On the need for increased Industrial Capacity

By Kishika Mahajan

Published in

The Agenda (IYEA)

21 min readMay 10, 2021

The industrial capacity of a nation, in a very basic sense, refers to the ability of its industries to manufacture goods with the available resources. The importance of the industrial capacity of a nation has always played a significant role in determining its position in the world in various regards.

To put this in perspective, it’ll be helpful if we try to understand the case of the United States in the second World War. While on one hand, the US was going through the Great Depression and was determined to stick to the policy of isolationism, the Pearl Harbour and the fact that the UK practically ended up being the only major nation between the Axis and the control over Europe and beyond and the Pearl Harbour attack (without getting into the controversy of the attack that Roosevelt had an idea or wanted it to happen) led to US intervention in the second World War.

By the end of the war, the United States was producing two-thirds of all Allied military equipment ($183 billion of arms, 86,000 tanks, 2.5 million trucks and half a million Jeeps, 286,000 warplanes, 8,800 naval vessels, 5,600 merchant ships, 434 million tons of steel, 2.6 million machine guns and 41 billion rounds of ammunition). As William Knudsen, president of General Motors and Roosevelt’s wartime director of production management put it, “We won because we smothered the enemy in an avalanche of production, the like of which he had never seen, nor dreamed possible.”

The United States became a world superpower and ensured the victory of the Allied powers as it wouldn’t be an understatement to say had it not been for this “production avalanche”, the Allied powers would have lost.

The War Production Board was set up in 1942 just after a month of the Pearl Harbour with the main purpose of the War Production Board was to shift the production of the peacetime industries to the production of equipment that is necessary for the war and to conserve materials which would be needed in the war.

With automobile manufacturers producing war equipment, the production of cars in the US fell by millions. There was strict rationing for the citizens. With men serving in the military, women took the jobs earlier dominated by men and this increase in the workforce, stimulated the economy which had been in a depression. It is said the increase was equal to if the US had been producing in peacetime considering full employment.

There are two things that can be inferred from this. Firstly, the US had the industrial capacity to produce the necessary goods in the desired quantities which rightly justifies the status it got. The other thing that needs to be focused here in particular is that the US was effectively able to use its capacity to the fullest by shifting the production to what was strategically desirable in the prevailing situation.

It is hence fairly intuitive that just having the industrial capacity alone isn’t sufficient, what is needed is that when such peculiar conditions prevail, are we able to efficiently shift our production to what is deemed appropriate at the time.

To look at a different scenario, we can look at the example of India under the British Raj. India was just a colony which provided for the raw materials needed for the industries of Britain. Before the Industrial Revolution in England, Indian cotton was in high demand not only in England but all around the world. One of the reasons being how cheap Indian cotton was. After the Industrial Revolution in England, tariffs were imposed on Indian imports to reduce their usage and when that didn’t solve the purpose, Indian cotton was ultimately banned. While India had been for centuries the largest exporter of cotton goods in the world, it was now an importer of British cotton products and an exporter of raw cotton for the same products. The British also prevented the growth of iron and steel in the nation by making sure no such factory was allowed to even set up.

All that was being produced in India, the only aim was to satisfy the British revenue demands and to make sure that the industries in Britain flourish. While there was a decay of the traditional industries, this decay was not followed by an improvement in better and modern techniques as was the case in the other parts of the world. Due to the shutting down of these already prevailing industries in India, the dependence on agriculture as a means of livelihood increased significantly which is something that still persists in India. British economic exploitation be it in terms of charging high revenues, encouraging production of only cash crops or raw materials required by the British industries especially the production of Indigo by force, the decay of traditional industries or the prevalence of a one-sided free trade with India led to extreme poverty in India. During the period of British rule, most Indians lived on the verge of starvation and India witnessed a number of famines and loss of lives of many people during that period.

Another thing to be observed is that India lacked capital goods industries like steel etc. without which there cannot be any rapid development of other industries. This was one of the areas that was focused in the second five year plan. This was established by the Nehru-Mahalanobis model of growth which essentially said that for sustained long term growth, it was important that major investment was done in building a capacity (industrial capacity) in the production of capital goods. It was further said that this high growth in the heavy goods sector would expand the capacity in the production of consumer goods in the country.

What is essential here to note is that the natural resources in India were abundant and capable of bringing prosperity to the people if utilized in the right direction. But as a result of British rule, it can be said that the capacity that India possessed wasn’t utilized efficiently in the interest of the people but instead just on the grounds of British needs. This only led to deterioration of the social and economic conditions of the country.

