Deindustrialization 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 of heavy industry or manufacturing industry.
There are different interpretations of what deindustrialization is. Many associate American deindustrialization with the mass closing of automaker plants in the now so-called Rust Belt between 1980 and 1990.Robert Forrant (2008) Metal Fatigue. The US Federal Reserve raised interest and exchange rates beginning in 1979, and continuing until 1984, which automatically caused import prices to fall. Japan was rapidly expanding productivity during this time, and this decimated the US machine tool sector. A second wave of deindustrialization occurred between 2001 and 2009, culminating in the automaker bailout of GM and Chrysler.
Research has pointed to investment in patents rather than in new capital equipment as a contributing factor.Kerwin Kofi Charles et al (2018) The Transformation of Manufacturing and the Decline in US Employment in U.S. Employment∗, National Bureau of Economic Research At a more fundamental level, Cairncross and Lever offer four possible definitions of deindustrialization:
Rowthorn and Wells 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 suggest that, to the extent that manufacturing is characterized by higher productivity, this leads, all other things being equal, 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 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 , manufacturing moved to lower-cost sites and in its place service sector and financial agglomerations concentrated in urban areas.
The term deindustrialization crisis has been used to describe the decline of labor-intensive industry in a number of countries and flight of jobs away from cities. One example is labor-intensive manufacturing. After free-trade agreements were instituted with less developed nations in the 1980s and 1990s, labor-intensive manufacturers relocated production facilities to third world countries with much lower wages and lower standards. In addition, technological inventions that required less manual labor, such as , eliminated many manufacturing jobs.