Deindustrialization (also spelled deindustrialisation) is a process of social and economic change caused by the removal or reduction of industrial capacity or activity in a country or region, especially heavy industry or manufacturing industry. It is an opposite of industrialization.
There are multiple interpretations of what this process is. Cairncross (1982) and Lever (1991) offer four possible definitions of deindustrialization:
- 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.
- 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.
- 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.
- 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.
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 characterized 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 characterized 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 characterized 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 . 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 that fail to reject the hypothesis that the income elasticity for (final, consumer) services is actually unity.
George Reisman (2002) identified inflation as a contributor to deindustrialization. In his analysis, the process of fiat-money inflation distorts the economic calculations necessary to operate capital-intensive manufacturing enterprises, and makes the investments necessary for sustaining the operations of such enterprises unprofitable.
Institutional arrangements have also contributed to deindustrialization such as economic restructuring. With breakthroughs in transportation, communication and information technology, a globalized economy that encouraged foreign direct investment, capital mobility and labor migration, and new economic theory's emphasis on specialized factor endowments, manufacturing moved to lower-cost sites and in its place service sector and financial agglomerations concentrated in urban areas (Logan & Swanstrom 1990).
Although literature (Brady et al 2007, Feinstein 1999, and Lee 2005) indicates the occurrence of deindustrialization in Australia
, industrial employment and output in the country have been steady. Industrial output has been stable since 1975, according to OECD
(2008) data, and has been increasing gradually since 2001. Industrial employment has also been stable since 1964, actually increasing since 2001. It is notable that employment in the service sector has been increasing substantially since 1964, with the most dramatic rises occurring from 1995 onward. At the same time, employment in agriculture was steady from 1964 until 2000 when it began to decrease. These contradictions imply that Australia is not deindustrializing. The country has shifted to service oriented production however, with 70% of the GDP resulting from the service sector and only 26% from the industrial sector.
Austria has many indicators that justifies labeling them as a deindustrializing country. Data collected from the OECD for Austria has shown that since 1956 total employment did grow until 1994 and since then has remained relatively steady. Employment in industry and construction, however, has declined steadily as service sector employment has steadily increased. Data also shows that even as employment in industry and construction has decreased, industry productivity has continued to grow. Austrian unemployment has steadily increased since 1983 due to deindustrialization. Austria was one of countries in a study that showed that increasing overall unemployment was significantly related to manufacturing unemployment. Austria's foreign and domestic policy has made deindustrialization possible. High labor taxes and high withholding taxes repel low skill immigration as low capital taxes enables domestic capital investment. Stern banking secrecy policies, no withholding taxes for non-residents, joining the European Union, and adopting the Euro enabled substantial growth in Austria's services sector.
Data taken from the OECD website shows that industrial employment in Belgium rose between 1999 and 2000 and then declined until 2003, rising again until 2006. The overall trend in industrial employment in Belgium, however, is still a decline. OECD data also shows that production and sales of total industry in Belgium has been on the rise since 1955 with the exception of small declines during a few years. Despite this trend, deindustrialization is occurring at fairly rapid rates in Belgium. Variables such as large population increases and regional discrepancies account for these misleading statistics. Deindustrialization is hitting the region of Wallonia much harder than the region of Flanders. Wallonia remains much more impoverished and has an unemployment rate of about 17% (twice that of the unemployment rate in Flanders). Other Statistics displaying the effects of deiundustrialization in Belgium is the rise in employment in the service sector from 1999 until 2006. Today, industry is much less significant in Belgium than it has been in previous years.
