The relation between deindustrialization and reindustrialization: a new perception of industrial structure upgrading

Shevchenko D.1, Zhao W.2
1 Southern Federal University, Россия, Ростов-на-Дону
2 Southern Federal University, Rostov-on-Don, Russia; 2 Henan University of Economics and Law, Zhengzhou, China

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Экономика, предпринимательство и право (РИНЦ, ВАК)
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Том 12, Номер 9 (Сентябрь 2022)

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Shevchenko D., Zhao W. The relation between deindustrialization and reindustrialization: a new perception of industrial structure upgrading // Экономика, предпринимательство и право. – 2022. – Том 12. – № 9. – С. 2363-2376. – doi: 10.18334/epp.12.9.116201.

Аннотация:
According to traditional industrial structure upgrading theory, the economic structure of a country should be transformed from agricultural economy to industrial economy and service economy. It is contrary to the current \"re-industrialization\" strategy of developed countries such as the United States and European Union states. This paper indicates that traditional industrial structure upgrading theory doesn’t clarify the prerequisites for industrialization and deindustrialization and ignores the different characteristics of each industrial sector. The traditional industrial structure upgrading theory also emphasizes on the expansion of specific industrial sector scale and doesn’t take into account the interactions between them. Considering the interaction and integration of modern manufacturing sector and service sector, from the perspective of the improvement of social productivity, this paper explores the essential relationship between industrialization and deindustrialization using theoretical model analysis. This paper holds that simply pursuing the expansion of the scale of the service sector is inclined to lead to premature and excessive deindustrialization, which should not be the goal of industrial structure upgrading. The new theory of industrial structure upgrading should aim at the maximization of social productivity and constantly approach the equilibrium between manufacturing sector and service sector.

Ключевые слова: deindustrialization, reindustrialization, industrial upgrading

JEL-классификация: L51, L52, L53



Introduction

Sustainable and inclusive economic growth is a process of industrial structure upgrading and structural transformation with continuous technological innovation [1]. In recent years, focusing on the problem how to promote industrial structure upgrading and economic development, the research on the topic related to reindustrialization and deindustrialization has been paid more attention by scholars. The debate on the relation between reindustrialization, deindustrialization and industrial structuring upgrading is on the rise. The process of reindustrialization in advanced economies is essentially the return of labor, material and intellectual capital to those economies [2]. Developed countries, with the success of the post-industrial development model, are paying again attention to reindustrialization. The reasons for this fall into two broad categories: economic and political [3]. For Russia, the choice of industrial structure upgrading by reducing industry and agriculture is unreasonable and even dangerous, because Russia's deindustrialization cannot compensate the Western model by transferring production capacity. Therefore, the service revolution threatens the country's economic sovereignty and economic security [4].

Since a recent focus is turning attention towards the nexus of reindustrialization, deindustrialization and industrial structure upgrading. So, there is scope to expand related studies to compare and establish the rationale behind the nexus. This paper posits out the shortcomings of traditional industrial structure upgrading theory and indicates that the root course of reindustrialization and deindustrialization is to pursue the balance of industrial structure. Considering the interaction and integration of modern manufacturing sector and service sector, this paper explores the essential relationship of industrialization and deindustrialization with theoretical model. Furthermore, this paper conclude that the aim of industrial structure upgrading should focus on the co-evolution of manufacturing sector and service sector, thus maximizing the social productivity.

The shortcomings of traditional industrial structure upgrading theory

The traditional industrial structure upgrading theory mainly comes from the industrialization theory. Industrialization theory is the most classic theory to describe the changes in the stages of economic development. Historically, based on the actual situation in England,William Petty in 1691 clearly points out, industry is often more profitable than agriculture, and commerce is often more profitable than industry [5]. Based on William Petty's research results, Clark (1940) extends William Petty's idea of ​​industrial and commercial development from the field of income to the field of employment structure [6]. He empirically compares the distribution of the employed population among agriculture, industry and services sectors under different income levels and indicated that with the development of the economy and the improvement of the national income, the labor force firstly transferred from agriculture to industry, and then transferred to the service sector. Simon Kuznets further extends the idea of ​​Petty-Clark law to the field of national economic accounting. Based on the data of industrial structure in 13 countries, he finds that the proportion of agricultural output in total output continue to decline with economic development, and the proportion of industrial output gradually increase, the proportion of service industry output value does not change significantly [7].

It can be seen that in mainstream research, industrial structure transformation refers to the reallocation of production factors such as labor and capital or distribution of final products among agriculture, manufacturing and service sectors with economy development [8]. On the basis of these theories, Chenery and Taylor divided the upgrading of industrial structure into three stages: 1. Primary product production stage. At this stage, the dominant production activity is the production of primary products, agriculture is the main sector of it; the speed of economic growth is relatively slow. 2. The industrialization stage. At this stage, the dominant production activity shifts from primary product production to manufacturing production. The contribution of manufacturing to economic growth is relatively important, and the economy will experience a period of high-speed growth. 3. The developed economy stage. At this stage, as a result, the comprehensive contribution of the input of production factors has become smaller, and the rate of population growth and economic growth has slowed down [9].

