Deindustrialisation

What is Deindustrialisation?

Deindustrialisation refers to the decrease in the secondary sector of industry in an economy. It means that the number and size of manufacturing firms decrease in an economy over a period of time. Deindustrialisation is commonly observed in developed countries. In this article, we will explain the concept of deindustrialisation in detail. Let’s begin with the sectors of industry.

Sectors of Industry

An industry is the collection of business firms in an economy. There are four main sectors of industry, which are explained as follows:

Primary Sector of Industry

This sector of industry is composed of business firms which are involved in the extraction of natural resources. Agricultural farms, oil drilling companies, and mining firms are some examples of firms in the primary sector. 

Secondary Sector of Industry

This sector of industry is composed of business firms which are involved in transforming raw inputs into finished goods. Automobile manufacturers, furniture makers, construction companies and all other manufacturing firms are in the secondary sector. 

An increase in the secondary sector of industry is called industrialisation.

A decrease in the secondary sector of industry is called de-industrialisation.

Tertiary Sector of Industry

This sector of industry is composed of business firms which are involved in providing services. Educational institutes, law firms, banks, retailers, telecommunications companies, and other service providing firms are in the tertiary sector of industry. 

Quaternary Sector of Industry

This sector of industry is composed of business firms which are involved in providing information services such as computing, management consultancy, research and development (R & D), web design, data analysis, and software development. The quaternary sector is considered a sub-set of the tertiary sector of industry.

Importance of the Sectors of Industry

The relative importance of each sector is measured by the employment in a sector as a percentage of total employment and the output contribution by a sector as a percentage of the GDP of the country. A dominant sector means that it has the highest percentage of jobs and the highest contribution in the GDP out of all the sectors of industry.

• The primary sector is dominant in poor countries.
• The secondary sector is dominant in developing countries.
• The tertiary and quaternary sectors are dominant in developed countries.

Changes in the Sectors of Industry

The sectors of industry and their relative importance in an economy change over time. For example, in developing countries or less developed countries (LDCs), there is an increase in the secondary sector of industry, which is called industrialisation. On the other hand, developed countries face a decline in the secondary sector and a rise in the tertiary sector of industry, which is called deindustrilisation. The changes in the sectors of industry are according the stage of economic growth and economic development happening in a country.

Understanding Deindustrialisation

As explained earlier, deindustrialisation is the decrease in the size and importance of the manufacturing sector of industry. This is mostly accompanied by an increase in the tertiary sector of industry. For example, in the UK, in the last 25 years, the total output made by the secondary sector, has fallen, while the tertiary sector has grown in size. Countries experience industrialisation to fuel their economic growth through the production and export of more goods. This industrialisation is normally followed by deindustrialisation when the manufacturing sector started decreasing.

Reasons for Deindustrialisation

The following are some reasons for deindustrialisation:

Changes in Comparative Advantage

As industrialisation fuels economic growth, unemployment decreases and per capita income increases. Wage rate increases due to a higher demand for labour, while land and other resources also become more expensive. This leads to an increase in the cost of production. In advanced industrial countries, when cost of production increases, this means that there is a long-term shift in comparative advantage. It is easier to import these manufactured products from countries that produce them with low labour costs, such as China, India and other such countries in Southeast Asia. Recent studies show that the United Kingdom has lost its comparative advantage in many industries, such as clothing and electrical manufacturing, but gained a comparative advantage in financial services. Due to this transition of manufacturing to low-cost countries, deindustrialisation is experienced by many developed countries, such as the United States, the UK, Germany, France, Canada, South Korea, and many more.

High Demand for Services

When individuals earn more or their income levels increase, they can afford better-quality personal services such as tourism and hotels. Western economies have been significantly noticing the increase in real incomes due to positive economic growth. This trend drives positive impact in the service-based industries, like hotels, cafes, and tourism, as well as in the financial industry. As a result, there has been a rise in the tertiary sector of industry during deindustrialisation. 

Differences between Deindustrialisation and Industrialisation

The following table contains the main points of difference between deindustrialisation and industrialisation.

Consequences of Deindustrialisation

The following are some of the consequences or effects of deindustrialization:

Structural Unemployment

The deindustrialisation process can cause structural unemployment or the loss of jobs in agriculture, mining and other manufacturing firms. But the service sector provides job opportunities for workers. However, it is difficult for workers to shift their career from industrial work to service sector jobs. People who lose their jobs can be jobless or unemployed for a certain period of time due to occupational immobility. For example, some manufacturing industries, such as coal mining, provide employment that does not require a high level of qualification or any kind of skill. So it is difficult for that person to find job in tertiary sector.

Disruptions in the Labour Market

Deindustrialisation can cause disruptions in the labor market. People need time to adjust even when they get a job in the service sector as they come from different job backgrounds, which is disruptive. These new jobs can be part-time, temporary, low-paid, and may not provide the same benefits as the manufacturing industry.

Regional Decline

The regional areas or towns, which rely on manufacturing, feel the costs of deindustrialisation intensely. For example, in cities near the US rust belt, like Detroit, people in these regions struggled to retain their main employers from these towns but failed. However, the overall economy enjoys a high real GDP, but those affected areas still suffer from capital and human flight, a big problem in the decline of inner cities or regions.

Advantages of Deindustrialisation

The following are some advantages of deindustrialisation:

High Income Levels

A reason for deindustrialisation is that high-income individuals spend more on services. People can afford to buy high-priced and good-quality products or services. Moreover, service may provide a high income as compared to the manufacturing sector.

Increased Trade

When manufacturing activity is shifted from developed countries to developing countries, the manufactured goods are brought back through international trade. People in developed countries get the same products at a lower price in the form of imports from low cost countries. This reduces the disposal of income in advanced economies. This practice also increases welfare and income levels in developing countries.

Job Opportunities

An advantage of deindustrialisation is that it provides job opportunities to the unemployed labor force of the manufacturing industry in the service industries. Many service sector jobs are less tiring, more creative, and highly flexible as compared to manufacturing ones. Some manufacturing jobs, such as coal mining, are more physically demanding and dangerous for laborers. Those who worked in coal mines have serious health issues, like lung problems due to breathing in coal dust.

Environmental Friendly

The phenomenon of deindustrialisation is supposed to be more environmentally friendly as secondary industries cause air pollution, which damages the natural ecosystem. The shutdown of mines is a more environmentally friendly move to protect the environment from pollutants. For example, the closure of factories can reduce carbon emissions, and people will have a clean environment to breathe in.

Capital Inflow

The United Kingdom has seen capital inflow from China and other countries provide financial investments to counterbalance the loss of exports of goods.

Conclusion

In conclusion, deindustrialisation is a fall in the secondary sector of industry and it negatively affects workers and their families related to the manufacturing industry. Factory closures may cause a great deal of unemployment among workers. Although it increases job opportunities in the service sector with high wages, these workers are unable to shift jobs because of a lack of skills and may require trainings to get new skills according to the requirements of the jobs in the tertiary sector.