Much of the academic literature pertaining to Canada
hints at deindustrialization as a problem. However over the past fifty years, according to 2008 OECD
data, industrial production and employment have been steadily increasing. Industrial production leveled off a bit between 2004-2007, but its production levels are the highest that they've ever been. The perception of deindustrialization that the literature refers to deals with the fact that although employment and economic production have risen, the economy has shifted drastically from manufacturing jobs to service sector
jobs. Only 13% of the current Canadian population has a job in the industrial sector. Technological advancements in industry over the past fifty years have allowed for industrial production to keep rising during the Canadian economic shift to the service sector. 69% of the GDP
of Canada comes from the service sector.(CIA World Factbook
Regarding Denmark’s industry, the country does not appear to be deindustrializing as a whole. Literature (Goldsmith and Larsen 2004) has stated that perhaps Denmark’s size and “Nordic style” of governing has allowed it to hide from the detrimental effects of globalization. Both men’s and women’s labor statistics (OECD data 2008)show a steady increase over the past decade. Despite a slight dip from 2001 to 2003, overall employment in Denmark has been at a steady increase since 1995. Denmark’s total industry output has also been on the rise since the 1974, despite an economic recession from 1987 to 1993. The country’s high employment and low unemployment rates have improved the production industry and the high tax rates have strengthened the economy.
Based on the data from the OECD website, Finland has been industrializing according to industrial employment and industrial production statistics. Finland has been considered very resilient based on its remarkable economic comeback after their recession in 1990 due to the fall of the Soviet Union. During this time production of total industry and civilian employment in industry declined rapidly. Finland has been ranked number one three times in the World Economic Forum competitiveness studies as one of the most developed IT economies since 2000. Since the 1990 recession, which was one of the largest in European history, Finland has managed to soar back to the top of the economic ladder. Finland has done so by focusing strongly on education. After their recession, Finland invested its money on boosting R&D, education, and retraining workers that had lost their job due to the recession. With its investment in education, Finland has succeeded in increasing some of its industries. For example, the forest industry now specializes in high-quality papers. As a result of investment in education and technology, Finland is now one of the world’s largest producers of paper-making machinery. According to the statistics on the OECD website, Finland is not deindustrializing.
Data for France indicates that while employment in industry relative to the total French economy has decreased, there is a lack of sound evidence pointing to an overall trend of deindustrialization. Research (Lee 2005, Feinstein 1999) shows that at the same time relative employment in industry is decreasing, total production in industry has almost quadrupled since the mid 20th century, leveling off only since about the year 2000 (OECD 2008). Lee shows that between 1962 and 1995, employment in industry in France fell 13.1% (2005:table 1).Advances in technology that allow for higher output by fewer employees, coupled with a change in the type of products manufactured domestically, such as the high-tech electronics now manufactured in France, explain negative relationship of employment and output in French industry. Thus, it may feel like deindustrialization is occurring because of the relative decrease of employment or highly publicized cases of outsourcing, yet the data suggest industry production in France is not suffering.
In occupied Germany after World War II
the Morgenthau Plan
was implemented, although not in its most extreme version. The plan was present in the U.S. occupation directive JCS 1067
and in the Allied "industrial disarmament
On February 2
, a dispatch from Berlin reported:
Some progress has been made in converting Germany to an agricultural and light industry economy, said Brigadier General William H. Draper, Jr., chief of the American Economics Division, who emphasized that there was general agreement on that plan.
He explained that Germany’s future industrial and economic pattern was being drawn for a population of 66,500,000. On that basis, he said, the nation will need large imports of food and raw materials to maintain a minimum standard of living.
General agreement, he continued, had been reached on the types of German exports — coal, coke, electrical equipment, leather goods, beer, wines, spirits, toys, musical instruments, textiles and apparel — to take the place of the heavy industrial products which formed most of Germany's pre-war exports.
According to some historians the U.S. government abandoned the Morgenthau plan as policy in September 1946 with Secretary of State James F. Byrnes
' speech Restatement of Policy on Germany
Others have argued that credit should be given to former U.S.President Herbert Hoover who in one of his reports from Germany, dated March 18 1947, argued for a change in occupation policy, amongst other things stating:
- "There is the illusion that the New Germany left after the annexations can be reduced to a 'pastoral state'. It cannot be done unless we exterminate or move 25,000,000 people out of it."