These ideas constitute the traditional theory of industrial structure upgrading. The traditional industrial structure upgrading theory believes that in the early stage of industrialization, the upgrading of industrial structure is manifested in the decrease of the proportion of the primary industry (Agriculture sector) and the increase of the proportion of the secondary industry (Manufacturing sector), which is the process of industrialization; in the later stage of industrialization, the upgrading of the industrial structure is more manifested in the decrease of the proportion of the secondary industry and the increase of the proportion of the tertiary industry (Service sector). This process is also known as the deindustrialization process. With the development of economy, in current, many developing countries, including China, are in the trend of "de-industrialization"; while some developed countries, such as the United States and European countries, have begun the process of "re-industrialization”. Since the 1980s, the United States has begun the process of "de-industrialization" and has been carrying out financial innovations. However, the over-inflation of the financial industry accelerated the outbreak of the financial crisis in 2008 [10]. This in turn affects the global real economy, showing the negative impact of "de-industrialization" in developed countries. In this context, developed countries re-examined the relationship between the real economy and the virtual economy, and adopted “re-industrialization” strategy to rebuild their competitive advantages. Accordingly, the "re-industrialization" strategy of developed countries seems to be contrary to the current development path of many developing countries and the traditional economic transition model. Traditional industrial structure upgrading theory is based on the specific historical background and should be continuously improved and enriched with the development of social phenomena. This paper holds that the traditional industrial structure upgrading theory has some significant shortcomings.

First, according to the traditional theory of industrial structure upgrading, the proportion of added value and employment of the manufacturing sector should increase first and then decrease. But it is not clear, when should it start to increase and when should it start to decrease? Once the proportion of added value and employment of the manufacturing sector crosses the peak from rising to falling, does it mean that manufacturing sector is no longer important to economic development? What are the conditions to start industrialization and what are the conditions to start deindustrialization? Is it possible deindustrialization has no limit? Are there issues of premature deindustrialization and excessive deindustrialization? The history has confirmed that both premature deindustrialization in Southeast Asia and Latin America, and excessive de-industrialization in the United States and the European Union have hindered economic development to varying extent.

Second, the traditional industrial structure upgrading theory emphasizes on the expansion of industrial scale, such as the proportion of output and employment in total, while ignoring the difference in the characteristics of different industrial sectors. This simple division ignores the inherent characteristics of different industries, which have different impacts on the economy development. Evaluating the position of an industry sector in the economy is a very complex issue. Using the proportion of added value and employment in total to decide if it is in a dominant position is just a statistical method, which is intuitive and simple but not comprehensive [11]. In the industrial structure, the secondary industry is the key to improving the technical efficiency of the primary industry and the tertiary industry, and the efficiency improvement of the secondary industry can spill over to other industries more deeply and comprehensively [12]. From the perspective of the competitive advantages of an economy, manufacturing is the key to economic development [13]. Manufacturing sector is the power source of national economic growth [14]. Manufacturing sector is the user and disseminator of technological innovation, and the source of job creation [15]. After the scale of the manufacturing sector reaches a certain level, the proportion of added value and employment in the manufacturing industry changes from increasing to decreasing, but the manufacturing sector, especially the advanced manufacturing industry, still plays an important supporting and leading role in the national economy. Instead of relying on production factors to drive the expansion of industrial scale previously, it must rely on innovation to improve product quality and competitiveness.

Third, the traditional industrial structure upgrading theory emphasizes on the transformation among different industrial sectors but ignores the interactions between them. The transition from the primary industry to the secondary industry cannot be simply analogized to the transition from the secondary industry to the tertiary industry. The connections between the secondary industry and the tertiary industry are very intense: a large number of activities in the tertiary industry are still serving the development of the secondary industry, such as logistics, sales, financial and other industries [16]. In the modern economic structure, there is a symbiotic, co-prosperous and mutually reinforcing relationship between advanced manufacturing and producer services. On the one hand, the producer service industry can provide high-quality and specialized production services for advanced manufacturing industries, thus improving the operational efficiency and increase added value of manufacturing products in all aspects. It can promote the upgrading of the manufacturing industry to the high-end of the value chain. On the other hand, the large-scale and high-end manufacturing industry can also promote the development and growth of the producer service industry. The emergence of the producer service industry itself is the consequence of the specialized division of labor in the manufacturing industry. Therefore, developed manufacturing industry can support the development of the producer service industry [17]. The traditional industrial structure upgrading theory simply interprets industrial upgrading as the transformation from manufacturing-led to service-led, ignoring the comprehensive and deep integration and interaction externalities of modern manufacturing sector and modern service sector.

