanded in isolated markets. By the early twentieth century intense economic interaction with Europe did bring access to investment and technology, resulting in establishment of mechanized factories often owned by Europeans as well as ethnic and religious minorities.

These possible foundations for industrial development, however, were disrupted by the rise of nationalist movements that led to the evacuation and expropriation of the assets of much of the existing bourgeoisie. Postcolonial states led by a new class of reform-oriented elites took over the drive toward import substitution industrialization (ISI). With a heavy urban bias, these regimes viewed large-scale factory production as a marker of modernity and national independence. These projects, however, were often driven more by an interest in expanding state power and employment generation than long-range development goals. As a result, most industrial sectors remained dominated by state-owned enterprises and/or supported by tariff and quota protection and subsidies that have proved politically difficult to remove ever since.

Although state-led ISI efforts made impressive early gains, their inward-oriented development models soon faced crises. In the 1970s states such as Turkey, Egypt, and Tunisia adopted "open door" policies to attract investment, but only in the 1980s and 1990s did they implement substantial price liberalization and the privatization of state-owned assets. Economic liberalization spurred smaller scale, private sector investments in light manufacturing, textiles, and food processing.

Meanwhile, in the wake of the 1973 oil embargo the region witnessed a massive inflow of capital with the soaring price of oil. This income allowed the oil-rich states of the Persian Gulf to expand their modern infrastructure and oil-related sectors. Many would also later seek to diversify their economies.

Regional oil dependency, however, has resulted in "rentier" economies marked by excessive state expenditures, unproductive investments, and unsustainable import levels. At the same time, investment in turnkey projects rapidly increased industrial capacity but failed to sustain technological advancement or encourage local innovation. Moreover, oil incomes gave these states the ability to provide extensive educational and social welfare benefits for their populations while eliminating the need for taxation, reducing pressures for administrative accountability and political representation. The bulk of the excess capital generated by the oil boom was invested in the advanced industrial economies, and regional investment was mostly limited to tourism, real estate, and construction. The oil boom also produced rentier effects in the oil-poor states by generating flows of aid and private remittances.

Throughout the post-1945 era, some of the greatest negative factors inhibiting industrialization have been the successive wars, continuous political hostilities, and military authoritarian regimes in the region. In many states, more effort and finance has gone into building military might than into developing civilian industry. In fact, the Middle East devotes a greater share of income to arms purchases than any other region.

The wars and political tensions in the Middle East, caused by regional insecurity and external intervention, have also resulted in investors being put off by the risks and uncertainties. As investment flooded the "emerging markets" in the post - Cold War era, there has been little foreign direct investment in the Middle East, and major multinational companies are still reluctant to establish substantial production facilities in the region.

While economic fortunes vary considerably across the region, in general, Arab states have failed to encourage knowledge-intensive fields and make investments in research and development. And in the last two decades of the twentieth century, encompassing both the oil boom and the decline of oil prices in the late 1980s, per capita growth in the Arab states was on average 0.5 percent, which is well below the global average of 1.3 percent. As a result, most states remain ill prepared to face the challenges of economic globalization. In many states, large sections of the population view globalization as an externally driven threat to their well-being and way of life.

Country Experiences

Not surprisingly, Turkey has experienced the most success with industrialization in the region. The regional paradigm for state-led ISI was set by Turkey, which under Mustafa Kemal (Atatürk) established heavy industries in the 1920s and 1930s such as steelmaking and modern textile plants. These were planned on the Soviet model, primarily to serve a protected domestic market. These plants provided the inputs for more consumer-oriented industries such as clothing and household fabrics, and eventually consumer durable manufacturing was developed, including vehicle assembly using domestically produced sheet steel.

Despite the substantial size of the domestic market in Turkey, the import substitution process was running out of steam by the 1960s, and most of the state-owned industries were sustaining heavy losses. Change finally came in 1980, when economic liberalization measures were introduced, liberalizing prices, reducing subsidies, removing import restrictions, and, most importantly, letting the exchange rate find its own level in the market. An export boom resulted, encompassing a range of manufacturing sectors, and Turkey moved into balance of payments surplus as a result of flourishing trade with Europe and exports of manufactured goods to neighboring Middle Eastern countries.

