De-Industrialization and Comparative Advantage in the Global Value Chain
WIFO Working Paper No. 506/2016 (revised, April 11 2017)
29 Pages Posted: 14 Jan 2016 Last revised: 13 Apr 2017
Date Written: January 13, 2016
Abstract
We investigate the causes of de-industrialization and potential for re-industrialization using trade-linked Input-Output data from WIOD. Introducing new measures of induced value added chains, we relate a sector's share in domestic final demand to that in production and separate the direct effect of trade on its income share. This method establishes a new measure of comparative advantage and identifies the declining share of manufacturing value added in domestic final expenditures to be the main cause of de-industrialization. Differences in comparative advantage between countries do matter, especially in the case of employment shares, but have a limited impact via the direct trade effect on value added. The findings point to a peculiar paradox of industrial policy: precisely when it is successful in raising competitiveness and hence productivity growth of manufacturing, it also furthers the global decline of relative prices in manufacturing. In contrast to the national objectives of re-industrialization, effective industrial policies accelerate de-industrialization in the global economy.
Keywords: Industrial policy, de-industrialisation, global value chains, Input-Output analysis, WIOD
JEL Classification: F1, L5, L6, O2, C67
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