Had India been an independent nation during this time, probably there would have been retaliation but a need to preserve her identity. At this moment, with no freedom or say, India was at the mercy of foreigners who only had the aim to exploit the country to benefit themselves.

There could also have been a probability that with the demand of Indian textiles and other goods all across the globe and the industrial capacity of the nation, India would have emerged as an active trading partner with most nations.

It can be concluded that India as a nation had the industrial capacity but merely that wasn’t enough because when there is no independence, this industrial capacity isn’t a tool for the nation’s development but as in this case, merely to satisfy the oppressor. So, another aspect that we can observe is that the sovereignty of a nation plays a very important role in ensuring that the capacity utilization is at the fullest and that too in the direction of the nation’s goals.

When we talk about the sovereignty of a nation in this regard, we can also look at it in an alternate way wherein, the lack of industrial capacity can lead to loss of sovereignty of a nation.

This argument can be made clearer if we consider that while some goods that aren’t as essential can be imported from other nations, there should be some goods that should be produced domestically within a nation as the foreign dependence for these goods can be a threat to the sovereignty of a nation.

These goods can be the raw materials for capital industries of a country which facilitate the development of other industries, weaponry that determines a country’s military power, necessities like certain drugs or oil and fuel which are important factors in deciding the prosperity of a country.

Considering the US, one reason which cannot be ignored for it emerging as a world superpower post the second World War is the export of armaments to the Allied powers. The Allied powers wouldn’t have stayed in the war for long had it not been for the support from the United States, the face of the war would’ve been different and hence the status of the world superpower is justified.

If we consider the current scenario, it is essential that the production of something as basic as masks should happen domestically in every nation. The fact that emphasis is being laid that vaccines should also be produced domestically if possible supplement the argument. Every country, at this time, will think first about its own citizens and later about the world and it’s trade agreements. To depend for such things at this time on another country, would mean risking lives and sacrificing independence. Considering this, the opportunity cost of importing these goods which are deemed to be of some importance, can in fact be very high. The opportunity costs in this scenario can be viewed beyond monetary expenses. It includes giving up your sovereignty which is of utter importance.

Also, it is fairly intuitive that if at all a country will let go of it’s domestic capacity to produce something, it will ultimately be imported only if the net costs for importing will be minimal. Not just focusing on the accounting costs of the same but actually, the economic costs which means the opportunity cost of importing something should be minimal which is essentially the idea behind the comparative advantage theory. This logic states that a country should produce those goods in which it has lower opportunity costs as compared to its trading partners and import those for which it has relatively high opportunity costs. It can also be said, in a way, if a country produces goods in which it does not have a comparative advantage and it is something that can be imported instead, it is actually a loss of its industrial capacity as the same could’ve been put to use in the production of other goods. Therefore, the aim here is not essentially to promote self sufficiency but instead self reliance.

Another thing to be considered is that apart from the military forces of a nation, the industrial capacity is also an important factor that very well determines the “power” of a nation. To have the most technologically advanced military but depending on another nation for necessities or your weaponry or the raw materials required for your industries is like sacrificing your sovereignty and allowing a foreign country to have it’s say in matters of your nation’s concerns.

We can also address the question if the domestic production of such strategic goods necessarily should imply centralisation of said production as well. While we can continue to promote free markets, there is a need to ensure production in times of wars or pandemics must be coordinated and has to move in hand with the government because a nation as a whole has to move towards achieving one goal.

Here, again, the trade off between efficiency and equity can be thought of. While the involvement of the government will better ensure that the production benefits everyone wholly and the nation moves in the right direction, it is necessary that the private firms be involved in the production so that such goods can be produced in the most efficient way and of the right quality.

Therefore, it is pertinent that the production be coordinated with the government and should follow the strategic path deemed fit because without the private sector, social objectives cannot be fulfilled and complete centralization will lead to heavy deficit for the government.

In their book “War by Other Means”, Robert Blackwill and Jennifer Harris define geoeconomics as the “use of economic instruments to promote and defend national interests, and to produce beneficial geopolitical results.” Geoeconomics is basically the use of economic tools for geopolitical purposes.