Worries about the sluggish recovery of the European economy, which before the war had depended on the German industrial base, and growing Soviet influence amongst a German population subject to food shortages and economic misery, caused the Joint Chiefs of Staff, and Generals Clay and Marshall to start lobbying the Truman administration for a change of policy.
In July 1947, President Harry S. Truman rescinded on "national security grounds the punitive occupation directive JCS 1067, which had directed the U.S. forces of occupation in Germany to "take no steps looking toward the economic rehabilitation of Germany [or] designed to maintain or strengthen the German economy", it was replaced by JCS 1779, which instead noted that "[a]n orderly, prosperous Europe requires the economic contributions of a stable and productive Germany.
It had taken over two months for General Clay to overcome continued resistance to the new directive JCS 1779, but on July 10 1947, it was finally approved at a meeting of the SWNCC. The final version of the document "was purged of the most important elements of the Morgenthau plan.
Dismantling of (West) German industry ended in 1951, but "industrial disarmament" lingered in restrictions on actual German Steel production, and production capacity, as well as on restriction on key industries. All remaining restrictions were finally rescinded in May 5 1955. "The last act of the Morgenthau drama occurred on that date or when the Saar was returned to Germany.
Vladimir Petrov concluded: "The victorious Allies … delayed by several years the economic reconstruction of the war torn continent, a reconstruction which subsequently cost the US billions of dollars.
While unemployment in Germany
is very high, industrial output is steadily increasing. Germany's startling unemployment rate of roughly seven percent (OECD, 2008) is by and large due to the continuing struggles with the reunification process between East and West Germany that began in 1990. However, the unemployment rate has been declining since 2005, when it reached its peak of over ten percent. Despite this high rate of unemployment, Germany's economy is ranked third largest in the world (measured by GDP, Wikipedia, 2008), and exports over a trillion dollars worth of goods every year. This notion of deindustrialization may be an inaccurate label for what is really happening in Germany. Germany is producing more with less labor; a product of improving efficiency. Another factor that is camouflaged by deindustrialization is that the labor market has shifted from industry to service. On the surface, it appears that deindustrialization is occurring in Germany (and all over the world), but it may be just a shift in interests that are generating these statistics. 33.4% of Germany's workforce is in the industrial sector, whereas 63.8% work in the service sector (and the remainder work in agriculture). Germany's recent history has made quite a difference in its economic standing; it has been through a lot of peaks and valleys over the past few decades. At first glance, these ups and downs could be interpreted as a product of deindustrialization, but after interpreting the available data, we see that Germany is simply evolving while dealing with its difficult past.
Ireland has yet to de-industrialize. Industrial employment and production and sales in industry have increased since 1990 according to OECD data. The increase in industry coincided with the introduction of Intel
to the Irish economy in late 1989. Though we may not think of Intel as industry in the same sense as steel production, it is considered to be industry. Intel is now the largest company by turnover in Ireland. This was the beginning of what was called the “Celtic Tiger
” economy. Dell
also followed Intel to Ireland, creating a large software industry. As is evidenced by these 3 companies, a majority of the industries that exist in Ireland are a result of foreign direct investment
. The top 3 FDIs are the U.S., the U.K. and Germany.
does not seem to be deindustrializing. According to OECD (2008)
data, the rate of industrial employment is at an all-time high, although, in general, it has stayed relatively consistent since 1956. The rate of industrial production is also on the rise after a small dip in recent years; even though production rates are still at almost 2 percent less than they were in 2000, the 2005 rate is eighty percent more than what it was in 1955. These figures, however, do not make the distinction between different regions of the country: according to Rowthorn and Ramaswamy (1999), most manufacturing plants are located in cities such as Genoa
in Northern Italy, and the unemployment rate in the south is significantly higher than in the north. Prior to World War II, Italy's economy was mainly agricultural, but it has since shifted to become one of the largest industrial economies in the world. In general, Italy is continuing to experience a period of industrialization that has been taking place since the shift.
