The British Economy - Case Study Example

Brief Introduction: The Great Britain is one of the leading economies in the world. It is a permanent member of United Nations Security Council as well as of Group-8 which is a platform of top eight developed industrialised nations such as United States, France, Japan, China, Germany, Russia and Italy. It comes on number six in the list of top manufacturing economies after United States, China, Japan, Germany and Italy and is just ahead of France. Major Industries: I previously mentioned that Britain is viewed as sixth largest manufacturing economy in the world. This is because of its established industrial base and business, economic and manufacturing- friendly government policies. British government is inclined to enhance industrial efficiency and productivity to generate maximum earnings from the manufacturing sector by using minimum human resources. The British Industrial base is actually a result of Industrial Revolution which benefited this country the most compared to others. Truly, the attention, during and after that era, was paid mainly on labor-intensive and less value-added industries such as Steel-making, Textiles, Ship-Building etc. Millions of workers were directly related to these labor-intensive factors. Advanced Industries didn’t exist at that time. However, in the wake of changing international environment because of globalisation and subsequent communication revolution, the countries which have cheap availability of skilled-labor have competitive advantage for production of certain products over the countries that do not have these cheap physical resources. Britain is, therefore, turning towards more heavy-investment or capital-intensive industries because of its scientific and technological development over years. Aerospace, electronics, Pharmaceuticals, Defense, petroleum, oil and gas, food-processing, tobacco and chemicals have become some of the most productive and income-generating manufacturing industries in Great Britain over the past 50-60 years. While engineering industries such as Machine tools, motor vehicles and parts, electronics, communication, railroad and automation equipments etc. have also contributed greatly in the British economic development. In other words, I can say that these industries are replacing the decline industries such as Ship-building, textiles and clothing, Steel-making, plastics and others that are viewed by British policy-makers as less “value-added” and income-generating. Britain Economic Data: Services Sector – over 80% per cent of UK GDP Industry & Manufacturing - 14% per cent of UK GDP Agriculture – 6% per cent of UK GDP (internet: Economy watch.com) The statistics collected from Peter Mash’s article are as under: “Manufacturing in 2007 was less than 13% (150$ Billion) of UK value added output or GDP at current prices compared with nearly 33% in 1970 and a peak of close to 40% in 1950s. Today, around 3 million people are employed in manufacturing sector compared with 7 million (estimated) in 1980 and a high of 8 million in 1950s. More than 50% of exports (it is some 1.5 times the size of the overall financial services sector) are from this sector. Labor productivity is fairly high. In 2007 value added per each manufacturing employee per year (an indicator of wealth each job creates) was 55,300 British pounds or one-fifth higher than economy as a whole.” Examples: British transnational companies are as under: Pharmaceutical Company: Glaxo Smith Kline Oil and Gas: British Petroleum Cellular Company: Vodafone Aerospace: Rolls Royce and British Aerospace Britain – Industrialised or Deindustrialised: It is said today that Britain has been no more a Manufacturing and Industrial economy rather it is completed dominated by “Services Sector” which enjoys a mammoth 80% share of British Gross Domestic Product. Patnaik (2003) defines Deindustrialisation as “a decline in the ratio of the workforce employed in industry”. Based on this definition, no one can falsify that British is no longer an industrialised economy because today only 3 million people are employed in the manufacturing sector. Economists who support that manufacturing industry is in crises usually argue that, “Already, since 1997, more than a million jobs in manufacturing have been lost. Only around 30 million people is now employed in manufacturing, down by about a third since the mid- 1980s.” (Jones, 2005) Acquired from: http://news.bbc.co.uk/2/hi/business/1861801.stm The above graph provides us an explanation share of manufacturing employment was over 26% before 1978 but has continuously reduced since then. In 2000 the manufacturing provided employment to only 14% of entire British work force of educated, skilled, semi-skilled and unskilled workers. On the other hand, if we calculate British manufacturing performance and growth by through increase in output and productivity, the statistics would be astonishing for since British industrial productivity and output has increased by more than “280 per cent between 1980-2007, compared to 240 per cent in France over the same period and 190 per cent in Germany. Furthermore, manufacturing makes up a much larger chunk of the economy in Japan and Germany (about 20 per cent) but that is unusual; at 13%, the share of the economy devoted to manufacturing in the UK is actually higher than in France or the US (both 12%).” (Internet: thefirstpost.co.uk). The above statistics show that Britain has emphasized the increase in productivity in order to achieve maximum gains by exploiting minimum resources. This would also prove that Britain is not a completely de-industrialised economy because it has observed phenomenal growth in productivity and output. Thus, it still maintains the status of 6th largest manufacturing economy in the world. Acquired from: http://news.bbc.co.uk/2/hi/business/1861801.stm The