• Causes of Deindustrialization

• Is Malaysia facing premature deindustrialization?

• Factors that contributes to the deindustrialization

• Is deindustrialization always a negative?

• New challenges and emerging paradigms

• Reversing premature deindustrialization

Industrialization as an engine of growth has been an important phase of development and supporting a country’s economic development. The first industrial revolution in Europe and United States saw sustained productivity growth, resulting in the division of the world economy to differentiate into rich and poor countries. There was no exception and country could not escape from industrialization when the country started to develop their economy.

Most of the advanced economies have long moved into a new, post-industrial economy and the term of deindustrialization mainly refers to the experience of these advanced economies. Deindustrialization is the phase of economic development in which the employment share in manufacturing will decline, while increase in services sectors. When deindustrialization occurs, a country is trying to focus on the development on services sector, the government will re-allocate the resources to fostering the growth of services sector instead of manufacturing sectors. Therefore, some researcher stands in different views to argue that deindustrialization would have the opportunity to bring either positive or negative impact on economic growth and development. Some believe that deindustrialization brings positive impact to economic development while others believed that deindustrialization would bring long-term negative impact on economic growth.

Deindustrialization is the process by which manufacturing declines in a society or region as a proportion of total economic activity. It is the opposite of industrialization, and therefore sometimes represents a step backward in the growth of a society’s economy.

Causes of Deindustrialization

There are a number of reasons why a society might experience a reduction in manufacturing and other heavy industry.

• A consistent decline in employment in manufacturing, due to social conditions that make such activity impossible (states of war or environmental upheaval). Manufacturing requires access to natural resources and raw materials, without which production would be impossible. At the same time, the rise of industrial activity has done great harm to the very natural resources on which industry depends. The consequences of this environmental degradation are making it more difficult for a country to sustain its industrial output.

• A shift from manufacturing to service sectors of the economy. As countries develop, manufacturing often declines as production is shifted to trading partners where the costs of labor are lower. The result is a relative shift in employment from manufacturing to the service sector.

• A trade deficit whose effects preclude investment in manufacturing. When a country purchases more goods than it sells, it experiences a trade imbalance, which can reduce the resources needed to support domestic manufacturing and other production. In most cases, the trade deficit must become severe before it begins to have a negative effect on manufacturing.

• Policy – whether by commission or omission – is likely to be especially important in bringing about premature deindustrialization. Policies will commonly have differential effects across as well as within sectors, either affecting sectors to different degrees, or aiding some sectors while disadvantaging others.

Is Malaysia facing premature deindustrialization?

When the Federation of Malaya gained independence in 1957, economic conditions were ripe for rapid and sustained growth, and the new country’s primary export sector showed immense potential for expansion.

During the periods of 1960s, Malaysia became a developing country with middle income economy. A legacy of its colonial past, primary commodities - particularly tin ore and natural rubber - accounted for a third of Malaysia’s gross domestic product (GDP) and over 75% of exports by 1970. Manufactured exports accounted for less than 10%, raising concerns that heavy reliance on a few commodities left it vulnerable to terms-of-trade shocks from swings in commodity prices.

There was little economic diversification up to the 1980s, with undersized manufacturing focused on little more than processing agricultural and mining output. In fact, several terms-of-trade shocks in the early 1980s - followed by global recession a few years later - ballooned fiscal and current account deficits, setting the stage for radical reform.

Yet, even in its earliest days, the roots of a massive, nationwide structural change had already begun. After the post-war years and subsequent reconstruction period, Malaysia began experiencing a relative decline in agriculture’s share and a relative increase in the industrial sectors’ share of the national GDP, in fact this began as early as 1955.

A new National Development Policy was introduced, placing wealth creation ahead of wealth redistribution. The Promotion of Investment Act of 1986 extended generous incentives for private investors, and regulations on foreign direct investment (FDI) were relaxed, allowing 100% foreign ownership of export-oriented companies. Massive FDI inflows ensued. This opened Malaysia’s gates to the global production network, and the country succeeded in developing a vibrant and competitive electronics sector. Manufacturing grew sharply from about 12% of GDP in 1970 to over 30% by the mid-1990s. During 1980s, manufacturing sectors had overtaken the agriculture sectors as the main economy activities to boost the economy in Malaysia and the country was able to catch-up with other Four Asian Tigers i.e. Hong Kong, the Republic of Korea, Singapore and Taiwan.

Overall, economic growth experienced by Malaysia can be categorised under different time periods. The varying degrees of economic growth points to the structural transformation of the Malaysian economy that took place during those periods, adapting to the conditions, circumstances and demands of the era. These transformations can be loosely clustered into three time-periods, based on the dominant economic activity of the time.

• 1960 – 1985: A primary, resource-based economy that slowly began to modernise and industrialise. The first process of industrialisation was primarily import-substitution which then evolved into the beginnings of Malaysia’s exportoriented industrialization.

• 1986 – 1998: A manufacturing-based economy geared for a trade-centred growth which saw export-oriented industrialisation taken off, and its effects had materialised in full force. Policies introduced by the government allowed industrial sectors to thrive and dominate, allowing industries such as electrical and electronic (E&E), chemicals, and palm oil products to take a foothold in the Malaysian economic landscape.

• 1998 – Present day: Weathering through two major economic crises, the economy underwent major reforms to increase the resilience and robustness of its existing sectors. During this period, growth in the industrial sectors have tapered off, and the economy has begun deindustrialising. Malaysia’s economy has started to diversify, marked by an increasing share of employment in the services sector.

Source: BIMB Securities Research - 9 Aug 2019