Development Trends Of The UKs Economy - Case Study Example

Development Trends Of The UK’s Economy Introduction World Economy is going through a systematic change since 2007 owing to subprime mortgage crisis. The resulting meltdown has caused drastic decline into the growth patterns of UK as well as US and as such the overall forecasts are not healthy. Chances are that the UK will soon drop out from the top ten economies of the world due to persistent economic recession that it is experiencing since 2007. Economic stagnation as well as suppressed consumer demand is few of the major indicators that are indicating a more different picture of the UK’s current economic conditions. It is therefore largely believe that a radical change in the UK’s economic infrastructure must result into broader changes to take place in future. However, what is also significant to understand that the UK’s economy has been going through a consistent and gradual change over the period of time. There has been a gradual and subtle shift towards the service sector from manufacturing despite the fact that UK is still 6th largest manufacturing economy in the world. The current trends indicate that the falling world production, lack of credit to private sector as well as more of on-demand production may further dampen the manufacturing base of the country. There is a gradual decline in the output and producers may be forced to look for alternative ways of doing the business. These trends therefore further indicate that the UK’s economy is either becoming de-industrialized or it is evolving to accommodate the changes that are taking place at the global level. This paper will discuss both of these assumptions with special reference to UK’s economy. De-industrialization De-industrialization involves a gradual reduction in the importance of the industry and manufacturing sector in the economy. As such this process involves a systematic shift in the overall economic structure of an economy and its reliance on the value generating sectors. It is argued that the de-industrialization finally allow more dominance of services sector in the economy. It is generally believed that the UK is experienced de-industrialization since 1980s and this process is continuously dominating the economic structure of the country. This argument is generally put forward due to the fact that most of the western economies including UK have lost their comparative advantage in manufacturing to countries like China and Japan and as such the shift towards services is considered as one of the natural consequences of this process. Three are different assumptions and thesis which discuss this de-industrialization of UK’s economy and specially focus on different aspects of the overall economic development and growth of UK. It is argued that the UK and other developed economies have reached their maturity stage where the overall contribution from the manufacturing sector is increasing at a decreasing rate. Further there have been structural changes in the very structure of the UK’s economy itself as it experienced greater reliance on the services sector to accommodate post modern demands. What is also significant is the fact that process of de-industrialization also brought in an stagnation into the wage rates of the manufacturing sector and increase in the overall inequality of the wage rates between employees of services sector and manufacturing sector. This corresponding with other changes, the process of de-industrialization seems to have played significant role in increasing the influence of services sector in the UK’s economy. In order to further argue this point, the next section will discuss some of the facts about the UK’s manufacturing sector. UK- A manufacturing economy The current state of the UK’s manufacturing sector will indicate that it is in recession and as discussed above, it may start to loose its ranking as one of the leading manufacturing economies of the world. However, despite this recession, UK is the 6th largest manufacturing economy of the world however; its total contribution is gradually declining since 1977. The issue of de-industrialization of UK’s economy also started to emerge during this period when it was strongly believed that the UK’s economy is gradually drifting towards services. The gradual decline in the industrial output of the economy has now resulted into the decline of the manufacturing share to only 13% of the total GDP of the country. Over the last seventy years, the overall productivity of the UK’s manufacturing sector by almost 90% over that period. Such exorbitant increase in the productivity of the sector indicates that the sector thrived on many important competitive advantages that allowed it to comprehensively dominate the manufacturing sector of the world. This increase in the productivity of the sector may also be attributed to the fact that UK traditionally gained its competitive advantage due to its technological superiority as well as focus on more advanced manufacturing technologies. The relentless drive for better performance and productivity pushed forward the economy and the sector to a level where it started to dominate not only the regional economies but also the world economy and UK became one of the leading manufacturing economies of the world. Aerospace industry of UK is the second largest industry in the world and contributes extensively towards the growth of UK’s economy. Over the period of time, UK aerospace companies have developed their expertise in almost every market niche and as such continue to dominate the market not only at the regional level but at the international level also. Through the formation of strategic alliances, UK’s aerospace industry has dominated the market over the long period of time and provided sustained growth. What is also significant to understand that despite the events of 9/11 and the uncertain political situation in most of the world, the performance of the UK’s aerospace sector remain relatively more superior as compared to most of other firms in the world.1 What is also significant to understand that this has resulted into the increase in the share of aerospace sector into the overall manufacturing sector of the country? This growth in the aerospace industry do further support the assumption that the UK is still far ahead of most of the countries in terms of producing high tech engineering items that require extensive technological skills. What is also important to note that over the period of time, the overall nature of UK’s manufacturing sector has changed as it is now becoming a high-tech manufacturing sector with hi-tech companies occupying larger share of the market. There has been however, a consistent decline in the output as well as employment levels in the manufacturing sector mainly due to dominance of China in providing cheap manufactured goods at international level. What is however, also argued that the manufacturing sector of UK may further pick up due to its traditional superiority in design and technology. However, this can only be achieved through systematic introduction of the new and more qualified individuals into the manufacturing sector of the economy. Following graph indicate the overall diversification of the UK’s manufacturing sector and indicate its relative strengths. Such high diversification into different areas of manufacturing clearly indicates the overall strength of the manufacturing. This diversification also indicates that the food and beverages production is one of the leading manufacturing sectors of the economy. Manufacturing sector in UK now almost employs more than 2 million people and as such in 2007, it accounted for almost 13% of the UK’s GDP.2 The annual growth rate of the manufacturing sector has been only 0.8% as compared to the