When we think about industrial capacity, we try to assess how essential it is for a country to domestically produce certain goods or to reduce its dependence on other nations for goods that are deemed to be strategically important. However, in today’s world wherein the ultimate contest is not on the battlefield since expertise in areas like communication, legal, political, logistics etc. may even prevent the enemy from coming to the battle in the first place. It is thus fair to conclude that just establishing a physical industrial capacity (manufacturing base) is not enough. Therefore, we can say that nations that achieve economic dominance or that possess geoeconomic powers can effectively suppress hostile activities and thus win geopolitical conflicts by default as the rivals either compromise or are forced to compromise due to their economic dependency in a way skewing in favour of the said dominant nation and hence in a way, economic security is in fact national security.

As Michael Mandelbaum puts it, “the heart of politics is power; the aim of economics is wealth. Power is inherently limited. The quest for power is therefore competitive. It is a ‘zero-sum game’. Wealth by contrast, is limitless, which makes economics a positive-sum game. Therefore, in economics, unlike in war, everyone can be a winner.” is the idea why geoeconomics as a concept is gaining a lot of popularity in recent times.

When we talk about effective use of geoeconomic means, one of the best examples given is of China. There are a few examples given in “War by Other Means” that can back this claim. In 2012, after a Philippine ship attempted to arrest fishermen working off the Scarborough Shoal, banana imports of the Philippines were restricted in China and they were never allowed to enter in the Chinese markets. This was a huge shakeout for the Philippines’ agricultural sector and cost the Philippines’ farmers in huge sums. However, this was only a beginning and further inspections were done for various other fruits from the Philippines. These strategic geoeconomic actions led to a major reduction in the Philippines’ exports as around 30 percent of local Philippines’ fruits’ exports were to China. This was followed by China ensuring to discourage tours to the Philippines. However, as soon as the Philippines’ pulled its ships from the Scarborough Shoal, Beijing dropped the banana ban and the fruits were hence allowed to enter. This is an explicit example as to how the use of geoeconomic tools by China made sure the Philippines would behave in the manner as desired by China. Another example given by the authors is how China uses geoeconomic tools on Japan. In 2001, post the testimonies that World War II era germ warfare research was conducted on Chinese nationals, the annual quota for automobile imports from Japan was planned to be cut by 40–60 percent by the Chinese. Another instance was when the Japanese approved history textbooks that highlighted Japan’s wartime actions in China, there were huge consumer boycotts by the Chinese which was another geoeconomic shakeout. Another instance was when in 2010, the Chinese captain was arrested by Japanese officials, China retaliated by halting shipments of rare earth oxides, rare earth salts, and pure rare earth metals to Japan which are essential materials for Japanese industries and without these, Japan cannot produce electrical components required by U.S. and European companies. This was another way in which this geoeconomic action by China led to global implications which led to Tokyo releasing the fishing captains. There are also claims that China has also used cyber tools to obtain information related to Japanese defense equipment and nuclear power plant designs.

These are just a few instances among others wherein China has asserted geoeconomic pressure on Japan. Another example given is that of Africa. Among other things, China has built more than fifty-two sports stadiums in Africa, curiously, most in the presidential places of those countries. According to AidData, China has also paid around $80 billion for various projects in Africa but most of that money went to areas where the national leaders were born which indicates a political bias and the ultimate motive of enhancing political ties.

The One Belt One Road initiative by China can be viewed as another geoeconomic tool used by China wherein China seeks to establish regional leadership using economic integration. To put it briefly, OBOR aims to strengthen trade and investment between China and approximately sixty-five other countries. The “road” refers to a maritime network running from China and all the way to Europe and the “belt” refers to overland routes stretching from Central Asia to Europe. The OBOR includes many developing nations as well which were deemed important for the overall purpose. For OBOR to be successful, there had to be considerable investments in terms of infrastructure among others by all nations and it is fairly intuitive that not all nations could undertake those kinds of investments. For this reason, China invested in heavy sums in various nations to make this project a success. For example, in Kenya, China built a $3.2 billion railway connecting Mombasa and Nairobi, in Sri Lanka, around $200 million of Chinese investment went into the construction of an international airport, the China-Pakistan economic corridor etc. The OBOR basically tries to make all trades simpler which either originate from China or have China as the end destination. Upon analysing, it is very much evident that this is an initiative to have an economic dominance over all these nations. Be it in terms of the debt countries will owe to the Chinese for all the developmental projects or the dependence on China for materials essential for the industries of different countries, it all simply means China effectively aimed to use economic tools for not just economic purposes but also for various geopolitical goals.