Egypt's state-led industrialization drive under Gamal Abdel Nasser had also faltered by the 1970s, although it was the Arab - Israel War of 1967 that led to the end of development planning and economic policies based on Arab socialism. In the wake of the 1973 Arab - Israel War President Anwar al-Sadat initiated the infitah (open door policy) to attract foreign investment. Husni Mubarak followed up by introducing a partial liberalization of the economy, but it was much less sweeping than Turkey's changes. Egypt's subsidies have been reduced at the behest of the International Monetary Fund (IMF), some price controls removed, and the exchange rate floated.

There has been some privatization, but Egypt's industries are not yet internationally competitive, due as much to lack of quality control as to price. Although the large state-owned firms still provide substantial employment, the most dynamic firms are the privately owned export-oriented ones engaged in light manufacturing for international franchises. Much of Egypt's private capital, however, has been invested in real estate and service-sector businesses such as tourism.

Although oil was discovered in the Middle East before World War II, it was the development of the Organization of Petroleum Exporting Countries (OPEC) and the 1973 oil embargo that led to the rapid rise of oil prices, which in turn led to massive revenue increases in the oil-rich states such as Saudi Arabia, Kuwait, Iraq, and Iran.

In Saudi Arabia, the state-owned Saudi Basic Industries Corporation (SABIC) has become a major petrochemical producer working in collaboration with leading multinational oil and chemical companies. Jabal Ali has risen from the desert sands to become the leading industrial complex in the Persian Gulf and the largest in the Arab world. It produces not only a large variety of petroleum derivatives, but also fertilizers and steel. The petrochemicals are the feedstocks for plastics, and Saudi Arabia already has a range of downstream manufacturing, producing everything from transparent bags and other disposables to heavy durable plastic products.

Apart from Turkey, Saudi Arabia is the only Middle Eastern country to have experienced a considerable degree of industrial success. The Riyadh government took the lead because of the substantial scale of the financing involved, but Saudi Arabia, like Turkey, has a vigorous and growing private manufacturing sector. In Turkey, the comparative advantage lies in its modest labor costs and the adaptability and skills of its people. In Saudi Arabia, where much of the labor is foreign, the advantage is the abundance of energy and a tradition of trade and commerce.

With oil resources, abundant human capital, and an agricultural base, Iraq could have been expected to develop into a regional economic powerhouse. After an emphasis on agricultural development and decentralized food-processing factories in the early republican (post-1958) era, during the oil boom Iraq came to focus on its oil and gas sector. By the late 1970s Iraq had shifted toward heavy industry and armament manufacturing. In the wake of two wars and a decade of sanctions, however, its oil sector and industrial base became dilapidated, and it will be difficult to rebuild it in the wake of the U.S.-led toppling of the Baʿathist regime.

Iran saw its industrial output in steel and petro-chemical production decline throughout the 1980s following the disruption of the Islamic Revolution and the Iran - Iraq War. Many industrialists and managers left after the overthrow of the shah, and the war resulted in severe shortages that made it difficult for industries to obtain necessary raw materials and imported inputs. After the war the Tehran government engaged in a "construction jihad" to develop the country's infrastructure and educational system, but political isolation has continued to limit its industrial prospects.

Israel is the most industrialized country in the region and one of the few with a highly skilled work-force and a commitment to supporting research and development. Industrial development, however, has been hampered by isolation and continuing regional conflict. The Oslo peace process of the mid-1990s led to short period of exaggerated hopes in Israel and across the region for economic cooperation in inward investment, but these expectations fell with the decline of the peace process in the late 1990s. As a small state trying to diversify with a limited domestic market, Israel has suffered from its exclusion from regional markets, despite post-Oslo efforts towards regional normalization. Israel's trade with Egypt and Jordan has been minimal, though some low-skilled labor-intensive production has been outsourced to these states, which have peace treaties with Israel. Trade relations with the European Union have been difficult despite a cooperation agreement, and the United States is a somewhat distant market.

