Industrial development and economic growth: Implications for poverty reduction and income

6. Discussion
For the countries analyzed here, industrial development has been an impor-
tant basis for economic growth. Output expansion has been associated with
export promotion, increased trade opening, economic liberalization and an
improved business climate in most of the countries. However, import protec-
tion and selective government intervention have been employed as well. 
As poverty in many developing countries is a predominantly rural prob-
lem, increased agricultural productivity is often a key to poverty reduction at
the outset of economic development. This has been the case e.g. in China and
Indonesia. Countries that have started their economic reforms – as China did
– with agricultural reform or otherwise emphasized rural development have –
at the beginning – typically experienced declining inequality due to a decrease
of rural poverty. In Korea and Taiwan, due to land reforms of earlier decades,

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Industrial Development for the 21st Century
income distribution was relatively even when rapid industrialization began. In
Indonesia, oil rents were used in financing rural development. 
After the early stages of economic development, growth in the industrial
sector is, however, essential for sustained long-run growth and poverty reduc-
tion. In the countries studied, the growth of the manufacturing sector has cre-
ated employment opportunities outside agriculture and, as manufacturing in
many of these countries has been – at least at the beginning – intensive in
unskilled labour, the poor have benefited. In some countries, like Korea,
growth during certain periods has clearly been pro-poor, with the poor bene-
fiting proportionally more than the non-poor. There are, however, significant
differences between countries as far as the impact of industrialization on the
poor is concerned. In Mexico, for example, the growth of the manufacturing
sector in the late 1980s and early 1990s benefited skilled workers to a greater
extent than unskilled ones. Often, economic growth has been accompanied
by increasing inequality over some periods, even if poverty in absolute terms
has declined – as shown by the recent experience in China. 
The extent to which industrial development effectively decreases pover-
ty and inequality depends on the pattern of industrialization. Industries
which employ a high proportion of unskilled workers and/or use domestic
inputs and raw materials produced with labour-intensive technologies can
have positive effects on incomes of the poor. In Taiwan, for example, during
the early phases of industrial development, the demand for unskilled work-
ers increased relative to that for skilled workers, which reduced inequality
and poverty. At later stages, demand for skilled workers significantly
increased, along with a change in Taiwan’s export and manufacturing struc-
ture. By that time, Taiwan had made major investments in human capital, so
the effect on income distribution of changing skill demands was relatively
muted. The Republic of Korea has followed a similar path. In Brazil and
India, on the other hand, manufacturing has tended to be relatively capital
intensive, creating relatively modest employment opportunities for the poor.
Also in India, the service sector has been a major contributor to recent
growth, but the dynamic service industries like software and back-office pro-
cessing have provided few jobs for the unskilled directly. Still, with strong
growth performance for the past 15-20 years, the poverty rate in India has
significantly declined.
The geographical location of industry can also affect the extent to which
industrialization is pro-poor. In China, industrialization has significantly
increased per capita income, but as industrial development has been concen-
trated in the eastern coastal regions of the country, inequality between
regions has increased and industrial development has contributed relatively
little to poverty reduction in much of the interior. Still, inter-regional labour
mobility is high and the remittances sent home by migrant workers can help
mitigate effects of geographic concentration of industry on regional inequal-
ity. Geographical reasons – or economic distances – also partly explain why