pie chart above shows the share of major industries (2000) in the British economy. Competition with Emerging Asian and East European Economies: Britain has become largely dependent over high-tech industry because it has facing stiff competition with emerging Asian and East European economies. China, India, Malaysia, Indonesia, Turkey, Hungry, Poland and Czech Republic are some of the booming economies that have competitive advantage over Britain because of in-expensive availability of labor. These developing countries are now involved in more manufacturing and industrial activities. According to Jerry Jones, “The trend also reflects the extent that manufacturing industries are being relocated to less developed countries, where wages are a fraction of what they are in the advanced countries, enabling goods to be produced more cheaply (and more profitably for company shareholders”. They have a policy to produce consumer goods by utilizing their cheap infrastructure, labor resources and utilities and then to sell to developed nations at international market prices. Because of the fact that they have lower cost of doing business, they are recipient of increased foreign investment in their manufacturing and services sectors. Most of their produce is exported to developed industrialised nations which in return supply them their required technology and machinery. British are well-aware of their weakness of unavailability of cheap human resources which accounts for most of the cost of production. It has therefore focused more on sophisticated and high-tech value-added industries than labor-intensive textiles, steel-making, consumer goods etc. because chances of survival for industrialists are less in these areas. “Further, the danger of relying on low-tech, low wage jobs has its costs for the bosses and the economy. It creates a society where the level of education and skills are low and therefore less productive.” (Basketter, 2009) “In fact, manufacturing as a share of output has been falling in all the advanced industrial countries. In France and the United States, for example, it fell from about 30 per cent in 1960 to around 16 per cent now, about the same as in Britain. In Japan and Germany, over the same period, it fell from 34 and 40 per cent, respectively, to 21 and 23 per cent now. Employment in manufacturing has fallen roughly in proportion”. Most of the developed nations like Britain are (Jones, 2005) Mechanisation: British economic policy makers emphasized the use of improved technology and heavy machinery to observe economies of scale (large scale productions). It is quite evident that the better the machinery, the faster the production in same time-period and the more cost-efficient an organisation becomes compared to its competitors. The outcome of investing heavily in advanced machinery that requires less labor successfully increased the total output produced by manufacturers. At the same time, it also resulted in negative consequence-Unemployment. Unequivocally, it was beneficial for Britain to enhance its productivity like other developed nations because it is scarce in raw-materials and has to import from countries that are rich in natural resources. In simple words, Britain was able to maintain its competitiveness in global markets through mechanisation but also observed the drastic surge in unemployment all across the country. Advanced Manufacturing and Aerospace Industry: Peter Mandelson, Secretary of State for Business, states that “At the heart of Britain Knowledge is our manufacturing base. High-valued, highly skilled, and internationally successful businesses that have worked hard to secure a lead in global high-tech supply chains.” These words represent that Britain today is inclined towards “advanced manufacturing businesses which require high level of design and scientific skills to produce technologically complex products and processes. Because of involvement of specialised requirements, these goods and associated services are of high-value.” The UK is a leading exporter of high-tech goods, with 25% of UK goods exports defined as high-tech, compared to 22% in the USA, 15% in France, and 11% in Germany. (Internet: berr.gov.uk) Acquired from: http://www.berr.gov.uk/files/file52374.pdf Today, the advanced manufacturing industry such as Aerospace has become of the leading industries with potential growth prospects. It provides employment to more than 100,000 highly skilled, trained and educated individuals that can meet the changing demands of buyers in world market and cope with the sophisticated technology and advanced equipments. This industry is worth more than 30$ billions and exports are above 4.5$ billions. This makes crystal clear how important and vital this industry is for Great Britain. The chances to get additional business in future are high because world economy is expected to flourish once “the beginning of the end of recession is confirmed”. The airlines of developing economies will demand for more high-tech airbuses for passenger and transport services. Therefore, Britain is hopeful that it would be able to maintain and develop its market share in Aerospace industry. Services do now account for 80% of Britain’s G.D.P. as in U.S: The Services Sector in Britain consists of banking, insurance, telecommunications, distribution/supply, wholesale and retailing, travel agencies, security, cleaning, catering, maintenance services, software and computer services, transportation, lawyers, health services, stocks brokerage, real estate etc. Together, these along with others are accounted for more than 75% employment in Great Britain and near 80% in Gross Domestic Product. Services sector has observed a phenomenal growth in Britain in past 30 years with its share in GDP has increased from 50% to above 75%. The revenue generated, however, is much lesser than what is