Deindustrialization

Deindustrialization or 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 the opposite of industrialization.

There are multiple interpretations of what this process is. Cairncross (1982) and Lever (1991) offer four possible definitions of deindustrialization:

The colonization of different Asian countries by European powers in the 18th–20th centuries led to a fall in their manufacturing and global GDP share, affecting mainly India, China and countries in Southeast Asia.

Theories that predict or explain deindustrialization have a long intellectual lineage. Rowthorn (1992) argues that Marx's theory of declining (industrial) profit may be regarded as one of the earliest. This theory 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 embodies a smaller value and surplus value. The average rate of industrial profit therefore declines in the longer term.

Rowthorn and Wells (1987) distinguish between deindustrialization explanations that see it as a positive process of, for example, maturity of the economy, and those that associate deindustrialization with negative factors like bad economic performance. They suggest 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 leads, all other things being equal, to a reduction in 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 reduces manufacturing share without negatively influencing the economy. Indeed, it potentially has positive effects, provided such actions increase firm productivity and performance.

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