I.

Introduction

Industrialization and De-Industrialization, in economics, conditions marked by increase or lessening of the importance of industry in the economy. The process of industrialization describes a transition period from an agricultural to an industrial society. In contrast, de-industrialization can be defined as a stage in economic growth when the relative share of manufacturing industry in terms of total employment and output is in decline.

II.

Industrialization

The process of industrialization entails a transition from an agricultural to an industrial society, associated with a movement towards higher per capita income and productivity levels. For this to happen, the demand for agricultural products (food and raw materials) has to be satisfied. Empirical estimates show that the demand for agricultural goods exhibits income elasticity (as income rises so does the demand for agricultural products). For viable and sustainable industrialization to take place, the demand for agricultural products has to be met either by an increase in imports or by a rapid growth of domestic agricultural productivity. In the early stages of industrialization, the ability to meet the required demand for agricultural products via an increase in imports is constrained by the effects this would have on relative international prices. If the demand for imported food is high enough the international terms of trade could move against the industrializing country to such an extent that the result is “immeserizing growth”—a situation where real per capita income falls in the industrializing country while the whole rise of productivity is used to finance the demand for agricultural imports. Thus, in most cases, successful industrialization requires a significant rise in domestic agricultural productivity. Hence, agricultural productivity growth is a necessary precondition for modern industrial growth to become self-sustaining. Although it is now recognized that a period of protoindustrialization pre-dates the Industrial Revolution, modern industrialization is often dated as having its origins in the British industrial revolution of the 18th century. A sequence of further industrializations were observed during the 19th and 20th centuries. During the 19th century successful industrializations were observed in a number of northern European economies and in North America. By the end of the 19th century this process encompassed some southern European economies and Japan. During the 20th century, particularly after World War II, the process was observed in a number of economies in East Asia. The following sections will describe three models that attempt to shed some light on the process of industrialization, and will evaluate their ability to explain the observed evidence.

A.

Rostow’s “Take-Off” Theory

Walt Whitman Rostow analysed the British and later industrialization experiences. He argued that for countries to industrialize successfully certain prerequisites were needed—such as a high productivity for the agricultural sector, the existence of functioning markets, and stable government. Once the preconditions were present industrialization could manifest itself in the form of a “take-off”—a brief period of 20 to 30 years in which the process of industrialization is completed. Because countries satisfy these preconditions in different historical time periods, industrializations are spread over time. In Rostow’s framework, countries go through very similar stages of development. Britain was the first country to manifest a take-off into industrialization during the period 1780-1800, followed by France, Germany, and America in the 19th century. Although appealing as a general theory, Rostow’s explanation of industrialization fails to describe the experience of the countries he studied. Recent works on the British industrial revolution suggest that the idea of a take-off during 1780-1800 is misleading—instead the economy saw a steady pace of industrialization throughout the 18th and early 19th centuries. The experience of the continental European economies also contradicts the idea of a take-off. The process of industrialization is a phenomenon observed throughout the 19th century, and although the pace of industrialization was not steady it seems misleading to fit the evidence into the straitjacket of Rostow’s stages theory.

B.

Gerschenkron’s “Relative Backwardness” Theory

Alexander Gerschenkron dismissed the historicism of Rostow’s take-off model of industrialization as theoretically unsatisfactory and empirically weak. Instead he introduced the concept of “relative backwardness” by arguing that the development path of a late industrializing country will, by the virtue of its “backwardness”, tend to differ fundamentally from that of the leading country—in this sense history matters in determining the nature of industrialization. He postulated that the late industrializer will display the following characteristics: (1) a rapid and intense growth of industrial output: (2) an emphasis in the composition of output on producer goods as against consumer goods, leading to considerable pressure on the level of consumption of the population; (3) a stress on large-scale plant and enterprise; (4) a reliance upon technological borrowing, and probably financial assistance from abroad; (5) importance of the state as the promoter of industrial development; (6) virulence of ideologies under the auspices of which the industrialization proceeds; (7) a passive role for agriculture, particularly as regards growth of productivity and as a source of demand for the output of the industrial sector.

Historical case studies of the European economies have, however, failed to verify many of these descriptive features. For example, the role of banks in financing industry during the 19th century was quite different in France and Germany, despite the fact that both countries are classified as “relatively backward”. Similarly, it has proved difficult to verify Gerschenkron’s postulate that the relatively backward industrializer will exhibit a rapid increase in output (with an emphasis on producer goods that give rise to pressures on the consumption of the population). France clearly displayed steady industrialization as did Austria-Hungary. Nevertheless, Gerschenkron’s general perspective has had significant impact on our perception of the process of industrialization: most economists would accept the idea that history matters on determining the path of industrializations. The main problem has been to clarify the mechanisms by which these interactions between early and late industrializations come about.

C.

“Catching-Up” Models of Industrialization

In recent years economists have attempted to explain the process of industrialization within a framework of “catch-up” growth. In this respect the recent theories have developed from Gerschenkron’s perspective, which emphasized the historical conditions faced by the late industrializers. Latecomers in terms of industrialization can imitate technologies already in existence in the leading countries, allowing them to undertake economic development and catch up with the per capita productivity levels of the leaders.

