Industrialization: Engine of Growth [Characteristics, Drivers, Impacts]

Industrialization emerged, for example, during the industrial revolutions in the United States and Europe in the mid-18th to 19th centuries. Economic activity in the manufacturing sector is growing rapidly as new technological discoveries. It boosted economic output significantly, brought urbanization from the countryside to industrial areas, encouraged financial investment, and gave rise to a new class in society: the working class and the financier.

Perhaps you associate industrialization with the industrial revolution. Both have similarities; however, the Industrial Revolution is more used to refer to industrialization in some developed countries in the past. Examples are:

• The first industrial revolution started between the 1760s and 1840s in England. It started after the invention of the steam engine when machines in factories began to replace manual labor.
• The Second Industrial Revolution began when electricity and the internal combustion engine were widely used in 1870. It then gave rise to capitalism, which flourished in Western countries.
• The third industrial revolution is due to advances in science and technology such as computers, digital, nuclear, and space. It took place in the aftermath of World War II and transformed the modern information society.

What is industrialization?

Industrialization is a process by which the economy transitions from an agriculture-based to a manufacturing-based basis. Investment in production facilities increased rapidly, leading to the large-scale production of goods and services.

Labor is transferred from farms to factories where capital equipment is concentrated. People move from rural to urban areas, where manufacturing activity is located. Productivity and output increased rapidly to keep pace with the increased demand for goods.

The economy then became more modern. Machines replaced human work. More sophisticated production methods, such as lean production and agile manufacturing, also support greater and varied output. Mechanized mass production replaced individual manual labor, and assembly lines replaced craftsmen.

The manufacturing sector grew rapidly, and its contribution to the economy has increased—measured by the percentage of its final output to gross domestic product (GDP). Likewise, this sector also creates more jobs, making employment increase faster than other sectors.

After some time of industrialization, employment in the service sector increased more rapidly than in manufacturing. As a result, the economy began to move from manufacturing to service, which led to deindustrialization.

Hallmarks of industrialization

Industrialization is marked by a cluster of transformative changes that reshape economies and societies. Here’s a closer look at some key characteristics:

• Economic boom: Industrialization fuels economic growth by significantly increasing the rate of output. This surge in production translates into a more prosperous economy.
• Rising living standards: As economies flourish, the standard of living for citizens generally improves. This can manifest in better access to goods, services, and healthcare.
• Urban sprawl: Industrialization attracts people from rural areas to cities in search of factory jobs. This rapid population shift leads to increased urbanization.
• Population growth: Improved living conditions and healthcare advancements often accompany industrialization, leading to higher population growth rates.
• Innovation engine: Industrialization thrives on continuous technological innovation. New inventions and advancements drive efficiency and productivity gains.
• Cultural transformation: The rise of factories and urban centers often leads to a cultural shift as traditional ways of life adapt to the new industrial landscape.
• Specialization for efficiency: Industrialization promotes a more efficient division of labor. Workers specialize in specific tasks within the production process, boosting overall productivity.
• Enhanced productivity: Through mechanization and specialization, industrialization leads to higher labor productivity. This means more goods can be produced with less human effort.

The drivers of industrialization

Industrialization usually occurs in the early part of economic development. In less developed countries, primary sectors such as agriculture and mining contribute significantly to output and employment.

• Later, the economy developed, and the manufacturing sector (secondary sector) began to contribute more significantly to the economy during industrialization.
• The next stage is the transition from a manufacturing-based economy to a service-based (tertiary and quaternary sector) economy, as in developed countries like the United States. That then leads to deindustrialization, where the percentage of manufacturing contribution begins to decrease.

Back to industrialization. The need to add higher value to primary sector output spurred heavy investment in the manufacturing sector. Industrialization is also supported by various other aspects, including infrastructure, technological innovation and production techniques, government regulations and policies, and advanced financial markets.