Another question that can be brought up is if there are some kind of economic or political endowments that countries must possess to effectively exercise geoeconomic tools. While it can’t be stated clearly, one plausible requirement to ensure effective geoeconomic strategy seems to be availability of capital. Be it to invest domestically to increase output of a country so that firms grow and dominate in the markets, or be it to seize control of strategic economic territory i.e. to either invest in building up the industrial capacity of a nation in terms of specific strategic goods or to establish economic dominance, capital seems to be a basic requirement.

If we consider the current scenario of vaccinations, we can look at a number of factors as we try to examine the question of dominance in this sphere. The foremost thing that can be looked at is the scale of production of vaccinations in countries around the world. As of March 2021, China leads in this count followed by the US, Germany, Belgium, India and so on. Looking at these stats and keeping in mind the sentiments against China, it will be a fair assessment to say that the US is again emerging on the top because of its scalability in production which is yet to be matched by any other country. Here, again, we can try to look at how things might pan out for countries that are yet to inoculate their populations and rely on countries like the US for their share of vaccines. Considering the dire need of these doses, the sovereignty of these countries again comes into picture if there is complete reliance on foreign nations for the same. While we talk about theories such as that of comparative advantage and how it sets in tone the mutual gains of trade for all nations, the idea seems to be blurry when we bring into picture such crucial or in a way strategic goods (as described before). This becomes very intuitive if we try to understand the urgency of vaccines as in this case and how they will be a priority for every nation in at least the medium term. It becomes very difficult to set equivalency in terms of any other good or service with something as indispensable.

Before conclusively establishing an argument, another important factor that needs to be taken into consideration is the export of these vaccinations or alternatively, how much of this production is being retained domestically.

As of March 2021, a study by Airfinity shows that while China, India and the European Union are exporting in huge sums from their domestic production, the US and Britain exhibit the contrary. The US is said to follow the policy of “America first” and the similar strategy is being followed by Britain. The US has also been restricting exports of raw materials essential for the production of vaccines. India has been requesting to lift the ban on these exports as the second wave is causing disastrous consequences in the country. When questioned about this, State spokesperson, Ned Price made it clear that their sole focus at the moment is going to be a priority over everything else. He also said “It is not only in the U.S. interest to see Americans vaccinated; but it is in the interests of the rest of the world to see Americans vaccinated.” As for the rest of the world, “We will, of course, always do as much as we can, consistent with our first obligation”.

The EU has also urged for reciprocity lest a ban be imposed from it’s end as well to countries like the US and Britain. The logic given is very simply that if the bloc exports millions of vaccines to countries that are producing at a very large scale, it can’t continue to do so if it doesn’t receive the same from these nations i.e. during times like these, it becomes essential that there is a mutual gain for all countries. To expect a country to continue exporting vaccines selflessly which is indirectly limiting the inoculation of its own citizens, is not something practical. The EU is thus inclining towards a give and take in that respect

Another issue that can be looked upon is how the US is holding millions of doses of vaccines by AstraZeneca. The peculiar thing here is that this hoarding is taking place even when the vaccine is not yet approved in the US i.e. instead of rolling these vaccines out to countries where it is approved and inoculating millions of people, these vaccines are lying idly in the US awaiting clinical trials that can give a go ahead for its use in the country.

Again, the concern of deep pockets comes into picture. According to a report in the British Medical Journal (BMJ), before even being approved, the wealthy countries pre-ordered vaccines in huge numbers from the most promising developers. The US secured 800 million doses of at least six vaccines in development, with an option to buy about one billion more. The UK has purchased 340 million shots: approximately five doses for each citizen. Another very recent report by the Duke University’s Institute of Global Health found that the US has secured more doses of vaccines than it will ever need. Even if we take into consideration booster shots and vaccinating children as and when they become eligible, the report says that the US could have a surplus of about 300 million doses by the end of July. This is what precisely vaccine nationalism is wherein one country is, at the expense of others, just looking out for themselves and it is very much intuitive how this might turn out to be counterproductive. The main concern about the virus is that it mutates at a very rapid speed and the only way to get rid of it is to get rid of it everywhere. While the rational way is to adopt a global approach to these vaccines, the same is not something that seems sustainable in terms to how countries will behave when push comes to shove.

Moreover, if vaccines remain restricted to a few countries and exports of the same are curbed, to obtain these will be as difficult and will ultimately lead to the sovereignty of the unfortunate countries being compromised.

