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.
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).