DEINDUSTRIALIZATION IN THE GLOBALIZATION ERA: Examining the Relationship between Globalization and Industrialization in Developing Economies

Abstract: Industrialization has been the key engine for economic growth in the developed world, and currently these economies are substituting away from manufacturing towards services. The alarming trend is that developing countries are doing so as well to an even greater extent and at a lower level of GDP and development. This phenomenon of deindustrialization is premature for developing economies as they have never reached full industrialization in the first place and can be harmful to their economic growth prospects. Examining the underlying causes of this novel concept sheds light into the black box of deindustrialization and generates insights that can benefit policy makers. The economic impact of globalization is often debated and in theory is predicted to have a positive relationship with industrialization. However, some empirical evidence and other researchers argue that this might not be the case. This paper revisits the debate on the relationship between globalization and industrialization and examines if it differs for developed and developing economies. Using a sample of 32 developing and 8 developed countries spanning a time period from 1960 – 2010 it finds a positive relationship for both developed as well as developing economies. There appear to be regional differences among the developing regions regarding the evolution of the manufacturing sector. Asia does fairly well and even increases its manufacturing share on the global level. Contrasting is the stagnation and decline in Sub-Saharan Africa and Latin America. Regarding the impact of globalization there are also regional differences. The Asian region experiences a larger increase in manufacturing employment with the increase of globalization, whereas the Sub-Saharan African region benefits the least. Overall, support is found for the idea that Latin America and Sub-Saharan Africa are prematurely deindustrializing and are benefitting the least from globalization which can harm their economic growth path.