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The Effects of Restructuring & Deindustrialization

Instructor: David Juliao

David has a bachelor's degree in architecture, has done research in architecture, arts and design and has worked in the field for several years.

Nowadays, terms like 'restructuring' and 'deindustrialization' are heard more and more frequently. But what do they mean? In this lesson, learn about restructuring and deindustrialization and examine some of the effects of these economic transformations.

Economic Transformations

Human societies change and economic systems are transformed over time. When the Industrial Revolution began in the 18th century, the world changed and Europe and North America became industrial societies. For the first time, these regions relied more on manufacturing than on agriculture.

In the 20th century, new economic changes began in these industrial nations, allowing traditional sectors to disappear and giving way to new activities. These modern economic activities are usually grouped into sectors:

  • Primary sector: Basic industries related to production and retrieval of raw materials, like farming, mining, oil refineries, and steel factories
  • Secondary sector: Manufacturing industries that transform raw materials into goods, like construction, car industries, textile industries, and similar activities
  • Tertiary sector: Service activities like banking, entertainment, tourism, retail sales, and professional services
  • Quaternary sector: Knowledge-based activities, like information technology, research facilities, and other high-tech industries.

Deindustrialization is a process of economic transformation of a city or region, in which the primary and secondary activities stop being the main employment force of an economy and those industrial capacities diminish or even disappear. If the tertiary sector absorbs the workforce, then a restructuring process might be in place.

Deindustrialized economies stop relying on the primary & secondary sectors
Deindustrialization

Restructuring is an economic process that involves an urban area or region changing from a manufacturing-based to a service sector economy. This has been a common phenomenon in mature industrialized societies like Europe and the United States.

Effects of Restructuring and Deindustrialization

Worldwide, restructuring and deindustrialization are changing the contemporary economic landscape and have influenced in the development of new industrial areas and economic sectors.

Outsourcing of Manufacturing Activities

The deindustrialization of one area often means that those manufacturing activities have relocated somewhere else, also called outsourcing. By localizing specific activities in developing countries, many companies have increased productivity and reduced production costs.

Detroit knows the effects of outsourcing. It used to be the heart of the American automobile industry. Gradually, the production of several raw materials, components, and even entire assembly lines were relocated to other countries with more affordable labor costs. The companies maintained competitive prices, but Detroit suffered a severe job loss. Many factories left, as did people who were able to find jobs elsewhere. Today, the city, full of abandoned buildings, suffers from higher crime rates and other social issues, further debilitated by a lack of tax funds, money that used to be paid by car factories.

Deindustrialized Detroit
Abandoned factory

While outsourcing had a negative impact in some cities, it has allowed the emergence of newly-industrialized economies. Entire regions of Mexico, the Philippines, and other newly-industrialized countries have specialized in manufacturing components for the foreign industries. The outsourcing of tertiary activities is also a growing practice. For example, many companies hire the service of foreign call-centers for taking care of customer service lines.

Diffusion of Industrial Activities

During the 20th century, IT industries often concentrated all activities in large complexes. With the improvement of communications and lower costs of international transport, different production phases are now commonly located in different areas and one specialized firm often takes care of each stage of the process. This division of activities gave origin to the development of specialized manufacturing zones and a division of labor activities.

For example, in Mexican maquiladoras, materials are imported, locally manufactured, and then exported back to the country of origin. The process is tax-exempt. The Mexican manufactures of many American products gave birth to this term. Hundreds of industrial facilities have been established close to the US border.

Other manufacturing centers have developed as special economic zones. In China, the government defined several areas where foreign companies are exempt from taxes. Most, if not all, the manufactured goods are meant for export.

Low labor costs and special economic zones are available in China
Chinese cargo ship

There are also free-trade zones, used mostly for international commercialization instead of manufacturing. The Colon Zone in Panama is one of them. Thanks to the Panama Canal and tax exemptions, tons of goods are commercialized between international retailers at very competitive costs, resulting in an area that works like a global wholesale facility.

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