Cut diamonds remain a major industrial export for Israel, but earnings are static and the industry provides direct employment for only a few hundred skilled workers. Much of the country's industry is defense related and is dependent on the financial injections from the United States, which sustain the country's high level of military expenditure. Defense equipment, including aircraft, is exported to a number of countries.

In the 1990s Israel made considerable efforts to build up its civilian high technology industries, including electronics and software development. But Israel is a relatively high-cost producer and faces cutthroat international competition. Export growth in its high-technology sector came to a halt in 2000 with the high-tech bust in the United States and with the collapse of the peace process.

The peace treaty between Israel and Jordan failed to generate extensive economic cooperation, but Jordan has sought to diversify and liberalize its economy. With a small domestic market, Jordan had relied on mineral exports and trade with Iraq during its oil-boom phase, but since the mid-1990s has sought to promote tourism development, as well as export-oriented light manufacturing by granting incentives to firms located in qualified industrial zones (QIZ) and through its free trade agreement with the United States. Jordan has also developed a relatively successful pharmaceuticals sector, but its generic drug production might run into trouble with intellectual property rights.

In North Africa, Algeria's industrialization drive, supported by oil and gas revenues, was anchored by heavy-industry plans that failed to act as growth poles. Socialist planning has been disastrous, in particular, for truck and tractor assembly plants. Most consumer durables industries were established to serve the domestic market and have been protected from competition by tariffs and foreign exchange rationing. This also applies to Morocco, which never adopted socialist controls over its economy, as Algeria and Tunisia did. In fact, in Morocco, small-scale craft-based activities such as ceramics, woodcarving, metalworking, and clothing remain a source of strength, providing employment and output possibly equal to that of the country's industrial plants.

Tunisia and Morocco have pursued outward-oriented industrialization policies by promoting tourism development and building private-sector textile plants that carry out subcontracting work for European garment producers. These firms expanded during the 1980s and early 1990s, but have suffered from lower-cost Asian producers. Despite investment incentives and liberal laws on foreign capital, they have failed to attract considerable industrial investment from overseas. Both states have signed association agreements with the European Union that will gradually reduce tariff barriers on industrial products. In the meantime, Tunisia and Morocco have benefited from preferential access and have sought to promote an innovative industrial modernization program (mise à niveau) for small- and medium-sized firms in order to meet the challenges of integration into European and global markets.

Bibliography

Henry, Clement M., and Springborg, Robert. Globalization and the Politics of Development in the Middle East. Cambridge, U.K.: Cambridge University Press, 2001.

Issawi, Charles. An Economic History of the Middle East and NorthAfrica. New York: Columbia University Press, 1982.

Richards, Alan, and Waterbury, John. A Political Economy of the Middle East, 2d edition. Boulder, CO: Westview Press, 1998.

United Nations Development Programme. Arab HumanDevelopment Report 2003: Building a Knowledge Society. New York: UNDP, 2003.

RODNEY J. A. WILSON
UPDATED BY WALEED HAZBUN

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The process in which a society or country (or world) transforms itself from a primarily agricultural society into one based on the manufacturing of goods and services. Individual manual labor is often replaced by mechanized mass production and craftsmen are replaced by assembly lines. Characteristics of industrialization include the use of technological innovation to solve problems as opposed to superstition or dependency upon conditions outside human control such as the weather, as well as more efficient division of labor and economic growth.

Investopedia Says:
Industrialization is most commonly associated with the European Industrial Revolution of the late eighteenth and early nineteenth centuries. The onset of the second World War also led to a great deal of industrialiazation which resulted in the growth and development of large urban centers and as well as suburbs. Industrialization is an outgrowth of capitalism and its effects on society are still undetermined to some extent, however it has resulted in a lower birthrate and a higher average income.

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