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Industrial development and economic growth
some parts of Brazil, India, Indonesia or Mexico are much less developed
than other parts of those countries. 
Initial conditions significantly impact on whether major industrial
development occurs, and whether industrialization accelerates economic
growth and reduces poverty. Fundamental conditions for sustainable eco-
nomic growth and industrial development include political, social and
macroeconomic stability, well-functioning institutions and rule of law. The
role of government is essential in creating these. If these framework condi-
tions are lacking, investments – whether foreign or domestic – are likely to
be few and growth limited and fluctuating. Economic instability is likely to
impact especially the poor, as has happened e.g. in Mexico in the mid-1990s
and in Indonesia in the late 1990s. In Korea and Taiwan, on the other hand,
economic development has been much more stable. 
Government has an important role in infrastructure and human
resources development as well as in encouraging and supporting innovation
and technological upgrading. For poor people, education is often an avenue
to better employment and income opportunities. The existence of universal
education, as in China or Korea, gives the poor better possibilities to partic-
ipate in the development process. 
At the outset of their development, countries may rely on primary
resources or a cheap labour force, and all the countries analyzed here have
begun their development process by relying on one or both of these factors.
In the long run, however, investment in human capital and technological
upgrading are essential if a country wishes to remain internationally compet-
itive and sustain economic prosperity. Korea and Taiwan are good examples
of countries where human resources development has had a significant
impact on industrial development and broad economic growth. Due to rapid
technical change and globalization, competition is becoming more and more
intense, and the capacity to employ state-of-the-art technologies is increas-
ingly crucial to succeed. That capacity is above all a function of the educa-
tional attainment and skills level of the workforce.
Countries may choose to build their industrial capabilities through
domestic research and development as Taiwan and Korea did to a consider-
able extent. A more common approach has been to plug into global value
chains and become a supplier of labour-intensive products (UNIDO, 2002),
gradually upgrading technological capabilities through foreign investments.
This is the strategy used e.g. by Mexico and to a somewhat lesser extent by
Brazil. The two approaches are not mutually exclusive, and many countries
rely on a mix of technology imports and development of domestic technolo-
gies and technological capabilities, with the balance tending to shift towards
the latter as economic development proceeds. Governments have a signifi-
cant role in capability-building as well as in attracting FDI. 
All countries analyzed here have, at some point in time, carried out selec-
tive industrial policies, by which they have aimed to change the sectoral

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Industrial Development for the 21st Century
structure of production towards sectors believed to offer greater prospects for
faster productivity growth. Taiwan and especially Korea are examples of
export-manufacturing-oriented countries which have successfully used gov-
ernment intervention and import protection in the early phases of develop-
ment of their manufacturing sectors. 
Today, the degree of policy freedom left to developing countries is nar-
rower than it was some decades ago, even if some well-planned government
intervention may seem justified based on the success stories of the earlier
decades. However, governments still have a primary role in promoting sus-
tainable economic growth and especially poverty-reducing growth. In addi-
tion to ensuring stability, well-functioning institutions and appropriate leg-
islation (e.g. labour laws), other essential government actions are related to
skills formation, technology support, innovation financing, infrastructure
development, and provision of a variety of public goods. All these have an
impact on the growth and trade performance of a country. Rapid economic
growth as such tends to decrease poverty. Rapid growth may increase income
inequality, but this is not inevitable. Whether or not it does, depends not
only on the skill bias of technical change in an economy but on human cap-
ital formation measures and on the nature of taxation and expenditure poli-
cies. In addition to promotion of job creating industries and SMEs and sup-
porting the creation of domestic linkages, inequality can be decreased e.g. by
subsidized access to education, subsidized housing, progressive taxation or
economic asset redistribution like land reforms. 

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321
Agriculture
Industry
Services, etc.
0%
20%
40%
60%
80%
100%
1965
1970
1975
1980
1985
1990
1995
2000
Figure 1. Sectoral shares of GDP in China, 1965-2004 
Industrial development and economic growth
0
50
100
150
200
250
300
350
400
450
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
billion US $
Textiles & clothing, leather goods & other light industry manufactures (SITC rev . 3: 61, 63, 65, 8)
Road vehicles & other t ransport equipment (SITC rev.3: 78, 79).
Power generating machinery, industrial machinery, etc. (SITC rev.3: 71, 72, 73, 74)
Other commodity exports (primary commodities, food and beverages, chemicals, fuels etc., (SITC rev. 3: 0, 1, 2, 3, 4, 5, 9)
Iron & steel, non-metallic mineral manufactures & other heavy industry manufactures exc. machinery & transport equip. 
(SITC rev.3: 62, 64, 66, 67, 68, 69)
Electrical machinery, telecommunications equip., office machines etc. (SITC rev.3: 75, 76, 77).
Figure 2. China: export of commodities, 1992-2003
Source: World Bank (2006).
Source: UN Comtrade database. Obs.: re-exports included.

