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, where 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’s it: Industrialization is a process by which the economy transitions from an agriculture-based to a manufacturing-based basis. Investment in production facilities increased rapidly. That then leads 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.
Then, the economy became more modern. Machines replace human work. More sophisticated production methods, such as lean production and agile manufacturing, also support greater and varied output. Mechanized mass production replaces individual manual labor, and assembly lines replace craftsmen.
As a result, the manufacturing sector grew rapidly. As a result, 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-based to service-based. That then leads to deindustrialization.
Following are the characteristics of industrialization:
- Increasing the rate of economic growth.
- Increased standard of living.
- Increased urbanization.
- Higher population growth.
- Continuous technological innovation.
- Cultural shift.
- More efficient division of labor.
- Higher labor productivity.
Factors causing 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 create higher value-added to primary sector output spurred heavy investment in the manufacturing sector. It 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 processing it into a steel plate, the price will be doubled.
So, what are the factors causing industrialization? Here are some of them:
- Production methods and technology are more sophisticated. It enables higher productivity and a more diverse product.
- Energy supplies – such as oil and coal – are abundant. Therefore, it makes energy and transportation costs cheaper.
- Infrastructure is built such as roads, railways, ports, and communications, lowering logistics costs and facilitating access to sources of raw materials and customers.
- Division of labor and specialization were introduced. Companies divide complex production systems into specific tasks and jobs. Combined with mechanization, it enables a significant increase in worker productivity.
- The government introduces investment-friendly policies and regulations to attract more investment in the manufacturing sector by both domestic and foreign investors. Examples include providing subsidies, offering tax breaks, reducing red tape to facilitate foreign direct investment, and encouraging a more flexible labor market.
- Financial markets are developing more and more. Entrepreneurs find it easier to raise funds needed to set up a company or expand a business. They can access cheaper and more abundant funds than relying solely on bank loans or personal savings.
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 effects of industrialization
Following are the positive impacts of industrialization:
- The supply of goods and services in the economy increased significantly.
- Goods and services are increasingly diverse and have higher added value.
- People have more options for cheaper items.
- Employment opportunities are increasing, and wages are higher than wages in the primary sector.
- Labor productivity is higher due to specialization, assisted by more sophisticated machines.
- National income increases as higher value-added and various supporting industries develop, creating more jobs and income in the economy.
- The economy exports more higher-value goods, increasing export earnings and foreign exchange reserves.
- Other economic sectors are developing, especially the service sector, along with a more prosperous economy.
- The trade balance improved as exports increased and, at the same time, imports declined as domestic supply could better meet domestic demand.
- The standard of living is improving due to better access to easier and more varied goods and services such as health and education.
- Quality workers are more available in efforts to increase productivity through training and education.
Positive effects of industrialization
Following are the negative impacts of industrialization:
- Poor work practices emerge, such as low wages, poor working conditions, and child labor as manufacturers pursue output and profits.
- Urban residents face poor living conditions where urbanization raises various problems, for example, related to access to housing and crime.
- Environmental pollution is increasing through pollution, accumulated urban waste, and greenhouse gas emissions.
- Natural resources are dwindling because they are being exploited to meet the increasing demand for raw materials for the manufacturing sector.
- Manufacturing expansion makes it difficult for businesses to recruit new workers, especially if they are not supported by an adequate education and training system.
- Capital owners are getting richer, but workers struggle to earn more money, creating a wider wealth gap.
- Mechanization in the agricultural sector leads to higher structural unemployment in this sector as some farmworkers cannot upgrade their skills as the market demands.
- Larger imports of raw materials and capital goods, especially if domestic natural resources are inadequate and industrialization is not directed towards building an integrated supply chain in the domestic market.
- The domestic economy is more vulnerable to external and exchange rate shocks because it is increasingly connected to overseas economies through international trade and investment.