Manufacturing Industry Of The British Economy Essay
In the late 1940s, Britain’s share of world trade, three years after the war, stood around 25%. In the 1950s, regarded nostalgically as a golden time, Britain’s share of world trade fell by about 10% of the total (Madison, 1992). In the 1980s, Britain moved into deficit on its trade in manufactured goods with the rest of the world, for the first time, it is said, since the industrial revolution. What went wrong? Was it just a matter of shift of the government’s focus from manufacturing to service industry? Was the then “Workshop of the World” being mismanaged? All of these questions will be answered in this paper.
Using facts and figures from economic experts, we will be reviewing the historical economic data of Britain. Specifically, we will be looking into the trend of Britain’s manufacturing industry. By doing so, this paper hopes to find the underlying causes of the decline in the said industry. Apart from this, this paper will be exploring the competitiveness of its economy in comparison with other countries’ economic trends like France, Germany and Italy. Before going through the figures, it is important that we first have a background on the general economic view of Britain.
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It has achieved this position despite the lack of most raw materials needed for industry. The country also must import about 40% of its food supplies (Edgetorn, 1996). Thus, its prosperity has been dependent upon the export of manufactured goods in exchange for raw materials and foodstuffs. Within the manufacturing sector, the largest industries include machine tools; electric power, automation, and railroad equipment; ships; motor vehicles and parts; aircraft; electronic and communications equipment; metals; chemicals; petroleum; coal; food processing; paper and printing; textiles; and clothing.
During the 1970s and 80s, nearly 3. 5 million manufacturing jobs were lost, but in the 1990s over 3. 5 million jobs were created in service-related industries. By the late 1990s, banking, insurance, business services, and other service industries accounted for two thirds of the GDP and employed almost 70% of the workforce. This trend was also reflected in a shift in Great Britain’s economic base, which has benefited the southeast, southwest, and Midlands regions of the country, while the north of England and Northern Ireland have been hard hit by the changing economy (Rose, 2000).
The main industrial and commercial areas are the great conurbation, where about one third of the country’s population lives. The administrative and financial center and most important port is Greater London, which also has various manufacturing industries. London is Europe’s foremost financial city. Metal goods, vehicles, aircraft, synthetic fibers, and electronic equipment are made in the West Midlands conurbation, which with the addition of Coventry roughly corresponds to the former metropolitan county of West Midlands.
The industrial Black Country and the city of Birmingham are in the West Midlands. Greater Manchester has cotton and synthetic textiles, coal, and chemical industries and is transportation and warehousing center. Liverpool, Britain’s second port, along with Southport and Saint Helens are part of the Merseyside conurbation (Aspin 1996). Leeds, Bradford, and the neighboring metropolitan districts are Britain’s main center of woolen, worsted, and other textile production.
The Tyneside-Wearside region, with Newcastle upon Tyne as its center and Sunderland as a main city, has coal mines and steel, electrical engineering, chemical, and shipbuilding and repair industries. The South Wales conurbation, with the ports of Swansea, Cardiff, and Newport, was traditionally a center of coal mining and steel manufacturing; coal mining has declined sharply, however, in many parts of the region. Current important industries also include oil refining, metals production (lead, zinc, nickel, aluminum), synthetic fibers, and electronics.
In Scotland, the region around the River Clyde, including Glasgow, is noted for shipbuilding, marine engineering, and printing as well as textile, food, and chemicals production. The Belfast area in Northern Ireland is a shipbuilding, textile, and food products center. Great Britain has abundant supplies of coal, oil, and natural gas. Production of oil from offshore wells in the North Sea began in 1975, and the country is self-sufficient in petroleum. Other mineral resources include iron ore, tin, limestone, salt, china clay, oil shale, gypsum, and lead.
About 25% of Britain’s land is arable, and almost half is suitable for meadows and pastures. Its agriculture is highly mechanized and extremely productive; barley, wheat, rapeseed, potatoes, sugar beets, fruits, and vegetables are the main crops. The widespread dairy industry produces milk, eggs, and cheese. Beef cattle and large numbers of sheep, as well as poultry and pigs, are raised throughout much of the country. There is also a sizable fishing industry, with cod, haddock, mackerel, whiting, trout, salmon, and shellfish making up the bulk of the catch.