The theory of catching up predicts that there should occur a convergence of per capita income levels in poor and rich countries. There have been numerous tests of the so-called convergence hypothesis. Two findings stand out: first, there is a strong tendency towards convergence among the major countries (often referred to as the OECD economies). Secondly, when the number of countries analysed is expanded to include the very poor countries of the world the hypothesis breaks down. A large number of poor countries have failed to industrialize and grow rapidly relative to the rich countries: catching up is not an inevitable historical process.

In order to understand why the forces of catching up are only powerful in the developed world, Moses Abramovitz introduced the idea of “social capability”. A necessary condition for catching up is a sufficient degree of social capability: the relatively backward economies must be sufficiently socially advanced to be able to adopt the superior technology of the major industrial countries. If countries do not have high levels of human capital, due to a failure to invest in education, or have unstable political systems, we will find that the potential is not taken up. Hence, the whole world is unlikely to industrialize successfully to achieve comparable productivity levels. The next step in our knowledge is to try to understand how social capabilities can be improved to allow poor countries to benefit from the potential of industrialization via the catching-up process.

III.

De-industrialization

If de-industrialization is a stage in economic growth when manufacturing industry’s contribution to total employment and output is in decline, this definition does not necessarily entail a fall in the level of employment or output of manufacturing, although in recent years such level contractions have been observed. Focusing on the timing of the British experience of industrialization and de-industrialization we observe three specific phases: industrialization between 1700 and 1850; industrial maturity between 1850 and 1955; and de-industrialization from 1955 onwards. There are striking homologies between the processes of industrialization and de-industrialization. For viable de-industrialization to take place the demand for manufactured goods (which are highly income elastic) has to be satisfied. If an economy is not going to risk facing serious balance of payments problems, this demand has to be satisfied via a rapid increase of productivity in the domestic manufacturing sector.

A.

Observed De-industrialization

A process of de-industrialization has been observed in many of the major industrial countries during the post-war period. Some of the key empirical features of the phenomenon need to be explained. Although de-industrialization has been observed in a large number of industrial countries, the timing of the decline in the share of manufacturing employment and output differs across countries. The British experience is an interesting case in that the process started much earlier than any other country (from the mid-1950s). The speed of de-industrialization has not been smooth. For example, British de-industrialization accelerated significantly in the 1980s. The unsteady trend of de-industrialization allows us to distinguish between “positive” and “negative” de-industrialization. It has been argued that if de-industrialization is correlated with high productivity, growth, and full employment we can depict this as a positive feature; alternatively, if de-industrialization is observed with slow productivity growth and high levels of unemployment we can depict this as negative.

B.

Explanations of De-industrialization

A general theory of the process of de-industrialization can be found in “Baumol’s Law”. Given the high income elasticity of demand for the products of the manufacturing and service sectors, in mature industrial economies (defined as economies where the agricultural sector has already declined in relative importance) the two sectors will compete for scarce labour supplies. William Baumol argued that since the service sector generates low productivity growth, relative to the manufacturing sector, under market conditions relative prices will rise in favour of the service sector (in both the goods and the labour market), allowing the sector to attract the necessary labour to meet the required demand for services in the economy.

This theory is capable of explaining some of the empirical features noted above. For example, given that Great Britain was the first country to industrialize, the agricultural sector of its economy was uniquely different in structure to the rest of the world, and by the end of the 19th century was relatively much smaller than in the other major industrial countries of the time (including France, Germany, and the United States). Hence, Baumol’s theory predicts that Britain would experience the pressures of de-industrialization much earlier than other countries. As noted above, this prediction is consistent with the evidence.

Another feature of the path of British de-industrialization has been the speed of relative manufacturing decline compared to many other countries. The faster pace of de-industrialization in Britain can be partly accounted for by changes in international specialization. For most of the 19th century the comparative advantage of Britain resulted in surpluses in manufactures and deficits in nonmanufactures. This was clearly the case up to the early 1950s. However, by the early 1980s this situation had been totally reversed. In the light of this evidence the unique speed of British de-industrialization during the period 1955-1980 has been explained in functional terms: because of structural changes in production and the discovery of North Sea oil in the 1970s Britain did not need a large manufacturing sector to finance the deficit on nonmanufactured products; hence, structural change was accelerated by these events.

C.

The Importance of Events

So far de-industrialization has been analysed as a long-run economic process. Although these explanations are able to capture some of the observed trends, they do not do justice to the historical details. Consider two examples that illustrate the complexities of the actual path of de-industrialization. First, while the share of British manufacturing in aggregate output was fairly stable during the period 1870-1913, we observe an upward trend during the period 1920-1955. Secondly, during the 1980s the speed of British de-industrialization has accelerated, partly as a result of the introduction of a restrictive monetary policy regime. This recent trend can also be observed in a number of other countries, including Germany, France, and the United States. Such variations in the trend of de-industrialization suggest that events (such as policy regime changes) and long-run processes (such as those that arise from Baumol’s Law) need to be considered jointly. For example, in the case of Britain during the period 1920-1955 a number of policy changes improved the performance of the domestic manufacturing sector (including devaluation in 1931 and tariffs in 1932). In contrast, during the early 1980s restrictive monetary policy put an upward pressure on the exchange rate, with adverse effects on the international competitiveness of the domestic manufacturing sector.

Such an interaction between policy and the path of de-industrialization raises serious doubts about the “natural” aspect of the observed trends. The level of de-industrialization we see today is the outcome of two quite separate historical processes: first, long-term structural change which results from industrial maturity, and secondly, discrete policy regime changes that either stimulate or depress the relative size of the manufacturing sector.