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:
- 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
- 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
- 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
- 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 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, ceteris paribus, 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.
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 (Bluestone & Harrison 1982, Logan & Swanstrom 1990).
De-industrialization crisis
The term de-industrialization crisis has been used to describe the decline of manufacturing in a number of countries and the flight of jobs away from cities. One example is Detroit. Companies moved their production to other areas where wages and standards were lower. In addition, technological inventions that required less manual labor erased many manufacturing jobs.Detroit and the auto-industry are highly regarded as the 'perfect' example of what de-industrialization can do to an area and its people. Today the area has many jobless people, a high concentration of poverty, and noticeable racial isolation. When industry was booming and the area was turned into a factory town, and there was a high standard of living for the people and workers. Presently, however, the factories are abandoned or the areas are now prairie lands. Over one third of the residents live below the poverty line.
The population of the United States has nearly doubled since the 1950s, adding approximately 150 million people. Yet, during this period (1950-2007), the population of the great manufacturing cities of the northeast has declined significantly: Detroit, Cleveland, Pittsburgh, Baltimore, Philadelphia, St. Louis and Buffalo, NY, have all lost nearly half their population in the past half-century. During the 1950s, the nation's twenty largest cities held nearly a fifth of the US population. In 2006, this proportion has dropped to about one tenth of the population.[1]
Many small and mid-sized manufacturing cities in the Manufacturing Belt experience similar fates. For instance the city of Cumberland, Maryland declined from a population of 39,483 in the 1940s to a population of 20,915 in 2005.
As Americans migrated away from the manufacturing centers, they formed sprawling suburbs, and many former small cities such as Phoenix, Arizona have grown tremendously in the last 50 years. In 2005 alone, Phoenix has grown by 43,000 people, an increase in population greater than any other city in the United States. Contrast that with the fact that in 1950, Phoenix was only 99th out of America's 100 largest cities with a population of 107,000. In 2005, the population has grown to 1.5 million, ranking as the fifth largest city in the US.[1]
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