Premature Deindustrialisation and Its Implications for Developing Economies: A South African Perspective

Research has highlighted concerns surrounding premature deindustrialisation, a phenomenon where developing economies experience a decline in their manufacturing sector at lower levels of income and employment than previously observed in now-developed countries (Rodrik, 2016). This was touched on in my previous writing “Navigating the Double-Edged Sword of Technological Advancements: Equipping the Workforce for the Future in South Africa and Developing Countries” (Setati, 2023). This article examines the potential implications of industrialisation, deindustrialisation, and premature deindustrialisation on the development of these economies, particularly focusing on the South African context.

As previously mentioned, deindustrialisation refers to the contraction of a nation’s manufacturing sector, which traditionally provided numerous low-skilled employment opportunities (Rowthorn & Ramaswamy, 1997). Premature deindustrialisation occurs when this contraction takes place at lower peaks of manufacturing employment and per capita income than historically experienced by developed nations (Rodrik, 2016).

Historically, the manufacturing sector has been a significant driver of economic growth, productivity, and exports (Szirmai, 2012). It also creates job opportunities for low-skilled workers and fosters government investment in infrastructure, leading to the development of the middle class (Szirmai, 2012). Ideally, a nation would transition from industrialisation to an economy focused on high-skilled employment and innovation once it has established a stable middle class (Autor, 2015).

However, research reveals a significant decline in manufacturing employment and output in many developing nations (Rodrik, 2016). This trend is particularly concerning for regions like sub-Saharan Africa, which still faces widespread poverty and has yet to fully benefit from industrialisation-led development (World Bank, 2021). This is an issue as findings show that as deindustrialisation occurs, there is a decrease in low-skilled employment opportunities and an increase in high-skilled positions (Autor, 2015). This emphasises the importance of the manufacturing sector in fostering economic development and the availability of high-skilled jobs.

In the case of South Africa, the consequences of premature deindustrialisation are evident (Tregenna, 2009). Despite the country’s potential for labour-intensive export-oriented manufacturing, minimum wage laws and logistical inefficiencies make it difficult for South Africa to compete in the global market (Edwards & Alves, 2006). Furthermore, the country faces a high-skilled labour shortage and struggles to provide adequate employment opportunities for its educated workforce (Bhorat et al., 2014).

Technological advancements can lead to the destruction of jobs in some sectors while creating new opportunities in others (Autor, 2015). In South Africa, the rise of automation and digital technologies has led to job losses in traditional manufacturing and mining sectors (Bhorat et al., 2016). However, it has also opened up new opportunities in information technology, renewable energy, and creative industries (UNCTAD, 2017). Policymakers must proactively invest in education, skills development, and infrastructure to enable workers to transition to these new sectors and ensure inclusive economic growth (World Bank, 2021).

Causes of Premature Deindustrialization

• Globalisation: International trade and global value chains have created a more competitive environment, making it difficult for developing countries to establish and maintain a strong industrial base (Rodrik, 2016). As a result, traditional import-substitution industrialization strategies have become less effective (UNCTAD, 2003).
• Labour-Saving Technological Progress: Technological advances have reduced the demand for low-skilled labour in manufacturing, undermining the potential for industrialization to create employment and drive economic growth in developing countries (Autor, 2015).
• Policy and Institutional Failures: The inability of developing countries to adopt policies and build institutions conducive to industrialization is another contributing factor (Rodrik, 2016). These failures can include inadequate infrastructure, insufficient investment in human capital, and weak business environments (UNCTAD, 2003).

Consequences of Premature Deindustrialization

• Lower Economic Growth: Historically, industrialization has been a crucial driver of economic growth and convergence with high-income countries (Szirmai, 2012). Premature deindustrialization may limit the growth potential of developing countries, leading to a divergence in incomes and living standards (Rodrik, 2016).
• Reduced Employment Opportunities: The decline of manufacturing sectors in developing countries can lead to fewer jobs, particularly for low-skilled workers (Rowthorn & Ramaswamy, 1997). This can exacerbate income inequality and social tensions, as well as hinder poverty reduction efforts (World Bank, 2021).
• Vulnerability to External Shocks: With a diminished industrial base, developing countries become more reliant on volatile commodity sectors and external demand for their exports, making them more susceptible to economic shocks and crises (UNCTAD, 2003).

Policies and Strategies to Address Premature Deindustrialization:

Embrace Non-Traditional Sectors: Developing countries should explore new growth opportunities beyond manufacturing, such as modern services or the agroindustry (UNCTAD, 2017). These sectors can potentially absorb labour, foster innovation, and drive economic growth, as long as they are subject to similar competitive pressures and incentives as the manufacturing sector (Rodrik, 2016).

Implement Targeted Industrial Policies: Government should consider a more strategic approach to industrial policy, focusing on sectors with the greatest potential for productivity gains and employment growth (Rodrik, 2016). This may involve providing targeted support through tax incentives, investment in infrastructure, or human capital development (UNCTAD, 2003).

Improve Policy and Institutional Environments: Developing countries should work to address the underlying policy and institutional failures that contribute to premature deindustrialization (Rodrik, 2016). This includes building a stable macroeconomic environment, strengthening property rights, and investing in education and workforce development (UNCTAD, 2003).

The research conducted by Rodrik (2015) highlights the concerning trend of manufacturing decline in many post-colonial nations. Addressing premature deindustrialisation requires a multifaceted approach, including embracing non-traditional sectors, implementing targeted industrial policies, and improving policy and institutional environments. By adopting these strategies, developing countries like South Africa can mitigate the negative impacts of premature deindustrialisation and pave the way for inclusive economic growth and development.

References:

Autor, D. (2015). Why are there still so many jobs? The history and future of workplace automation. Journal of Economic Perspectives, 29(3), 3-30.

Bhorat, H., Cassim, A., & Hirsch, A. (2014). Policy co-ordination and growth traps in a middle-income country setting: The case of South Africa. WIDER Working Paper, 2014/155.

Bhorat, H., Naidoo, K., & Oosthuizen, M. (2016). Demographic, employment, and wage trends in South Africa. UNU-WIDER Working Paper, 2016/141.

Edwards, L., & Alves, P. (2006). South Africa’s export performance: Determinants of export supply. South African Journal of Economics, 74(3), 473-500.

Rodrik, D. (2016). Premature deindustrialization. Journal of Economic Growth, 21(1), 1-33.

Rowthorn, R., & Ramaswamy, R. (1997). Deindustrialization: Causes and implications. IMF Working Paper, 97/42.

Setati, T. K. (2023). Navigating the Double-Edged Sword of Technological Advancements: Equipping the Workforce for the Future in South Africa and Developing Countries. LinkedIn.

Szirmai, A. (2012). Industrialisation as an engine of growth in developing countries, 1950–2005. Structural Change and Economic Dynamics, 23(4), 406-420.

Tregenna, F. (2009). The fat years: The Structure and Profitability of the US banking sector in the pre-crisis period. Cambridge Journal of Economics, 33(4), 609-632.

UNCTAD (2003). Trade and Development Report 2003: Capital Accumulation, Growth and Structural Change. United Nations Conference on Trade and Development.

UNCTAD (2017). The Least Developed Countries Report 2017: Transformational Energy Access. United Nations Conference on Trade and Development.

World Bank (2021). World Development Report 2021: Data for Better Lives. World Bank Group.