What is premature deindustrialisation and does it matter?

Structural change has long been associated with deindustrialisation in advanced countries. This typically means that there is a focus on the shrinking proportion of industrial or manufacturing activity in GDP or employment.

In developing countries, deindustrialisation is happening at lower levels of economic development than was historically the case in richer countries. This phenomenon has been labelled by UNCTAD, Gabriel Palma, and Dani Rodrik as ‘premature deindustrialisation’. Put differently, developing countries have reached ‘peak manufacturing’ in employment and value-added shares at a much earlier point than the advanced nations in terms of income per person.

What drives such this process and does it matter? A new ESRC GPID Briefing Paper addresses these questions.

First, there are differing views on the causes of premature deindustrialisation. Rodrik links the phenomenon to trade liberalisation and the impact of China’s entry into manufacturing. One could also potentially add automation and technological change. Jesus Felipe and colleagues at the Asian Development Bank argue that premature deindustrialisation is caused by the fact that large national increases in labour productivity were counteracted by a shift of manufacturing jobs to lower productivity economies. And a range of further hypotheses have been advanced.

In assessing whether premature deindustrialisation poses a problem to developing economies, much depends on the question if manufacturing is ‘special’. The importance of manufacturing is predicated on the work of Cambridge economist Nicholas Kaldor (1908–1986) who sought to explain the economic development of Western Europe through the development of manufacturing. Kaldor argued that manufacturing was the engine of growth for every country at every stage of economic development.

Does Kaldor’s claim still hold true? Is manufacturing special? Does premature deindustrialisation matter? The Briefing Paper gives a concise introduction into this topical debate.