Increased value-added brings more income to the economy. Primary sector output has low added value compared to the secondary sector. Iron ore, for example, is not only cheap but also volatile. However, if it is processed into a steel plate, the price will be doubled.

So, what are the drivers of industrialization?

Industrialization doesn’t happen by accident. Several key factors create the conditions necessary for this economic transformation:

• Technological advancements: More sophisticated production methods and technologies become the backbone of industrialization. These advancements allow for higher productivity, enabling the creation of a wider variety of goods at a faster pace.
• Energy abundance: Reliable and abundant energy supplies, such as coal and oil in the past and renewable sources today, are crucial. Cheaper energy translates to lower production and transportation costs, making industrial activity more feasible.
• Infrastructure boom: The development of infrastructure like roads, railways, ports, and communication networks plays a vital role. This infrastructure lowers logistics costs and facilitates access to raw materials and markets, creating a smoother flow of goods.
• Division of labor and specialization: Companies break down complex production processes into specialized tasks. This division of labor, combined with mechanization, significantly increases worker productivity and overall output.
• Investment-friendly policies: Governments often implement policies to attract investment in the manufacturing sector. These policies might include subsidies, tax breaks, streamlined regulations for foreign investment, and promoting flexible labor markets.
• Thriving financial markets: Developed financial markets make it easier for entrepreneurs to raise capital. Access to cheaper and more abundant funding, beyond traditional bank loans or personal savings, fuels business expansion and innovation within the manufacturing sector.

The effects of industrialization

Industrialization is good for bringing more output, jobs, and income into the economy. In addition, it also stimulates the growth of various supporting industries, especially services.

But, it also raises another problem. Environmental degradation and social problems in urban areas are examples. Others are bad working practices for the pursuit of profit.

Positive impacts of industrialization

Industrialization isn’t without its challenges, but it has also driven significant progress across economies and societies:

• A flood of goods: Industrialization triggers a surge in the supply of goods and services. This wider variety provides consumers with more choices and greater access to essential products.
• Innovation breeds diversity: As industrialization progresses, the range of goods and services becomes not just more plentiful but also more diverse. New inventions and production methods lead to a wider array of products with higher added value, catering to evolving consumer demands.
• Affordability for all: Increased production often leads to lower prices for consumers. This affordability allows people to stretch their budgets further and improve their quality of life.
• Job boom: Industrialization creates a surge in employment opportunities, particularly in manufacturing sectors. These jobs typically offer higher wages compared to those in the primary sector (agriculture, mining).
• Productivity powerhouse: Specialization and the adoption of sophisticated machinery significantly enhance worker productivity. This translates to more efficient production and the ability to create more goods with less manpower.
• Economic engine: A thriving manufacturing sector fuels national income growth. The production of higher value-added goods strengthens the economy, creating more jobs and generating additional income across various sectors.
• Export power: Industrialized nations often become major exporters of high-value manufactured goods. This export boom increases foreign exchange reserves and strengthens a nation’s economic position on the global stage.
• A thriving ecosystem: Industrialization often stimulates the development of other economic sectors, particularly the service sector. This creates a more diversified and resilient economy.
• Trade winds in favor: As domestic production ramps up, a nation’s trade balance can improve. Increased exports coupled with a decrease in reliance on imports create a more favorable trade position.
• A higher standard of living: Industrialization paves the way for a better standard of living. People gain easier access to a wider variety of goods and services, including those related to healthcare and education.
• Skilled workforce: To meet the demands of a growing industrial sector, governments and businesses invest in training and education programs. This fosters a more skilled and qualified workforce, further boosting productivity and innovation.

