Premature Deindustrialisation

Premature deindustrialisation means a country's factory sector starts shrinking, as a share of jobs and output, before the country has become rich. In the normal path, a country builds factories, grows rich, and only then shifts to services. In premature deindustrialisation, the factory share stops rising and starts falling while most people are still poor. The idea was made popular by the economist Dani Rodrik.

Why does it matter?

Factories have been the main ladder out of poverty in history. A worker moving from a farm to a factory usually becomes much more productive and earns more. Factory goods can also be sold anywhere in the world, so a poor country can grow fast by exporting. This is how Britain, Japan, South Korea, Taiwan and China became richer. If this ladder is taken away early, a poor country loses its easiest path to fast growth and mass jobs.

Where did the idea come from?

• Economists have long seen manufacturing as the "engine of growth". The Cambridge economist Nicholas Kaldor argued in the 1960s that faster growth in manufacturing lifts the growth of the whole economy.
• In rich countries, manufacturing's share of jobs peaked and then fell, as they moved into services. This is normal deindustrialisation. For example, in Britain, manufacturing's share of jobs fell from about a third in the 1970s to a little above 10%.
• In 2015, Dani Rodrik published a paper called "Premature Deindustrialization" (NBER Working Paper 20935). It was published in the Journal of Economic Growth in 2016. He showed that newer industrialisers reach their factory peak earlier, at a lower peak share and at much lower incomes.

How does it show up in the data?

Economists describe the rise and fall of manufacturing as a hump. At first, as incomes rise, manufacturing's share rises. Then it peaks and falls. Rodrik found that this hump has moved down and closer to the start for newer countries. In his paper:

• Western European countries such as Britain, Sweden and Italy reached their peak manufacturing employment at incomes of about $14,000 (in 1990 dollars).
• India and many sub-Saharan African countries appear to have reached their peak manufacturing employment shares at incomes of about $700 (in 1990 dollars).
• Asian countries and exporters of manufactured goods were largely protected from this trend. Latin American countries were hit the hardest.

Think of it like a school ladder. Earlier students could climb ten steps before the ladder ended. Now, newer students find the ladder ending after just three or four steps. They must find another way up.

Why is it happening?

Two main reasons are given:

1. Technology: machines and automation now do much of the factory work. So factories need fewer workers for the same output.
2. Global trade: once a few countries (especially China) became very efficient mass producers, it became harder for new countries to break into world markets. Cheap imports also hurt factories in developing countries that opened up to trade.

India's position

India is often given as a key example. Its growth since 1991 has been led by services such as IT and finance, not factories. Manufacturing's share in GDP has stayed around 15-17% for decades, and never came close to the 25-35% seen in East Asian countries at their peak. Manufacturing's share in total jobs, from the Periodic Labour Force Survey (PLFS), has stayed around 11-12%.

Economists Amrit Amirapu and Arvind Subramanian also documented premature deindustrialisation within Indian states. India's policies, such as the National Manufacturing Policy 2011, Make in India and the PLI schemes, are all attempts to reverse this trend.

Commonly confused concepts

• Deindustrialisation vs premature deindustrialisation: deindustrialisation in a rich country (like the US or Britain) after reaching high incomes is normal. It is "premature" only when it happens at low incomes.
• Share vs absolute size: manufacturing output and jobs can still grow in number while their share in the economy stays flat or falls, because other sectors grow faster. India's manufacturing jobs rose slightly, but their share did not.
• Employment share vs output share: a country may keep its manufacturing output share while its job share falls, because machines raise output per worker. Rodrik found job shares fell more sharply than output shares.
• Services-led growth vs manufacturing-led growth: India's model relied on services. East Asia's relied on factories and exports.

Issues, criticism and the way forward

• Is services-led growth enough? Some economists argue modern services (IT, digital, global capability centres) can be a new engine of growth. Others point out that these services need skilled workers, so they cannot absorb millions of low-skilled workers as factories did.
• Jobless growth: when factories do not expand, workers stay in low-paying farm work or move to informal jobs in construction and small trade.
• Measurement debates: some argue the share looks low partly because of how output is measured, or because factory work is shifting into services like logistics and design.
• Way forward suggested by experts: focus on labour-intensive manufacturing where India has a large workforce, join global supply chains, improve skills and basic education, cut logistics and power costs, and support MSMEs. Many also suggest a parallel push to develop job-rich services such as tourism, care work and food processing.

Concepts to Know

• Productivity: how much a worker produces in an hour or a day. A factory worker with machines usually produces much more than a farm worker with simple tools.
• Structural transformation: the shift of workers from farming to industry and then to services as a country develops.
• Periodic Labour Force Survey (PLFS): the official survey by the National Statistics Office (NSO), under MoSPI, that tracks jobs and unemployment in India.
• Automation: using machines, robots or software to do work that humans used to do.