The country’s chief exports are manufactured goods, machinery, fuels, chemicals, semi-finished goods, and transport equipment. The chief imports are manufactured goods, machinery, semi-finished and consumer goods, and foodstuffs. Since the early 1970s, Great Britain’s trade focus has shifted from the United States to the European Union, which now accounts for over 50% of its trade. Germany, the United States, France, and the Netherlands are the main trading partners, and the Commonwealth countries are also important. Recent news about the country’s economic status has been alarming.
Some commentaries are even blaming the Labour government for apparently mismanaging the British economy1. Based on the report by financial times, the British National Party is accusing the reigning party for pushing the Britain down to sixth place in the world from being fourth in 1997. Could it be that the decline of the country’s economic performance was just a co-incidence the fact that Labour took over in 1997 and after a decade, their performance went down as fast as two notches down? The British National Party stressed that the fall of the British economy was first time since 19991.
There is so much more to say about the political causes of the British economy’s getting poorer performance. According to a spokesman for the National Institute of Economic and Social Research the figures represented a “political economic cataclysm” for Britain – particularly as Labour used to make much from Britain being the fourth largest economy. While it can be stipulated that political factors contributed to such economic issue, this paper would like to focus its discussion on purely economic and social factors that came together to pull down the country’s performance particularly in the manufacturing sector.
It has been feared that the fast and continuing decline of UK’s economic performance would lead to recession. A recession is a period of negative economic growth for 2 consecutive economic quarters. In the post war period UK economic growth has been characterized by the boom and bust economic cycles. A period of growth is followed by high inflationary growth and then a downturn in the economy. However since 1992 the UK has experienced a long period of economic growth, the longest period of uninterrupted growth this century.
It appears the UK has temporarily avoided the threat of recession, but although forecasts remain positive there are many factors that could push the UK into recession. The performance of the UK economy has been viewed with pessimism for the past century. Complaints of low growth, insufficient investment, inadequate technical training, poor industrial relations and inept management have been familiar parts of the debate for this whole period. The perceived problems of the UK economy have been addressed in varying ways, both at micro- and macro-level, throughout this century.
In the 1920s the Rationalisation Movement tried to create more efficient corporate structures for business. In the post-Second World War period Keynesian demand management and economic planning attempted to improve the allocation and exploitation of resources within the economy. Initiatives such as nationalisation, education reforms, trade-union legislation, prices and incomes policies, taxation and subsidies can be seen as efforts aimed at addressing some of the basic causes of the UK’s apparent inability to match the economic performance of the other developed economies.
It is important that we first look into the importance of the manufacturing industry in a country’s economy. According to Graham Mackenzie, the Director- General of the Engineering Employers’ Federation, “Today’s manufacturing industry is internationally competitive in quality and cost but too small to support our economy, as shown by our national deficit in international trade (Barro, 1997). Manufacturing covers the activity of turning something into a more useful form. It is about making things but it is also about conceiving things and controlling the making of things.
“There is a belief at the highest level in this country that today’s manufacturing business is about making things. It is not just about conceiving things, but of making it control access to the market” (Gerald Avison Managing Director, The Technology Partnership, winner 1994 Quest for Growth Award, 1994). This is why Daimler-Benz is reported to be trying to take over British Aerospace’s interest in Airbus, and why Rolls-Royce has bought the American engine maker Allison. There are two benefits that a healthy manufacturing sector confers on a country.
One is the ready availability of products that are essential to the continuation of normal life. The second is the generation of wealth that then provides the resources which can be spent on other desirable, but wealth consuming, activities. Everything else follows from these two points, including employment. Mass production has given us democracy of possessions; more importantly, it has given more, better and cheaper possessions. When clothes ceased to be rationed in the early 1950s, an ordinary pair of nylon stockings cost 12/6d.
These were manufactured from flat nylon monofilament yarn. Today, a pair of ordinary tights, made from textured multi-filament yarn and containing three times the quantity, of nylon, can be purchased from supermarkets for around 60p, the same amount of money but a tiny fraction of the purchasing power. Similarly, men’s socks have become cheap, disposable items and darning a lost, but entirely unlamented, art. So what then are these facts relate to the decline in the British economic performance.