According to the traditional industrial structure upgrading theory, the current reindustrialization strategy of the United States and other developed countries seems to be contrary to the previous process of their deindustrialization process and the current development path of developing countries. What is the reason for this contrary? When should a country de-industrialize? Under what circumstances should it re-industrialize? How to avoid premature and excessive de-industrialization? All these questions couldn’t be resolved by traditional industrial structure upgrading theory. To answer the questions above, this paper argues that under a given condition, the optimal industrial structure can maximize the social productivity. Therefore, from the perspective of the improvement of social productivity, considering the interaction and integration of modern manufacturing sector and service sector, this paper analyzes the relationship of industrialization and deindustrialization with theoretical model and explores the essence of industrial structure upgrading.

Theoretical model analysis

To explore the relationship between industrialization and deindustrialization, this paper assumes that a small economy consists of only two industrial sectors: manufacturing and service sectors, and labor is the only input factor of production in the two sectors (Nmt represents the employment in manufacturing sector; while Nst represents the employment in the service sector; the total employment is Nt=Nmt+Nst). This model assumes the productivity of each sector consists of two parts. One part is each sector’s own productivity effect, another part is spillover effect from each other. Therefore, the productivity of manufacturing sector at time t can be expressed as following.

(1)

(2)

(3)

Among them, = / represents the proportion of employment of service sector in total employment at time t, / represents the proportion of employment of manufacturing sector in total employment at time t. Because we assume full employment , that is, Nt=Nmt+Nst, therefore, we can get , , . represents the productivity of manufacturing sector. According to our assumption, it equals with the the productivity effect brought by itself plus the productivity effect brought by the spillover externality of service sector. Among them, represents the productivity effect brought by the manufacturing sector itself. Here α is a positive coefficient. represents the productivity effect brought by the externality of service sector to manufacturing sector at a given time t; the relationship between and satisfies the conditions in formula (2). is the first derivative of with respect to . indicates that with every unit increase of the share of employment in service sector, the spillover effect of service sector to manufacturing sector will increase too. is the second derivative of with respect to . indicates that with every unit increase of the share of employment in service sector, the marginal spillover effect of service sector to manufacturing sector will decrease. means when there is no employment in service sector , there is no the spillover effect of service sector to manufacturing sector too. means when the share of employment in service sector approaches zero, every increase in will lead to the biggest spillover effect on manufacturing sector.

Similarly, the productivity of the service sector ( ) depends on its own productivity effect and the externality of the manufacturing sector. Therefore, the productivity of service sector ( ) at time t can be expressed as:

(4)

(5)

Among them, represents the productivity effect brought by the service sector itself, b is also a positive coefficient here. represents the productivity effect that comes from the externality of manufacturing sector, and the relationship between and is subject to the constraints in formula (5). is the first derivative of with respect to . indicates that with every unit increase of the share of employment in manufacturing sector, the spillover effect of manufacturing sector to service sector will increase too. is the second derivative of with respect to . indicates that with every unit increase of the share of employment in manufacturing sector, the marginal spillover effect of manufacturing sector to service sector will decrease. means when there is no employment in manufacturing sector, there is no the spillover effect of manufacturing sector to service sector too. means when the share of employment in manufacturing sector approaches zero, every increase in will lead to the biggest spillover effect on service sector.

Based on the analysis above, the social productivity at time t is equal to the sum of weighted average of productivity in both manufacturing sector and service sector. This paper assigns the weight of productivity of each sector in consistent with the proportion of the employment in each sector. Therefore, is the weight of manufacturing sector; while is the weight of service sector. The social productivity ( ) in a country can be presented as follows.

(6)

If social productivity ( ) shows a decreasing trend over time, it means that the economic growth of a country is slowing down; on the contrary, it means that the economy of a country maintains a continuous growth trend. Therefore, this paper calculates the derivative of with respect to t ( ), and the result is as follows:

(7)

The model shows three possible consequences of imbalances.

(1) The consequence of excessive "deindustrialization".

When → 1 and → 0, the derivative of with respect to t is positive ( ) and the derivative of with respect to t is negative( ). It indicates that the employment is transferring to the service sector. Accordingly, on the basis of and , the each item in the formula(7) can be concluded: <0, >0, , , . Therefore, is negative. It suggests that when → 1, → 0, that is, when the employment is excessively concentrated in the service sector, the social productivity will decline and economic growth will slow down. This can be confirmed by the performance of excessive "deindustrialization" process in developed countries such as the United States.

(2) The consequence of excessive "industrialization".