In order to further remove Japan as a potential future military threat after World War II
the Far Eastern Commission
decided that Japan was to be partly de-industrialized. The necessary dismantling of Japanese industry was foreseen to have been achieved when Japanese standards of living had been reduced to those existing in Japan the period 1930 - 1934. (see Great Depression
) In the end the adopted program of de-industrialisation in Japan was implemented to a lesser degree than the similar U.S. "industrial disarmament" program in Germany.
A notable event began in the 1990s as the economy of Japan
suddenly stagnated after three decades of tremendous economic growth. This could be construed as directly linked to deindustrialization, as this phenomenon began to be recognized in developed countries
of the world around this same time. However, Japan had larger economic problems, the effects of which can still be seen in the country's low economic growth today. According to data from the Organisation for Economic Co-operation and Development
(2008), deindustrialization is occurring in Japan. However, it is important to note that although the industrial employment as a percentage of total employment has dropped over the last couple of decades in Japan, total employment has not. Unemployment was fairly low at 3.5% in 2007 (CIA World Factbook
2008) and the economy is relatively stable. Literature (Matsumoto 1996) has stated that the service sector has been expanding and providing jobs for those that have been displaced from industry. Strong union membership
has also played a role in keeping employment rates stable. Although outsourcing and industrial decline may contribute to job loss in industry, the shift in modern economies from industry to service may help reduce negative effects.
Much like many other OECD countries, the Netherlands is not experiencing deindustrialization in the usual way we might think of it. While the OECD’s Annual Labor Force Statistics Survey may show that industrial employment opportunities in the Netherlands have significantly decreased in the past 50 years, the OECD’s Production and Sales MEI for Industry and Service Statistics shows that the overall production in the industrial sector has actually improved. Meaning, the Netherlands, like many other countries, has advanced to produce more with less. Also, perhaps in response to the decline in industrial sector employment, the service industry of the Netherlands has grown and expanded its employment opportunities. The timely response of alternatives for employment may have had something to do with the progressive policies the Netherlands has in place to complement the changes in industry. An example might include tax breaks for families where the father works full time and the mother works part time, also referred to as the “one-and-a-half breadwinner” policy.
New Zealand, along with other affluent global economies, is in a phase of deindustrialization, starting in the late 1990s. The evidence for this phenomena is apparent in the decrease of economic output, a shift from employment in the manufacturing sector to the service sector (which may be due to an increase in tourism), the dissipation of unions caused by immigration and individual work contracts, along with the influence on culture by highbrow mass media (like the internet) and technology. It is possible to interpret these trends in a different way due to the complex nature of the data and the difficulty in quantifying and calculating reliable results. These trends are important sociological phenomena to study because they could be exist and function in waves which could help scientists predict possible economic and cultural outcomes in the future.
In Poland, as in many other former communist countries, deinsturialization occurred rapidly in the years after the fall of communism
in 1989, with many unprofitable industries going bankrupt
with the switch to the market economy
Prior to its dissolution in 1991, the USSR had the second largest economy in the world
after the United States. The economy of the Soviet Union was the modern world's first centrally planned economy. It was based on a system of state ownership and managed through Gosplan (the State Planning Commission), Gosbank (the State Bank) and the Gossnab (State Commission for Materials and Equipment Supply). Economic planning was through a series of Five-Year Plans. The emphasis was put on a very fast development of heavy industry and the nation became one of the world's top manufacturers of a large number of basic and heavy industrial products, but it lagged behind in the output of light industrial production and consumer durables.
As the Soviet economy grew more complex, it required more and more complex disaggregation of control figures (plan targets) and factory inputs. As it required more communication between the enterprises and the planning ministries, and as the number of enterprises, trusts, and ministries multiplied, the Soviet economy started stagnating. The Soviet economy was increasingly sluggish when it came to responding to change, adapting cost−saving technologies, and providing incentives at all levels to improve growth, productivity and efficiency. Most information in the Soviet economy flowed from the top down and economic planning was often done based on faulty or outdated information, particularly in sectors with large numbers of consumers. As a result, some goods tended to be underproduced, leading to shortages, while other goods were overproduced and accumulated in storage. Some factories developed a system of barter and either exchanged or shared raw materials and parts, while consumers developed a black market for goods that were particularly sought after but constantly underproduced.