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322
Industrial Development for the 21st Century
Agriculture
Industry
Services, etc.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1965
1970
1975
1980
1985
1990
1995
2000
2005
Figure 3. Sectoral shares of GDP in India, 1965-2005
0
10
20
30
40
50
60
70
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
billion US $
Textiles & clothing, leather goods & other light industry manufactures (SITC rev . 3: 61, 63, 65, 8)
Road vehicles & other t ransport equipment (SITC rev.3: 78, 79).
Power generating machinery, industrial machinery, etc. (SITC rev.3: 71, 72, 73, 74)
Other commodity exports (primary commodities, food and beverages, chemicals, fuels etc., (SITC rev. 3: 0, 1, 2, 3, 4, 5, 9)
Iron & steel, non-metallic mineral manufactures & other heavy industry manufactures exc. machinery & transport equip. 
(SITC rev.3: 62, 64, 66, 67, 68, 69)
Electrical machinery, telecommunications equip., office machines etc. (SITC rev.3: 75, 76, 77).
Figure 4. India: Export of commodities, 1988-2003
Source: World Bank (2006).
Source: UN Comtrade database. Obs.: re-exports included.

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323
Industrial development and economic growth
Agriculture
Industry
Services, etc.
0%
20%
40%
60%
80%
100%
1965
1970
1975
1980
1985
1990
1995
2000
2004
Figure 5. Sectoral shares of GDP in South Korea, 1965-2004
0
20
40
60
80
100
120
140
160
180
200
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
billion US $
Textiles & clothing, leather goods & other light industry manufactures (SITC rev . 3: 61, 63, 65, 8)
Road vehicles & other t ransport equipment (SITC rev.3: 78, 79).
Power generating machinery, industrial machinery, etc. (SITC rev.3: 71, 72, 73, 74)
Other commodity exports (primary commodities, food and beverages, chemicals, fuels etc., (SITC rev. 3: 0, 1, 2, 3, 4, 5, 9)
Iron & steel, non-metallic mineral manufactures & other heavy industry manufactures exc. machinery & transport equip. 
(SITC rev.3: 62, 64, 66, 67, 68, 69)
Electrical machinery, telecommunications equip., office machines etc. (SITC rev.3: 75, 76, 77).
Figure 6. South Korea: Export of commodities, 1988-2003
Source: World Bank (2006).
Source: UN Comtrade database). Obs.: re-exports included.

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324
Industrial Development for the 21st Century
Agriculture
Industry
Services, etc.
0%
20%
40%
60%
80%
100%
1965
1970
1975
1980
1985
1990
1995
2000
2005
Figure 7. Sectoral shares of GDP in Indonesia, 1965-2005
0
10
20
30
40
50
60
70
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
billion US $
Textiles & clothing, leather goods & other light industry manufactures (SITC rev . 3: 61, 63, 65, 8)
Road vehicles & other t ransport equipment (SITC rev.3: 78, 79).
Power generating machinery, industrial machinery, etc. (SITC rev.3: 71, 72, 73, 74)
Other commodity exports (primary commodities, food and beverages, chemicals, fuels etc., (SITC rev. 3: 0, 1, 2, 3, 4, 5, 9)
Iron & steel, non-metallic mineral manufactures & other heavy industry manufactures exc. machinery & transport equip.
(SITC rev.3: 62, 64, 66, 67, 68, 69)
Electrical machinery, telecommunications equip., office machines etc. (SITC rev.3: 75, 76, 77).
Figure 8. Indonesia: export of commodities, 1989-2004
Source: World Bank (2006).
Source: UN Comtrade database. Obs.: re-exports included.