Negative impacts of industrialization

While industrialization brings undeniable benefits, it’s crucial to acknowledge its downsides:

• Exploitation at work: The relentless pursuit of profit can lead to unethical labor practices. This might include low wages, unsafe working conditions, and even child labor, raising ethical concerns and social unrest.
• Urban woes: Rapid urbanization often creates problems for city residents. Strained infrastructure can lead to inadequate housing, sanitation issues, and an increase in crime rates, negatively impacting quality of life.
• Polluting progress: Industrial activity often comes at a heavy environmental cost. Air and water pollution from factories, coupled with waste accumulation and greenhouse gas emissions, pose significant environmental challenges.
• Resource depletion: The ever-increasing demand for raw materials to feed industrial production can deplete natural resources. This unsustainable exploitation raises concerns about resource scarcity for future generations.
• The skills gap: As manufacturing expands and technology advances, the demand for skilled workers can outpace the education and training systems’ ability to provide them. This skills gap can make it difficult for businesses to find qualified workers.
• Widening wealth gap: The surge in profits for factory owners often doesn’t translate into higher wages for workers. This can exacerbate income inequality and create social tensions.
• Jobless in the fields: Increased mechanization in agriculture can lead to job displacement for farmworkers. If these workers lack the skills or opportunities to transition to new jobs in the industrial sector, it can create structural unemployment in rural areas.
• Foreign dependence: A reliance on imported raw materials and capital goods can leave a nation vulnerable to external shocks. Fluctuations in global commodity prices and exchange rates can disrupt domestic production and economic stability.
• Global interdependence: While increased international trade and investment foster economic growth, they also expose economies to external vulnerabilities. Global economic downturns or political instability in other countries can have a ripple effect on a nation’s industrial sector.

Industrialization in the modern era

The traditional image of smokestacks and factory lines might come to mind when you think of industrialization. However, the modern era presents a more nuanced picture:

• The rise of the service sector: As economies mature, the service sector often surpasses manufacturing in terms of contribution to GDP. This sector encompasses a wide range of industries, from finance and healthcare to information technology and tourism.
• Globalized production chains: Manufacturing has become increasingly globalized. Companies may source raw materials, manufacture components, and assemble finished products in different countries, taking advantage of variations in labor costs, resource availability, and regulations.
• The knowledge economy: Innovation and intellectual property play a crucial role in today’s industrial landscape. Research and development drive advancements in areas like robotics, artificial intelligence, and biotechnology, shaping the future of manufacturing.
• Focus on efficiency and sustainability: Modern industrial practices emphasize efficiency and sustainability. Lean manufacturing principles aim to minimize waste and optimize production processes. Additionally, environmental regulations and growing consumer awareness are driving the adoption of cleaner technologies and more sustainable resource management.

Globalization: reshaping the landscape of manufacturing

The rise of globalization has fundamentally reshaped manufacturing:

• Free trade agreements: International trade agreements have lowered tariffs and barriers to trade, facilitating the movement of goods and services across borders. This has intensified competition in the global marketplace.
• Shifting production locations: Companies are constantly evaluating the most cost-effective locations for different stages of production. This has led to a shift in manufacturing bases, with some companies moving operations to countries with lower labor costs or preferential trade agreements.
• Supply chain complexity: Globalized production chains create complex logistical challenges. Companies need to manage a network of suppliers, manufacturers, and distributors spread across different countries, requiring efficient communication, transportation, and risk management strategies.
• The rise of emerging markets: Developing economies with large workforces and growing consumer markets have become increasingly attractive destinations for manufacturing operations, propelling their economic growth.

The future of the industry: automation and the rise of Industry 4.0

The future of industry is likely to be characterized by increasing automation and the rise of Industry 4.0:

• Automation on the rise: Robots and other intelligent machines are increasingly performing tasks previously done by human workers. This automation can improve efficiency, precision, and consistency in production.
• Industry 4.0 refers to the integration of advanced technologies like artificial intelligence, the Internet of Things (IoT), and Big Data into manufacturing processes. This creates a “smart factory” environment where machines can communicate with each other and optimize production in real-time.
• The human factor: While automation plays a growing role, human skills remain essential. Workers will need to adapt and develop new skill sets to collaborate effectively with machines, manage complex systems, and drive innovation in this evolving industrial landscape.