earned from manufacturing sector because this sector is not productive in nature. One of the major areas in service sector is “Financial Services”. Britain has developed a sound financial system that has contributed greatly in providing jobs to educated executives such as Accountants, financial advisors etc. Hundreds of banks, financial institutions, leasing and stock brokerage companies, credit unions, private consultants are busy in serving people all across Britain. I would like to highlight the fact that most of the “service sector jobs” are directly dependent on the growth of manufacturing sector. Peter Mash mentioned the fact that “in 2007, around 6.5 million were employed in financial services, up from 3.5 million in 1980.” Examples: The distribution, wholesaling and retailing are dependent on the market growth and productivity of various FMCG, pharmaceuticals, autos, consumer durables and other industries. Undoubtedly, the output produced by a single company brings business to hundreds of dealers, wholesalers and retailers (and creates jobs) that are a part of distribution network. Imports also contribute to trade but since they are not produced within the boundaries of Britain, the jobs produced due to such business activities are not considered in above example. In addition, there are highly individuals who also provide direct services to public. They include doctors, designers, architects, musicians, teachers, lawyers etc. On the other hand, there are executives who although are a part of manufacturing sector, that is, they are provided jobs by this sector, yet they are considered a part of services sector because they are actually serving their respective companies. Quality administrators, accountants, marketers, supervisors, production staff, security guards of factories and others etc. are classified under this category. The explanation can be supported through the following quote, “The vast majority of service sector jobs contribute to the production of wealth in society. And most of the sectors are unionised. In many cases there is no fundamental difference between manufacturing jobs and service jobs. Repairing a car exhaust is defined as services, while putting on a new exhaust in a factory is manufacturing. Hospital ancillary workers, dockers, lorry drivers, bus and train drivers, and postal workers all work in the service sector.” (Basketter, 2009) Outsourcing is also a part of services which refers to international division of labor. This means manufacturing companies can approach to people who are specialised in their work, and at the same time, offer the lowest possible cost for a particular work. I would to recall that cost of doing business is increased in Britain; therefore, it is not possible for various labor-intensive industries to compete with the products emerging economies. Hence, they are outsourcing their work to people (both within and outside the country) who can provide them what they demand. CONCLUSION: Having studied the researches, statistics, facts and opinions of various institutions and economists, it is concluded that British is not truly a decentralized economy although its manufacturing sector is only 18% of GDP whereas services sector is more than 80%. The past statistics revealed that manufacturing sector once employed more than 8 million people but now it has fewer than 3 million employed because of mechanisation. The government has also formulated strategies to further bolster the capital-intensive industries to cover the loss incurred from closures or shrinkage of labor-intensive sectors because of competition from booming Asian and East European economies. Productivity and output is at all time high than past. However, depending heavily on Capital-intensive and value-added sectors is not justifiable because it would further aggravate the contribution to GDP ratios. Moreover, complete closure of labor-intensive industries will increase unemployment that might not be reduced even from a strongest Services Sector. After all, production is essential for survival of any economy. The most productive an economy, the higher the employment and the better the standard of living. British Government must pay immediate attention to stop “de-industrialisation” of labor-intensive industries and formulate strategies that could initiate their survival and growth. SOURCES Mash, Peter. “Make and Mend”. Available at http://www2.warwick.ac.uk/fac/sci/wmg/intranet/news/ft090209.pdf Accessed [December 1, 2009] Patnaik, P (2003), ‘On the Economics of “open-economy” De-industrialization’, Lecture at the Annual Conference of the Indian Society of Labour Economics Available at: http://www.macroscan.net/anl/nov03/pdf/Open_Economy.pdf [Accessed on December 1, 2009] Emmott, Bill. “The British Economy”. Available at http://www.trilateral.org/AnnMtgs/TRIALOG/trlgtxts/t55/emm.htm Accessed [December 1, 2009] Tarbell, Thomas. “UNEMPLOYMENT AND INSURANCE”. Available at http://www.casact.org/pubs/proceed/proceed30/30161.pdf Accessed [December 1, 2009] Jones, Jerry. 2005. “Halting the Decline of Britains Manufacturing Industry” Available at http://www.cpusa.org/article/view/949/ Accessed [December 1, 2009] Basketter, Simon. 2009. “Is manufacturing industry finished in Britain?” Available at http://www.socialistworker.co.uk/art.php?id=17862 Accessed [December 1, 2009] “British manufacturing: a success story” Available at http://www.thefirstpost.co.uk/47376,news-comment,news-politics,british-manufacturing-a-success-story Accessed [December 1, 2009] “UK Aerospace Industry Maps Out Multi-Billion Pound Future" 2009 Available at http://www.defencetalk.com/uk-aerospace-industry-maps-out-multi-billion-pound-future-19715/ Accessed [December 1, 2009] “The facts about UK manufacturing”. 2002 Available at http://news.bbc.co.uk/2/hi/business/1861801.stm Accessed [December 1, 2009] Read More