Industrialization and De-Industrialization

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.