1973 was again associated with a slowdown in productivity growth, particu-
larly in the developed countries. Kaldor’s Third Law is that faster growth of
output in the industrial sector leads to faster growth of productivity in the
whole economy (due to the operation of Verdoorn’s Law) because of dynamic
economies of scale. There is evidence that productivity growth by country and
also across different Indian states varies positively with the expansion of the
industrial sector (Dasgupta and Singh,2005).
Together the Second and Third Laws show that countries with a high growth
ra te of industrial sector gro wth will have a relatively high growth rate of
productivity in the economy as a whole. These laws show that the industrial
sector is the dynamic centre of technical change and productivity growth.
A more industrialized country will experience an increasing lead over non-
industrial countries. Economic success in the post-war world was typically
associated with rapid industrialization.
Structuralism: the debate
While Lewis (1954) argues that in order to facilitate the transfer of labour from
the traditional to the modern sector, there must be no increase in wages, many
structuralists argue that higher wages help expand the domestic market and by
making labour more expensive create an incentive to introduce productivity-
enhancing mechanization. Structuralists do not generally accept the auto-
maticity of structural change modelled by Lewis. They tend to argue that the
working of market forces can lead to developing countries being locked into
178 Patterns and Determinants of Economic Growth
Box 8.3 ‘The China effect’China is relatively resource-poor, and its rapid growth, based on the export of
manufactured products, has been very import-intensive. Between 1998 and 2003
China accounted for 96 per cent of the increase in global demand for steel, 99 per
cent for nickel, 100 per cent for copper, and 76 per cent aluminium. Between 2002
and 2004 the price of hot-rolled coil steel rose from $140/tonne to more than
$500/tonne (compared with a previous post-war peak of $400/tonne), a direct
result of growing Chinese demand. The other side of the ‘China effect’ has been
surging Chinese exports of manufactured goods. Between 1993 and 2000 there
was more than a 10 per cent decline in China’s terms of trade in manufactures,
particularly in computers and office equipment, telecommunications equipment
and semi-conductors, the sectors in which China’s participation in world trade has
being growing most rapidly. Some commentators believe this surge in raw-mate-
rial prices has fundamentally changed the nature of the world economy to the
permanent benefit of (African?) exporters of raw materials. Others argue it is only
a temporary effect that will last only as long as China’s growth is so raw material-
dependent and the upgrading in China towards more high-technology and skill-
intensive manufacturing sectors will reduce this effect over time.