When → 1 and → 0, the derivative of with respect to t is negative ( ) and the derivative of with respect to t is positive( ). It indicates that the employment is transferring to the manufacturing sector. Accordingly, on the basis of and , the each item in the formula(7) can be concluded: >0, <0, , , , . Therefore, is negative. It suggests that when → 1, → 0, ,that is, when a country's employment is excessively concentrated in manufacturing sector, the social productivity will also decline.

(3) The equilibrium between manufacturing sector and service sector.

Because , it will get same value if we calculate the derivative of with respect to or . In this case, in order to analyze the optimal share of employment in manufacturing sector when the social productivity reaches its maximum value, we let . The optimal share of employment in manufacturing sector ( ) can be calculate out as the follow:

(8)

Therefore, when the social productivity reaches its maximum value, that is, when the manufacturing sector and service sectors reach the equilibrium, the optimal share of manufacturing employment depends on (externality of the service sector to the manufacturing sector) and (externality of the manufacturing sector to the service sector). It is presented in Figure 1. If the share of manufacturing employment in a country is higher than the equilibrium point, the increased productivity of manufacturing sector will be lower than the loss of productivity of the service sector, resulting in a decline in social productivity. At this time, the employment ratio of the service sector should be increased, that is, de-industrialization. If the share of manufacturing employment in a country is lower than the equilibrium point, the loss of productivity of manufacturing sector will be higher than the increased productivity of service sector, which will also lead to a decline in social productivity. At this time, the proportion of employment in the manufacturing sector should be increased, that is, re-industrialization.

Figure 1. The equilibrium point between manufacturing sector and service sector

Source: compiled by the authors.

The relation between deindustrialization and reindustrialization

From the above analysis, it can be concluded that there is a highly relevant and complementary symbiotic relationship between service sector and manufacturing sector [18]. The symbiotic development of the two sectors can improve the efficiency of social innovation and promote social productivity. When a country enters the middle and late stage of industrialization, it usually concentrates labor and other production factors on the manufacturing sector, so that the productivity of the manufacturing sector increases faster, while that of the service sector lags behind. Nevertheless, this will cause the development of the manufacturing sector to encounter the bottleneck caused by the lagging efficiency of the service sector. At this time, the government will actively promote "deindustrialization" to improve the production efficiency of the service sector and ultimately promote the transformation and upgrading of industrial structure. However, if "deindustrialization" is excessive or premature, it will induce the excessive development of the service sector, squeeze the efficiency of the manufacturing sector, thus delaying the growth of social productivity, and eventually trigger the demand for "reindustrialization".

Therefore, the reason why the economic development of developing countries now shows the trend of "deindustrialization" is that the development of manufacturing sector in developing countries lacks the driving force from service sector. There is an urgent need for the development of service sector, especially modern producer service industries, to promote the transformation and upgrading of manufacturing sector; the reason why the United States and some other developed countries implement the "Reindustrialization" strategy after experiencing the process of "deindustrialization" is that the development of service sector in these countries needs the support and pull of manufacturing sector to enhance the country's industrial competitiveness. The "deindustrialization" of developing countries and the "reindustrialization" of some developed countries seem to have formed a conflict on the surface, but the essence is to correct the industrial structural imbalance in economic development. So, developing countries are solving the problem of excessive dependence on manufacturing sector in economic development, while developed countries are solving the dilemma of excessive dependence on service sector. Both developing countries and developed countries are seeking the coordinated coexistence of manufacturing and service sectors, so as to achieve steady economic development.

Conclusion

With the development of economy, the scope of both manufacturing sector and service sector has been broaden. The manufacturing sector can be divided into traditional manufacturing and advanced manufacturing. Service sector can be divided into traditional consumption service and modern producer service. The concept of manufacturing informatization and manufacturing service has blurred the boundaries between manufacturing sector and service sector. Advanced manufacturing and producer services can promote the development of each other. The traditional industrial structure upgrading theory only pays attention to the scale expansion of each industrial sector and takes the rise and fall of the proportion of service sector as the core standard to decide whether the industrial structure is advanced; while it does not clarify the prerequisites for industrialization and deindustrialization and ignore the quality of economic development and industrial competitiveness. In fact, the quality of each industrial sector can be more illustrative for competitiveness and is an important criterion for assessing the development stage of industrial structure. Furthermore, the traditional industrial structure upgrading theory also does not take into account the characteristics of different industrial sectors and the interaction among them.

This paper holds that simply pursuing the expansion of the scale of the service sector is inclined to lead to premature and excessive deindustrialization, which should not be the goal of industrial structure upgrading. The new theory of industrial structure upgrading should aim at maximizing social productivity and constantly approach the equilibrium between manufacturing sector and service sector. And different countries are in different economic development stages and have different social basic conditions, so the equilibrium between manufacturing sector and service sector is also different. Therefore, industrial structure upgrading should refer to keep the manufacturing sector and service sector in a reasonable range, which is in consistent with the stage of economic development, so as to continuously promote the integrated development of manufacturing sector and service sector.


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