On the Economics of “Open Economy” De-industrialisation
Author(s)
Patnaik, Prabhat
Abstract
De-industrialisation, in the sense of workers employed in the industrial sector becoming unemployed due to a deficiency of demand, can arise, in an open economy, for three distinct reasons: first, the standard Keynesian reason of the generation of an import surplus which entails a net loss of aggregate demand; second, the preference of certain classes, notably the landlords, who live off the domestic agricultural produce, for imported as opposed to domestically-produced industrial goods. (Here, even with balanced trade or an export surplus, de-industrialisation can occur, as in colonial times). The third case, which is the basic concern of this paper, is when there is no a priori preference of any domestic class for imported goods, but the autonomy of finance capital flows creates exchange rate movements which actually generate an import surplus and cause domestic de-industrialisation. This is a sui generis phenomenon in the age of globalized finance; counteracting measures in this case, other than imposing capital controls, only creates some other problems for the economy, as the Indian economy is currently realizing.