First, decline in manufacturing industry of a country is one of the major factors or indicators of economic recession. Secondly, manufacturing industry is an integral part of an economy playing an inevitable role as the major creator of wealth. This would mean that a decline in the manufacturing sector leads to an imbalance in the economy, with wealth consumption outstripping wealth creation. Governments spend wealth on a wide range of more or less deserving causes. So do individuals and companies.
Out of the wealth available companies need to find money to invest to ensure their survival and growth. Investment is not just in machinery, it is in research and development, training, etc. Competition for wealth leads to increased interest rates and works to reduce competitiveness. To take one extreme, in 1950, Sweden had a GDP per head twice that of anyone else in Europe, except the Swiss who were 25% behind (Supple, 1994). Sweden adopted an economic model of partnership between a market economy and an extensive welfare state. This was help up as an exemplar for other nations to follow.
However, in 1994, state spending reached 70% of GDP and a public sector debt equivalent to the country’s GDP. Sweden then stands at 17th in the OECD ranking of industrial countries in GDP per head, one place behind Britain. In Britain, there are about 4. 5 million people working in manufacturing (Rowthorn, 2000). We can estimate that there are about 5 million people in wealth creation, so each of these workers is ‘supporting’ around 11 other individuals. Let us look into the culture of Civil Service which is considered as one of the most stable institutions in the country.
The problem however was that its adherence to processes was stuck to traditional practices thereby disabling changes and therefore, improvement. Before 1939 its numbers varied between 100,000 and 150,000. It reached 748,000 in 1976, falling to 533,350 this year. There are 5,521 Quango’s with 73,000 ‘Quangocrats’. If the state spending is to shrink as a proportion of GDP, these numbers will have to fall. This is not just a matter of employment costs rather the state imposes significant hidden costs on wealth creators through bureaucracy.
The state of underfunding of research, by government and industry, is linked to the poor record of investment and of innovation. If the financial climate is uncertain, if inflation is likely to sweep away the benefits of investment, and if investment in research or new technology is likely to lead to a lower share price and a take-over, then Britain’s poor record is understandable. If individuals are consuming – because goods will be more expensive tomorrow – rather than saving, then there is less money to invest.
Compare the figures for industry-funded R&D: Britain: 1967 – 1% of GDP; 1977 – 0. 8%; 1987 – 1%; Germany: 1967 – 0. 9% of GDP; 1987 1. 8%; Japan: 1967 – 0. 83% of GDP; 1991 – 2. 13%. Even more striking is the fact that 40% of Japanese industry today is in areas that did not exist 30 years ago. Underfunding the science base may mean that the UK will miss out altogether on important and profitable areas of innovation. With hugely increasing populations in other parts of the globe, all these people will be keen to work and to sell to us.
If we are to avoid sucking in imports and damaging the balance of payments, home consumption will have to be restrained by government, so exporting will be vital for industry. If we are going to move to a manufacturing sector that is growing through constant innovation, industry is going to demand a well-educated workforce and well-informed citizens. Since technology – being able to do more things better and cheaper – is at the heart of industrial innovation, this means everyone should have a good basic education in science and technology.
Unfortunately, this is far from the case. Science teaching does not attract the best graduates, there has been a 15% drop in numbers on A level mathematics and science courses in five years, whilst students taking arts and social science have increased by 42%, figures familiar to every university engineering head of department and admissions tutor. Already, companies are reporting skills shortages. After considering the importance of the decline of the manufacturing industry, will there be a possibility that Britain is leading to economic recession?
In finding the answer, we need to understand the indicators and causes of recession and how manufacturing decline has something to do about it. Possible causes of a recession could include a fall in house prices, rise in interest rates, and decline in the manufacturing sector, high rate of government borrowing, global downturn, and rise in the price of oil. The UK economy has a strong dependence on the housing market. Most people own a house, renting is not common like on the continent. Borrowing costs are a high % of income because people take out large mortgages.
