Deindustrialization Is Not Necessarily Bad

Deindustrialization is not necessarily bad for an economy. The trend of deindustrialization reflects manufacturing industries moving offshore. There is fear that as other nations with lower wages industrialize, they will be able to exploit their wage gaps to win trade. Eventually these economies will product more complex industrial goods, contributing in theory to even more job loss in the economy (Krugman, 2008). The data supporting this theory, however, is inclusive (Ibid). Wilson and Purushotaman (2003) note that deindustrialization of the West in particular is expected to accelerate over the first half of the 21st century.

Leamer (2007) characterized this reshaping of global trade as focusing nations on trading with their neighbours. Eventually, as more nations deindustrialize, the newly-industrialized nations will see their wage advantage fall as their GDP and currency exchange rates rise relative to those of major nations. This may ultimately a prompt a reindustrialization process for Western nations in the latter 21st century, if the trends identified by Williamson (2004) from past deindustrialization events hold true in the future.

For Western nations, the response to deindustrialization has typically been to fight it. Krugman (1994) argued that this is the wrong response. The outcomes of deindustrialization, therefore, are related to the response of government and industry to the situation. The dogma of competitiveness, followed by many in the West even as competitiveness becomes a myth in the face of massive wage gaps with newly-industrializing nations, lead to a host of negative outcomes: "misallocated resources, trade frictions, and bad domestic economic policies" (Ibid).

The implication for this is that deindustrialization is most harmful when the nation refuses to accept it, and fails to make the appropriate policy decisions. The shift in the West has been to replace industrial jobs with intellectual ones. The competitive advantage that serves as the basis of trade for Western nations is not low cost labor, but rather high levels of education and innovation. China may manufacture computers, but Americans design them. Poor government policy makes it more difficult for resources to be allocated to these knowledge industries, even though those industries are necessary to transition to a post-industrial economy.

Even if it is taken as a given that deindustrialization reduces real wages -- something for which the evidence is inconclusive (Krugman, 2008) -- the impact of deindustrialization is significantly affected by the policy responses to the situation. While real wages in one sector of industry may drop, good policy will ensure that the nation still has competitive advantages in other sectors, and this will allow wages to remain high. Deindustrialization, after all, is simply an effect of competition. By shifting the competitive mindset from an "us vs. them" approach, governments can focus on finding areas where competition is less great, and then exploit those areas to generate high wages.