Deindustrialization and Industry Polarization

Abstract

We add to recent evidence on deindustrialization and document a new pattern: increasing industry polarization over time. We assess whether these patterns can be explained by a dynamic open economy model of structural change in which the two primary driving forces are sector-biased productivity growth and sectoral trade integration. We calibrate the model to the same countries used to document our patterns. We find that sector-biased productivity growth is important for deindustrialization, and sectoral trade integration is important for industry polarization through specialization. The interaction of these two driving forces is also essential. The key transmission channel is the declining relative price of manufacturing goods to services over time.