Conceding the weaknesses of their past approaches in solving new problems, the leaders of the late 1980s, headed by Mikhail Gorbachev, were seeking to mold a program of economic reform to galvanize the economy. However, by 1990 the Soviet government had lost control over economic conditions. Government spending increased sharply as an increasing number of unprofitable enterprises required state support and consumer price subsidies to continue.
The industrial production system in the Soviet Union suffered a political and economic collapse in 1991, after which a transition from centrally planned to market-driven economies occurred. With the collapse of the Soviet Union, the economic integration of the Soviet republics was dissolved, and overall industrial activity declined substantially . A lasting legacy remains in the physical infrastructure created during decades of combined industrial production practices.
When examining trends of Sweden
’s industrial sector, one will find diverging information in the realms of production output and industrial employment levels. Utilizing OECD
(2008) data, specific statements can be made about these elements. With this data, it can be seen that production output within the industrial sector has been constantly rising. Contrastingly, employment within industry has been steadily declining since the 1970s, as service sector employment rates increase. Though the decline in industrial employment points to a deindustrializing economy, the increasing levels of production output state otherwise. Sweden’s industrial sector remains intact as it relies on its resource base of timber
, and iron ore
as a large economic contributor (CIA World Factbook 2008
). Because of its increased production rates in industry, it can be ascertained that deindustrialization has not occurred in Sweden
. The decrease in industrial employment has been countered by an increase in efficiency and automation, increasing output levels in the industrial sector.
Deindustrialization is a phenomenon that has been occurring in Switzerland
since the mid 1970s. Civilian employment in industry has been in decline since 1975 according to OECD (2008) data due to a major recession in the market. Literature (Afonso 2005) has stated that this is due to large numbers of migrant workers being forced to leave the country thanks to nonrenewable working permits, the industry, heavily based in foreign labor suffered greatly and those losses are still observed in the present. Globalization
has also had a negative effect in the employment market. Production of total industry has been increasing consistently at a slow rate since a slight decline in 1974.
The United Kingdom has experienced many possible signs of deindustrialization such a shift in employment from the manufacture sector to the service sector. However, the United Kingdom manufacturing output has not declined. According to the OECD, the Labor Force in industry has declined substantially over the past forty years, since 1967. Although the employment in industry has declined, the OECD shows the total sales and production in the United Kingdom has increased over the part fifty years. The correlation between the decrease in industrial employment and the increase in national production and sales implies an increase in productivity.
According to OECD
(2008) data, real industrial production
rose in the United States
in every year from 1983 to 2007, with the exception of 1991, 2001 and 2002. Manufacturing output has followed a similar pattern. Total industrial employment has been roughly constant at around 30 million people since the late 1970s (though there has been a steady decline since the all-time peak of 31.5 million in 2000). The widespread perception of deindustrialization in the United States is due to shifting patterns in the geography of production (from the Northeast
towards the Southeast
) and increasing labor productivity, which has led to higher levels of output without increases in the total number of workers. In addition, though total industrial employment has been relatively stable over the past forty years, the overall labor force has increased dramatically, resulting in a massive reduction in the percent of the labor force engaged in industry (from over 35% in the late 1960s to under 20% today). Industry (and specifically manufacturing) is thus less prominent in American life
and the American economy
now than in over a hundred years.
Changes in industrial production have varied greatly between a number of sectors in recent years; since 2000, for instance, the production of electronic equipment has risen by about 75%, while that of clothing has fallen by roughly half. Following a moderate downturn, industrial production grew steadily between 2003 and 2007; since 2000, however, industrial growth has averaged less than 1% annually. Moreover, as of mid-2008, industrial production is again declining, thus translating into the longest sustained period of stagnation in the sector since the years between 1973 and 1983.
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