If house prices were to fall there would be a negative wealth effect which would adversely affect consumer spending and cause a fall in AD. Some people say house prices are overvalued because of speculation. However others argue the UK market remains strong because of shortage of supply and constant demand. However the housing market is very susceptible to even a small rise in interest rates. If interest rates rise it would increase mortgage costs and there would be a big fall in demand and therefore consumer spending.
In addition record levels of consumer borrowing means the economy is likely to be significantly affected by any rise in interest rates. The savings ratio is at an all time low. If interest rates were to rise then it would cause great pain to consumers. It is argued interest rates are being kept artificially low by the demand by China and other Asian countries to buy UK and especially US debt. If for whatever reason this was to end. Interest rates would rise to try and combat the imbalances in the current account and domestic levels of savings. In order to meet the shortfall the government may have to increase taxes.
This would have the effect of reducing consumer spending. If the world economy slows down there will be less demand for British exports and also reduced economic confidence. This is very significant with increased globalisation of the world economy. In the past 2 years the price of oil has surged ahead in the past this was often sufficient to cause a recession. This time has been different because the rising price has been caused by high demand rather than supply shocks. However if the price of oil was to continue to rise (as is predicted by many oil analysts) this would put pressure on business costs, causing inflation.
To maintain the government’s inflation target the MPC may increase interest rates. To explore these ultimate and fundamental explanations for British economic underperformance we introduce the concept of competitiveness. Competitiveness lies at the heart of the growth process. At the national level the OECD defines competitiveness as ‘the degree to which [an economy] can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long run.
’ Underlying this, of course, lies competitiveness at the firm level which can be defined as ‘the ability to produce the right goods and services of the right quality, at the right price, at the right time [thereby] meeting customers’ needs more efficiently and more effectively than other firms’ (HMSO 1994, p. 9). Competitiveness is also a significant contributory factor in whether governments can attain their three other macroeconomic objectives: 1.
Full employment, this dependent upon there being sufficient demand for labour to absorb potential labour supply, with the demand for labour in turn a function of the level of aggregate demand for goods/services and of firms being sufficiently competitive to maintain/expand their output and thus employment; 2. Price stability, this requiring mechanisms that generate cooperative bargains between workers and employers in terms of sustainable real wage growth (based on achieved productivity performance) and the share of profits in GDP needed to maintain high investment levels; and 3.
Equilibrium in the balance of payments, this requiring that British firms be sufficiently competitive that export growth at least matches import growth. Some economists, however, and most notably Paul Krugman (1996), are deeply sceptical of this approach because it misconceives the nature of international competition as a zero-sum game (a ‘win-lose’ struggle) in which countries like firms compete for world markets rather than recognising that the foundation of international trade is a positive-sum game with mutual benefits for all in the form of improved products and larger markets.
For Krugman’s the portrayal of national economic performance as a study of rivalries is not only potentially misleading but dangerous because it often underlies the case for protectionist measures which would destroy international trade. With world trade expanding at nearly twice the rate of world output growth during the golden age, and comfortably ahead thereafter, the role of international trade an engine of growth is indisputable.
However, the competitiveness concept, and the debate it has engendered, is particularly relevant to the British case as policy-makers have typically perceived economic performance in terms of country rivalries and have made constant reference to aspects of other countries’ national economic behavior and institutions which are more growth-promoting or at least less growth-inhibiting. For example, the charge has been and continues to be made that much of British economic underperformance stems from weaknesses in its educational system.
These need careful specification: first distinguishing between education and vocational training; and second, between the elite end of the education system and that serving the lower half of the ability range. Thus, in terms of ‘A’ levels and degrees, Britain does not compare unfavourably to many competitors (the US included), but there are definite problems with the volume and quality of provision for vocational training, especially apprenticeships, and with the numeracy and literacy attained by the educationally less able.
We can predict with some confidence that problems here have all lowered the human capital of the British workforce below potential and impacted adversely on the levels of productivity that can be attained with any given technology (see Prais 1995). Research and development expenditures (R&D) are another indicator which is often misunderstood. British R&D levels were much higher after the war than before and indeed second only to the US as a share of GDP.
