Premature Deindustrialisation

Premature deindustrialisation occurs when manufacturing begins to lose its share in an economy before that economy has become relatively prosperous. More precisely, manufacturing employment or output shares peak at lower income levels, and often at lower shares, than they did in earlier industrialising economies. It is a departure from the conventional pattern of structural transformation, in which workers move from agriculture into manufacturing and subsequently into services.

How it differs from normal structural transformation

In the conventional development path, manufacturing absorbs workers leaving agriculture, raises productivity and expands incomes. As an economy becomes richer, services gain importance and manufacturing's employment share may decline. Deindustrialisation is premature when this shift happens before manufacturing has provided a broad employment base.

• A declining manufacturing share does not necessarily mean that factory output or the number of manufacturing workers is falling in absolute terms; other sectors may simply grow faster.
• The income level at the manufacturing peak matters: a shift towards services in a rich economy is different from one occurring while a large workforce still needs productive non-agricultural employment.

Why developing economies face this risk

Developing economies need not reproduce the labour-intensive industrialisation path followed by earlier industrialisers. Changes in production technology and international competition can limit manufacturing's capacity to absorb workers.

• Labour-saving technology allows manufacturing output to expand without a proportionate increase in employment.
• Global competition can constrain domestic manufacturing where firms lack the productivity, infrastructure or capabilities needed to compete.
• A growing services sector may draw economic activity away from manufacturing, but services differ greatly in productivity, skill requirements and employment potential.

Implications for employment and India

The central concern is the loss of a large-scale route from low-productivity agriculture to more productive employment. A service-led transition is not necessarily unsuccessful, but its ability to generate accessible, productive jobs must be assessed rather than assumed.

• Workers leaving agriculture may enter low-productivity informal services instead of obtaining stable, better-paid manufacturing jobs.
• Skill-intensive modern services can raise output and exports without absorbing enough workers with limited education or training.
• For India, the relevant challenge is to expand productive non-farm employment through both labour-absorbing manufacturing and employment-generating services.
• Policy priorities include better infrastructure, workforce skills and conditions for productive enterprises to grow; success should be judged by employment quality as well as output growth.