annual growth rate of 2.5% in the services sector.3 Similarly, the employment level fell drastically too as only 2.9 million are now employed by the manufacturing sector. Such drastic decreases in the manufacturing base of the country indicate that the sector on the whole was not performing since last 30 years or so and as such there may be different reasons as to why such patterns were witnessed by the manufacturing sector of the economy. The current economic situation may be one of the reasons for the current performance of the UK’s manufacturing sector. The reduction in the credit to the private sector is also one of the reasons as to why the current recovery is lot slower than expected. One of the reasons as to why the most profitable as well as going concern businesses of UK are facing difficulties is due to this fact that the manufacturing firms are finding it difficult to obtain working capital loans and as such the productivity is being lost due to this factor. It is also important to note that the overall capacity expansion has stalled too due to the reduction in the consumer demand and increase in the different commodities such as oil. The changes in the manufacturing methodologies are also one of the reasons as to why the UK manufacturing firms are finding it difficult to cope with the new challenges. The just in time manufacturing techniques also force firms to respond to the changes quickly and as such due to lack of innovation and complacency, the manufacturing sector of the economy may not be able to respond to these changes. The next section will discuss the service sector in UK before making an analysis of whether the UK economy is adjusting itself according to the market trends or it is de-industrializing. Services Sector in UK The above discussion indicate that there is a gradual shift towards the services industry in UK with services now contribute almost 80% of the GDP of the country. UK has been dominated by the firms offering from financial services to airline services and as such the overall growth in this sector has remained relatively more agile as compared to the growth of manufacturing sector. However, the current state of UK’s services sector is not good as the financial meltdown has resulted into the overall decline for the demand of such services. What is however significant to note that the services sector has now become a part and parcel of the UK’s economy and account for most of the employment in the economy. What is also significant to note that the sector has basically supported the manufacturing sector also apart from financial services? The resulting changes that took place as a result of this shift in focus towards services indicate that that the manufacturing firms, in order to retain their customers and their market shares; have started to offer additional unique services. Thus the services though can be counted as separate sector of the economy, continued to support the manufacturing sector of the economy also. Further, UK has still one of the best education systems in the world and it continues to attract a large number of international students to their universities. Some estimates suggest that education services provide significantly large share of revenue and at regional level the overall impact of this significantly larger as compared to the national level. Similarly, medical services in UK are one of the best in the world and many people prefer to get treatment from UK. Thus medical tourism is another important reason as to why there has been a gradual increase in the dominance of services sector in UK’s economy. Due to increase in the services sector in such areas, other ancillary businesses and services also started to emerge which technically further bolstered the overall dominance of the services sector. Similarly, London has been the financial hub of the world offering excellent financial services all over the world. The dominance of large financial institutions such as RBS, Barclays, HSBC is a clear example of the dominance of the financial services firms in the overall economy of the world. Due to this sophistication of the services sector, the overall demand for the financial products and services remained healthy over the period of time and financial institutions contributed significantly towards the economy of the country. The discussion upto now leads to the next section where the process of de-industrialization will be re-visited to understand whether the UK’s economy is really going through de-industrialization or its adjusting itself according to the demands of the changes that are taking place at the global level. De-Industrialization The process of de-industrialization does not necessarily means a bad thing for an advanced economy as almost every economy faced this situation. The rising unemployment in the manufacturing sector, the shrinking wages as well as the rise in the inequality indicate a phenomenon which may not be entirely healthy for the economy however, the rise of de-industrialization must be viewed from the perspective of the globalization. As discussed above that the UK’s economy lost its competitive advantage to countries like China and Japan in manufacturing therefore it is important to understand that the process of globalization allowed the free movement of financial capital from one place to another. Due to trade liberalization as well as increasing globalization of the world, the manufacturing facilities have gradually shifted towards third world countries because these countries provided cheap labor as well as raw materials. The increasing competitiveness of the environment therefore required that in order to remain competitive, there must be relocation of the manufacturing facilities to the places where it is most profitable to operate. Considering this philosophy, most of the firms started to shift their manufacturing facilities to third world countries and focused on providing services to their customers in their parent countries. Further there has been an increase in the imports from the developing countries in order to control the costs therefore most of the arguments also suggest that since the products imported from developing countries carry higher portion of labor therefore there is larger tendency to displace the labor in developed countries. Further the increasing level of mechanization also resulted into the systematic reduction of the reliance on the labor as one of the key contributors to the production thus the gap between the skilled and unskilled labors widened not because of the de-industrialization but because of the changes that took place over the period of time. It is also important to understand that the process of de-industrialization is more of a response to the changing patterns that took place in most of the world including US. The de-industrialization in UK therefore must be seen as a natural effort to adjust the economic structure of the economy to accommodate the increasing demands of the changing requirements of the market at global level. The forces of globalization has forced many developed economies to shift their focus from being the manufacturing intensive economies to more service oriented economies in order to make them more competitive at global level. The shifting of manufacturing facilities to the third world countries is in fact an effort to gain and maintain the competitiveness in the local markets. It has nothing to do with the assumption that the process of de-industrialization is a result of services being the dominating sectors in the economy rather than the manufacturing sector. It is largely a result of the re-adjustment of the economy to accommodate the changing market requirements at the domestic as well as global level and shall be considered within this perspective. Read More