Industrial decline is no horror story, just a sign of success

There is a spectre haunting Europe, or so you might have been led to believe. It is the threat of a haemorrhage of industrial jobs from the rich countries to the cheap-labour Third World.

An unholy political alliance of left-wing bleeding hearts and right-wing nationalists is taking arms against the process of "globalisation", especially direct investment by multinationals in the newly industrialising countries, which they blame for the loss of jobs in manufacturing at home. The demands vary from outright protectionism to the imposition of minimum labour standards on developing countries, but they rest on the same interpretation of the "economic horror" (to quote the title of a recent French bestseller) of the global economy.

Some voices of reason have long been pointing out the excesses and errors of this global nightmare school of economic analysis. (One of Paul Krugman's excellent demolition jobs, The Age of Diminished Expectations, has just been issued in paperback by MIT Press.) However, a recent paper published by the International Monetary Fund goes even further, suggesting that de-industrialisation in the rich economies is not only caused by trade with poorer countries, it is also a sign of a vigorous and dynamic economy. The more the share of manufacturing has shrunk, the more successful the economy.

The authors, Robert Rowthorn, a professor of economics at Cambridge University, and the IMF economist Ramana Ramaswamy, write: "De-industrialisation is not necessarily a symptom of the failure of a country's manufacturing sector, or for that matter of the economy as a whole. On the contrary, de-industrialisation is simply the natural outcome of the process of successful economic development."

Their argument is that economic development involves a process of shifting employment and output from one sector to another, from agriculture to manufacturing and then to services. The process is driven by productivity growth. Employment, in particular, shifts from high productivity to low productivity activities. De-industrialisation therefore reflects the success of manufacturing in boosting levels of productivity and efficiency.

The paper gives figures showing that the manufacturing share in total employment and value added has been declining in the OECD countries since about 1970 - earlier in the US. For the "industrial" countries as a whole (or should that be "post-industrial"), the proportion of employees working in manufacturing has fallen from 28 per cent in 1970 to 18 per cent by 1994. By contrast, service sector employment has climbed from 42 per cent to 65 per cent. Although the shift from spending on manufactures to spending on services has been smaller, the greater productivity gains in manufacturing have pushed down the share of employment in manufacturing.

There are differences between countries that seem to be explained by trade patterns, but not trade with developing countries. Specifically, Japan has gained a bigger chunk of the export market for manufactures, while the US has lost a big chunk. This explains the faster-than-average pace of de-industrialisation in America and its slower pace in Japan.

A second difference is that the level of employment in US industry has not declined in absolute terms, whereas it has in Europe. In the latter case slow growth has linked de-industrialisation with unemployment and stagnant earnings. But the authors conclude: "Even if these countries had grown faster than they actually did during this period, de-industrialisation would still have occurred, though with more favourable effects on living standards and employment."

Breaking down the possible causes of de-industrialisation, they find that for the group of OECD countries as a whole, the 9.6 per cent drop in the share of manufacturing employment can be attributed to: higher productivity growth in industry (minus 6.3 per cent); trade (0.2 per cent - small but positive); weak investment (minus 1.8 per cent); and miscellaneous (minus 1.7 per cent).

The trade effect for the whole group combines a big negative for the US and a big positive for Japan. Low investment played a small part in manufacturing job losses everywhere apart from the US.

Their conclusions are that the decline of industry is a concern to the extent that it causes disruption during the adjustment, but no further. Future prosperity in the rich nations will depend on the growth of productivity in the dominant service sector.

Separate IMF papers in the same batch provide more ammunition against the ghoulish tendency. One confirms earlier research that it is hard to find any evidence that imports from developing countries have had a big impact on either wage levels or income inequality in the rich countries. Increased trade accounts for 10-20 per cent of the changes in earnings during the past two decades, although the report warns that future growth in trade could make workers increasingly vulnerable and insecure.

Another finds that low foreign labour standards, like low wages, are the mirror of low levels of productivity on the part of Third World workers. They are not a form of unfair competition. "There is little basis for fearing a competitive `race to the bottom'," it says, warning that the introduction of minimum labour standards in trade agreements would harm the very people - the exploited poor of the developing world - they are claimed to help.

"Deindustrialisation: causes and implications", by Robert Rowthorn and Ramana Ramaswamy; "The Effect of Globalization on Wages in the Advanced Economies", by Matthew Slaughter and Phillip Swagel; "International Labour Standards and International Trade", by Stephen Golub. All IMF working papers, April 1997.