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325
Industrial development and economic growth
0%
20%
40%
60%
80%
100%
1965
1970
1975
1980
1985
1990
1995
2000
2005
Agriculture
Industry
Services, etc.
Figure 9. Sectoral shares of GDP in Mexico, 1965-2005
0
20
40
60
80
100
120
140
160
180
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
billion US $
Textiles & clothing, leather goods & other light industry manufactures (SITC rev . 3: 61, 63, 65, 8)
Road vehicles & other t ransport equipment (SITC rev.3: 78, 79).
Power generating machinery, industrial machinery, etc. (SITC rev.3: 71, 72, 73, 74)
Other commodity exports (primary commodities, food and beverages, chemicals, fuels etc., (SITC rev. 3: 0, 1, 2, 3, 4, 5, 9)
Iron & steel, non-metallic mineral manufactures & other heavy industry manufactures exc. machinery & transport equip. 
(SITC rev.3: 62, 64, 66, 67, 68, 69)
Electrical machinery, telecommunications equip., office machines etc. (SITC rev.3: 75, 76, 77).
Figure 10. Mexico: export of commodities, 1989-2003
Source: World Bank (2006).
Source: UN Comtrade database. Obs.: re-exports included

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326
Industrial Development for the 21st Century
Agriculture
Industry
Services, etc.
2003
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1970
1975
1980
1985
1990
1995
2000
Figure 11. Sectoral shares of GDP in Brazil, 1970-2003
0
10
20
30
40
50
60
70
80
90
100
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
billion US $
Textiles & clothing, leather goods & other light industry manufactures (SITC rev . 3: 61, 63, 65, 8)
Road vehicles & other t ransport equipment (SITC rev.3: 78, 79).
Power generating machinery, industrial machinery, etc. (SITC rev.3: 71, 72, 73, 74)
Other commodity exports (primary commodities, food and beverages, chemicals, fuels etc., (SITC rev. 3: 0, 1, 2, 3, 4, 5, 9)
Iron & steel, non-metallic mineral manufactures & other heavy industry manufactures exc. machinery & transport equip. 
(SITC rev.3: 62, 64, 66, 67, 68, 69)
Electrical machinery, telecommunications equip., office machines etc. (SITC rev.3: 75, 76, 77).
Figure 12. Brazil: export of commodities, 1989-2004
Source: UN National accounts database.
Source: UN Comtrade database. Obs.: re-exports included.

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327
Industrial development and economic growth
Acknowledgements
I wish to thank David O’Connor (UNDESA/Policy Integration and Analysis
Branch) for his comments throughout the writing process. Mónica
Kjöllerström (UNDESA/Policy Integration and Analysis Branch) has written
the section on Brazil. This is gratefully acknowledged. Mr. Jukka Jalava and
Mr. Kalle Laaksonen of Pellervo Economic Research Institute have provided
feedback on selected sections. 
Notes
1 It is important to notice, however, that technological change is not only relevant to
manufacturing, but similarly has significant impacts in other sectors of the economy.
A good example of this is increased productivity in agriculture, which has been essen-
tial for accelerated economic growth in many developing countries. 
2 According to some analysts, the distribution of income among all people in the world
has become more equal over the last two decades.
3 It has also had negative impacts on income distribution. During the 1970s, for
instance, demand for skilled workers in heavy and chemical industries pushed up
domestic wages and increased wage differentials between skilled and unskilled work-
ers.
4 The validity of official inequality measures has been questioned, however. 
5 These included reduction in tariff levels, tariff dispersion and elimination of major
non-tariff restrictions.
6 Mexico is on the other extreme, having increased its openness to trade five times
between the early eighties and the first years of the current decade.
7 Job creation has shifted towards the private services sector, in both highly remunerat-
ed activities (financial services, telecommunications, etc.) and activities with low bar-
riers to entry, such as informal commerce and personal services (UN ECLAC,
2004a).
8 In 2000, income levels in the informal sector were 72 per cent lower than those pre-
vailing in the formal sector on average in the region, up from a 59 per cent differen-
tial in 1990.
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