But serious questions need to be asked about the effectiveness of much British R&D, and in particular of the consequences of it being dominated by government-financed military projects which absorbed a substantial portion of the scientific and engineering community and had very limited spin-offs for the civilian economy (Edgerton 1996, esp. ch. 5). The share of inward investment is now seen as important, although the point is rarely made that throughout the postwar period outward investment by British multinational companies exceeded routinely inward investment by other countries’ multinationals (Clegg 1996).
Similarly, with the recent reaction against big government, high taxes are now seen as a clear disincentive to business activity and yet taxes on corporate income are now higher than in 1973; indeed, the total ratio of tax receipts to GDP is higher now than during the golden age (Middleton 1996, table 3. 7; ONS 1997). Whilst we cannot provide estimates for all of our diagnostics for all of the years selected we are able to show here no simple pattern of declining competitiveness before OPEC I and stabilisation thereafter.
Moreover, the meaning of competitiveness and its significance depends upon the time horizon adopted. In the short-term a government may be able to improve international competitiveness, in the sense of lowering British costs relative to those of competitors, by devaluing the exchange rate. This should make British exports cheaper abroad but imports more expensive at home, thereby improving the balance of trade.
In the long-run, however, improved competitiveness depends upon securing productivity growth and this requires a mix of macro- and microeconomic policies which address deeply embedded features in the socio-economic system which are altogether more complex, which may take many years, if not decades, to yield benefits and which may produce unintended policy effects, for good or for bad. Let us however focus on discussing the effect of the decline in the manufacturing sector to the economic performance of the British economy.
For a long time the UK manufacturing sector has becoming more uncompetitive with the rest of the world. This is mainly because of competition from Asian countries with lower labour costs. In this sector the UK is experiencing rising unemployment, causing unemployment to go back above 5% (ILO Labour Force Survey). A recent TUC report revealed that government support for UK manufacturing is the lowest in Europe and that the UK has lost 750,000 manufacturing jobs since 1997 due to low levels of government support and chronic underinvestment.
However, under the EU constitution, all state aid would be directly controlled by the Commission and the rules enforced more vigorously. This would make it significantly harder to direct UK government investment into essential industries and services. All substantial government procurement and manufacturing investments and transfers have to be open to private competition across the member states. A good example of how EU rules and unaccountable institutions undermine UK manufacturing is the closure of Peugeot’s UK plant in Ryton, Coventry in 2006.
The closure of Ryton and the shift of production of the French company’s cars to Slovakia was not an ‘inevitable’ casualty of ‘globalisation’, as Prime Minister Tony Blair weakly tried to claim, but was a direct result of EU policies (Moore, 1999). Problems began for Ryton in 2002 when the UK government agreed a request of state aid from Peugeot- to be approved by Brussels – of around ? 14 million, so that the company could build its 207 model in Britain. Inexplicably, the European Commission sat on the request for two years – by which time Peugeot had switched 207 productions to France and now to a new factory in Trnava, Slovakia.
An investment in the skills of Coventry’s engineering workers of over ? 190 million was withheld because it took two years for Brussels to approve a state subsidy of just ? 14 million. As a result, over 2,300 more UK manufacturing jobs have disappeared. Meanwhile, since 2003, million of Euros of EU state aid has been pumped into the new Peugeot/Citroen plant in Slovakia. In other words, while Brussels sat on the UK request for state aid, it was pouring funds into upgrading the Trnava site and its surrounding infrastructure.
The Slovakian government realising the critical importance of building manufacturing capacity offered Peugeot ? 73 million in subsidy, free land, The closure of Ryton and the shift of production of the French company’s cars to Slovakia was not an ‘inevitable’ casualty of ‘globalisation’construction-financing, local infrastructure enhancement, a 10-year “tax holiday” and local labour training subsidies – all approved by Brussels. A Single Programming deal between the Commission and Slovakia also gave massive EU funding for transport links near the site.
The European Bank for Reconstruction and Development (EBRD) now says that Peugeot cited “proximity of quality transport links as one of the critical factors in picking Trnava”. PSA/Peugeot-Citroen already plans to expand capacity at Trnava to 500,000 cars by 2009. The Financial Times explained: “by 2008 Slovakia will be turning out 1 million cars a year – compared with 1. 6 million in Britain this year. The reason is simple. The average gross wage a month for a car worker in Slovakia is ? 350 – compared with about ? 2,000 a month for assembly line workers at Ryton.
