You are the minister of planning in a developing country with a poorly developed industrial sector. You would like to create a climate in which industrialists will invest and create economic growth. After much investigation, you realize that you are faced with the following basic problem. I’ll state it with a series of examples.

Nobody wants to invest in the coal industry because there is no developed railway to demand coal nor any factory furnaces that use coal. Nobody wants to invest in railways because they are scared that nobody will want to transport products on them (there are few products to transport at present).

They are also scared that there won’t be any coal to run the railway. Nobody wants to develop new products whose sale requires transportation because there isn’t a railway system. There is a problem similar to coal in the extraction of iron ore. There isn’t a steel industry, so who would want to extract large quantities of iron? Besides, there isn’t a firm that makes good extraction equipment. Talking to investors, you find that this is so because such equipment needs an extraction industry to demand their products and no such industry yet exists! Of course, potential investors in steel tell you that they can’t find firms to sell them iron, and so on. You realize that you are facing two kinds of issues. One is like a “chicken-and-egg” problem: industry A needs industry B and vice versa. Neither wants to get in there until the other does. The other is a problem of “linkages”: there is a chain of industries, with each having “forward” linkages to the sectors that demand its output, and “backward” linkages to the sectors that produce the outputs it demands.

(a) By drawing on my examples and expanding them with others, draw charts that show these different issues.

(b) You are going to recommend that the government take on the task of operating some of these industries (there are limited funds, so the government can’t do everything). What kind of industries in your chart should the government get into?

(c) “A leading sector is a particular sector of the economy that can stimulate the development of many other sectors.” Using what you have learned from this problem, try to explain the characteristics of a powerful leading sector.