Therefore, we’re effectively moving away from the traditional ideas and ways of economic dominance. Economic dominance, thus might not be established from acquiring markets by exporting goods to major countries but by possessing these vaccines and gaining control over policy stances and driving them in the favour of the geopolitical goals in the favour of our country. As inefficient a way as it might be if we consider the total welfare gains of the world, it is what will continue to play a predominant role in determining the power of any country.

Another scenario which highlights the importance of industrial capacity and to some extent globalization bottlenecks when it comes to sole dependency on other nations is the current case of the Suez Canal blockage. The blockade of the Ever Given led to the shutting down of traffic and since the canal is one of the world’s most heavily used shipping lanes, the consequences were disturbing. There was a loss of billions of dollars due to the blockade and trade came to a pause. To highlight the losses that this blockade caused, Egypt has now seized the ship and is demanding approximately $1 billion as compensation. While we continue to advocate globalisation as a means of development of all the nations collectively, what also seems pertinent is to observe the high levels of interdependence when it comes to trade.

While globalization has a number of positive effects including higher profitability and reduced costs, reduced need of stockpiling and bigger integrated markets, there can be cons of this state of affairs too. When it comes to essential apparel and in times of crisis, there can be worldwide shortages. Shortages that will not be met till the needs of people are met domestically. The core idea is that such crisis situations are extremely unpredictable. The Suez Canal blockade was not in far sights of anyone, yet, when it did happen, havoc was created worldwide and this brings us back to the initial idea of developing an industrial capacity for at least goods that are deemed to be essential and the shortage of which can lead to serious losses, as already highlighted before, of sovereignty.

While we continue to make arguments in favour of developing industrial capacity especially for the “strategic” goods to safeguard the sovereignty of a nation, another paradigm can be visited here. This argument is partially derived from the discussion on plural sovereignty vs the world state by Alexander Wendt.

While plural sovereignty is the natural favourable state of affairs by most, we can try to make arguments as to why the world state might be a better alternative in specific scenarios.

To put this in perspective, we can start by considering the Rawlsian Veil of Ignorance wherein John Rawls talks about a veil of ignorance behind which nobody knows who they are in terms of religion, power, wealth, caste etc. and keeping this in mind, people are asked to design the society from scratch. Now, since people don’t know who they are, they have to structure the society keeping in mind that any choice they make can benefit or harm them in any way. Therefore, the result would be a fair, egalitarian society.

Now, if we hypothetically think of inserting this veil before the Covid-19 crisis i.e. no citizen of any nation and no country can determine the intensity with which the virus might hit. Keeping this in mind, each citizen would want that if they end up being hit by the virus, the right amount of vaccines or any other preventive instruments be made available to them. Also, it is very rational that no individual would want that just because a country is more powerful or deep pocketed, the citizens of that country be provided care over those who need it more. The last conclusion is keeping in mind that individuals don’t know which country they would end up being in. So, in such a situation, it seems like individuals would end up wanting the world state over plural sovereignty to ensure equitable and rational distribution of necessary goods and services around the globe without any bias. By the same logic, the preference of the world state might hold in most world crises.

Although, it seems far-fetched, a system where the world state and plural sovereignty coexist might be an efficient state of affairs with the world state coming into picture in times of crises or situations that require the world to function as one. If there should be a separate global industrial base for the purpose or countries contribute collectively towards one source is something initial that needs to be thought about in such a state of affairs.

To conclude, the prevailing situation in Delhi must be given some thought. The second wave of the coronavirus has hit the whole country with severe consequences, and a shortage of oxygen and medical supplies in the capital has caused the loss of many lives. Delhi is not an industrial state, a consequence of which is, that even in these dire situations, Delhi cannot produce oxygen and the effects of which are visible. Transfer of large capacity cylinder units becomes a herculean task and requires other resources, but which is a discussion for another time. The shutting down of the Sterlite plant and the opposition to getting to start again, even if just to produce oxygen shows that there is reluctance on the part of the state as well as civil society to learn from such mistakes — the lesson remains the same: building up and possessing minimum or adequate industrial capacity to produce at least essential goods is not just a lesson for wartime, or in other words, healthcare emergencies are no less.

About the Author

Kishika Mahajan is in the final semester of B.A. (Hons.) Economics at Shri Ram College of Commerce (SRCC). She is a Research Associate at the Indian Youth Economic Association.