” The impact of the European Union as the regional arm of multinational big business in relocating manufacturing to low wage economies has been much underestimated. A strong, wealth-creating, industrial plan is also ruled out by current EU policies as the EU focuses industries in particular regions and imposes tough procurement rules. Under these rules any major work, particularly if it involves manufacturing production, has to be put out to tender on the European market, so that effective protection of domestic industries becomes impossible.
Absolute economic decline would be defined as either shrinking activity for the economy as a whole, as defined by total GDP, or as falling average real living standards for the population of an economy. Whilst there have been a number of periods of absolute decline in activity and living standards in the UK, such declines have always been brief, covering no more than a couple of years, and they represent mere deviations from what, in many ways, has been a remarkably stable record of continued economic expansion.
On average, the UK economy has expanded by 1. 7 per cent per annum this century; if we exclude the two World Wars, the annual average growth in total output has been some 2 per cent per annum. Looking at the principal sub-periods of the past century, i. e. the pre-First World War years, the two inter-war decades, and then the years since 1945, UK growth was at its lowest in the earliest periods and at its strongest in the 1950s, but the inter-period variation was only between average growth rates of 1. 5 per cent per annum and 2. 7 per cent per annum.
A more meaningful measure of relative economic decline, or advance, is comparative productivity – both its absolute level and its growth rate. It is output per head that both defines the living standards that an economy can achieve for its population, and the level of technology and economic organisation in an economy. Furthermore rapid growth rates must be expected in newly industrialising economies, there are less clear reasons why their absolute levels of productivity should exceed those of countries which industrialised earlier.
The data for the earlier years have to be treated with some caution; but the general picture given by the figures is quite reliable. The US already had higher productivity than the UK in 1900 and substantially outperformed the UK during the first half of the twentieth century, to enjoy by far the world’s highest level of GDP per head by 1950. Germany, by contrast, did not outperform the UK in terms of output per head in the first half of the century; and this is probably broadly true when comparing the UK with the rest of Europe.
Interestingly, much the strongest outperformance by the US was registered in the two periods of world war. However, the period since 1950 tells a very different story, as the main European economies such as Germany and France overtook the UK. Italy grew much faster and by 1990 almost matched the UK in absolute terms, whilst the lead enjoyed by the US was cut back. A slightly different measure of productivity levels and performance has been calculated by the economic historian Feinstein, who compared GDP per hour worked in the US, Germany, France, Italy, Japan, the UK, Belgium, the Netherlands and Sweden from 1870 to 1984.
On this measure, the UK starts the period as the most productive economy of the nine included in the analysis and was only surpassed by the US and Sweden by 1950. Subsequently, the UK loses ground to the European economies, and ends up in 1984 as the least productive economy in absolute terms with the exception of Japan. The US also loses relative ground after 1950, with productivity close to European levels by the early 1980s and its lead over the UK cut from 70 per cent in 1950 to 24 per cent in 1984.
Britain’s growth performance has been the most stable of the major economies – but also the lowest. It is this relative growth under-performance that has been the nub of the dissatisfaction with the UK’s record. It is an undeniable fact that the UK has lost ground over the past century to the US, its European neighbours and Japan in terms of economic expansion. In particular, the relative under-performance against European countries such as Germany, France and Italy was seen as an especially serious issue.
At the political level the key question that came to a head under the Thatcher government in the 1980s was whether the UK’s relative decline must be accepted or whether it could be resisted and reversed. To make things more clear, let us analyse economic figures through graphs. Although manufacturing contributes ? 150 billion to GDP, manufacturing industry in Britain has been in relative decline for a long time. The fall in the size and contribution of the manufacturing sector is known as de-industrialisation. Britain long seems to have been polarised into two different camps on the subject of manufacturing.
One says the only real jobs are factory jobs, that anybody who doesn’t make something is some kind of parasite, and that the UK is shedding its manufacturing at an alarming rate. The other camp says services are the future, that factories should be converted into industrial heritage leisure centres and cafes, and that the decline of manufacturing is inevitable. Let us take a look at some facts in the British manufacturing industry. First, let us consider the manufacturing output. Manufacturing now accounts directly f