Deindustrialization

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Deindustrialization (also spelled deindustrialisation) is a process of social and economic change caused by the removal or reduction of industrial activity in a country or region, especially heavy industry or manufacturing industry. Cairncross (1982) and Lever (1991) offer four possible definitions of deindustrialization:

1. Deindustrialization can mean a straightforward decline in the output of manufactured goods or in employment in the manufacturing sector. This, however, can be misleading because short-run or cyclical downturns may be misinterpreted as long-run deindustrialization.

2. Deindustrialization can mean a shift from manufacturing to the service sectors, so that manufacturing has a lower share of total output or employment. This may also be misleading, however, as such a shift may occur even if manufacturing is growing in absolute terms.

3. Deindustrialization can mean that manufactured goods comprise a declining share of external trade, so that there is a progressive failure to achieve a sufficient surplus of exports over imports to maintain an economy in external balance.

4. Deindustrialization can be defined as a continuing state of balance-of-trade deficit (as described in the third definition above) that accumulates to the extent that a country or region is unable to pay for necessary imports to sustain further production of goods, thus initiating a further downward spiral of economic decline.

[edit] Experience of Deindustrialization in OECD economies during the Twentieth Century

The process of deindustrialization is most evident in the world's richest countries, and reflects a period of marked declines in industries' share of output and employment in the last four decades of the twentieth century, alongside a corresponding increase in the share of the service sector. Such declines have typically seen the real (at constant prices) growth of manufacturing output keep pace with growth in the rest of the economy, with the declining share of nominal (at current price) output thus accounted for by an ongoing decline in the relative price of manufactures vis a vis services (see for e.g. Boulhol, 2004 for evidence across range of developed economies).

[edit] Explanations for Deindustrialization

Theories that predict or explain deindustrialization have a long intellectual lineage. Rowthorn (1992) argues that Marx's theory of declining (industrial) profit should be regarded as one of the earliest. This theory, generally rejected by mainstream economists today, argues that technological innovation enables more efficient means of production, resulting in increased physical productivity, i.e. a greater output of use value per unit of capital invested. In parallel, however, technological innovations replace people with machinery, and the organic composition of capital increases. Assuming only labor can produce new additional value, this greater physical output would embody a smaller value and surplus value. The average rate of industrial profit would therefore decline in the longer term.

Rowthorn and Wells (1987) distinguish between explanations of deindustrialization that see it as a positive process of, for example, maturity of the economy, and those which attribute deindustrialization to negative factors like bad economic performance. They suggest that deindustrialization may be both an effect and a cause of poor economic performance.

Pitelis and Antonakis (2003) suggest that to the extent that manufacturing is characterised by higher productivity, this will lead, ceteris paribus, to a reduction in the relative cost of manufacturing products, thus a reduction in the relative share of manufacturing (provided manufacturing and services are characterised by relatively inelastic demand). Moreover, to the extent that manufacturing firms downsize through, e.g. outsourcing, contracting out etc., this will reduce the manufacturing share without negatively influencing the economy. Indeed, it will potentially have positive effects, provided such actions increase firm productivity and performance.

Another possible explanation of deindustrialization concerns the structure of demand. As incomes increase, demand is argued to shift in favour of services. Services are thought to be characterised by income elasticity larger than unity, which means that the growth of demand for services will tend to exceed that of income, leading to an increase in the relative weight of services. This view, however, has not gained wide acceptance within the community of economic theorists, often because such arguments tend to confuse intermediate and final demands ^{[citation needed]}. Income-elasticity, in the microeconomic sense, relates to the final preferences of consumers, not the supply chain decisions of business. It is the latter, through the rapid recent expansion of business services, that has been the dominant counterpart to deindustrialization. Further, the microeconomic concept of income elasticity implies no change in relative prices; a significant amount of the rising proportion of nominal income spent on consumer services reflects marked changes in relative prices, rather than volumes. Such views are supported by a range empirical studies ^{[citation needed]} that fail to reject the hypothesis that the income elasticity for (final, consumer) services is actually unity.

[edit] References

• Baumol, W J (1967) ‘Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis’ The American Economic Review, Vol. 57, No. 3
• Boulhol, H (2004) ‘What is the impact of international trade on deindustrialisation in OECD countries?’ Flash No.2004-206 Paris, CDC IXIS Capital Markets
• Cairncross, A (1982) 'What is deindustrialisation?' Pp. 5-17 in: Blackaby, F (Ed.) Deindustrialisation, London: Pergamon
• Fuchs, V R (1968) The Service Economy New York, National Bureau of Economic Research
• Lever, W F (1991) ‘Deindustrialisation and the Reality of the Post-industrial City’ Urban Studies, Vol. 28, No. 6, Pp. 983-999
• Matthews, R C O, Feinstein, C H and Odling-Smee, J C (1982) British Economic Growth, 1856-1973, Oxford: Oxford University Press
• Pitelis, C and Antonakis, N (2003) ‘Manufacturing and competitiveness: the case of Greece’ Journal of Economic Studies, Vol. 30, No. 5, Pp. 535-547
• Rowthorn, R (1992) ‘Productivity and American Leadership – A Review…’ Review of Income and Wealth Vol. 38, No. 4
• Rowthorn, R E and Wells, J R (1987) De-industrialisation and Foreign Trade, Cambridge: Cambridge University Press
• Rowthorn, R E and Ramaswamy, R (1997) Deindustrialisation: Causes and Implications, IMF Working Paper WP/97/42.
• Sachs, J D and Shatz, H J (1995) ‘Trade and Jobs in US Manufacturing’ Brookings Papers on Economic Activity No. 1