Premature deindustrialization and income inequality in middle-income countries

This paper examines the income inequality implications of a ‘premature deindustrialization’ trend in middle-income countries. To identify the premature deindustrialization phase, we arrive at five conditions based on the trends in employment and value-added share of manufacture. Among these five conditions, the first and second examine the deindustrialization pattern in economies. The last three classify the identified deindustrialization phase as premature or not. We apply panel fixed-effects and bootstrap-corrected dynamic fixed-effects models to empirically examine the relationship between premature deindustrialization and income inequality. Our findings suggest that income inequality rises with premature deindustrialization if the displaced workers are absorbed into low-productivity and informal market services (especially with employment increase in non-business market services such as trade, transport, hotels, and accommodation activities). In contrast, if high-productivity non-market services are the dominant employment provider, this helps to reduce income inequality even in the presence of premature deindustrialization.