The Decline of UK Manufacturing Over the Last 40 Years - Case Study Example

The decline of UK manufacturing over the last 40 years ………………………………… College………………………………… …………… Introduction The manufacturing sector in the UK has long been considered to be the engine of its economic growth and a source for employment opportunities. A strong manufacturing base is one of the basic economic factors that stimulates growth and enables a country like UK which exports a major part of its Gross Domestic Product than any other country in order to achieve equilibrium in the trade account. The UK manufacturing had reflected both the importance of manufacturing industry to the UK economy as well as the importance of UK manufacturing to the world as a supplier of manufactured goods. But, UK manufacturing sector has been manifesting obvious signs of decline over the last 40 years and this has caused a number of economic issues in the UK including structural unemployment and deficit balance of payment. This research paper is an attempt to identify and analyze the reasons of decline of UK manufacturing over the last 40 years. Decline of UK manufacturing over the last 40 years The UK manufacturing sector, including food, paper, printing, aerospace, pharmaceuticals, construction and environmental technology is mainly involved in selling to government (Great Britain: Parliament: House of Commons, Trade and industry committee, 2007, p. 5). It is undoubtedly true that UK manufacturing sector has for last forty years experiencing a relative decline as manufacturing output has grown more slowly that the service sector and also the number of people employed in manufacturing has been decreased because productivity per employee has been increased. The UK manufacturing has been facing a number of challenges and threats including emerging markets and economic recession that hit industries recently. UK manufacturing has long been very strong and most powerful in the world until 1970s. The UK manufacturing has been risen only by 4% between 1975 and 1979 and then started falling by 15% between 1979 and 1982. Between 1979 and 1982, the employment in manufacturing has been declined by 20% and it was the striking indicator for the changes in UK’s manufacturing industry (Meyer, 1985, p. 83). West Midland has traditionally been the heartland of UK manufacturing. In 1968, West Midland recorded an unemployment rate of 1.9% which was one of the lowest totals. But, by 1982, its unemployment rate has been increased to 14.8% showing the highest levels of the region. Other manufacturing areas like Scotland and North England also have recorded increased unemployment rate during the same period (Meyer, 1985, p. 83). Thornton (2001) reported severe dangers of UK manufacturing decline and quoted warning from some expert agencies. UK’s trade gap was more likely to balloon because its manufacturing industry has been going in to long-term decline. Manufacturing sector had a very poor record of the 1990s of annual growth of just 0.5% a year. The warning was that if UK’s manufacturing condition was going to repeat the same in the coming years, UK’s deficit on traded goods will be more than £78 billion by 2010 from the £30 billion figure of 2000 (independent.co.uk). A research conducted by Price Water-house Coopers (2009) argued that UK’s manufacturing decline over the last 40 years have been exaggerated and same time UK’s manufacturing is relatively very successful in the world. According to the report of UN Council for Trade and Development, in 2008, UK’s manufacturing is the 6th largest manufacturer in the world by value of output. 25% of UK exports in 2006 were high tech products, which is really a success figure, compared to 22% of the USA, 15% of France and 11% of Germany in the same year. The research report also argued that over the past two decades Britain’s manufacturing sector has delivered greater productivity gains than Britain’s service industry (p. 8). Reasons for the manufacturing decline in UK over the last 40 years Deindustrialization An advanced industrialized economy could experience severe deindustrialization through its trade if it had inefficient manufacturing system or if there were long term disequilibrium. UK were in long term disequilibrium as its import and export propensities didn’t allow current account balance at a given desired level of employment and wage rate (Smith, 2003, p. 399). Therefore, UK’s manufacturing performance was crucial as to achieve current account balance and long term economic growth potential. Economic changes A general argument about the structural change in the UK’s manufacturing sector is that UK is the first country to industrialize and therefore it should be the first country to post industrial sector. Cook (000) has questioned this argument. This argument cannot explain why it is only UK rather than Germany or Japan as it also have experienced manufacturing decline. According to Cook (000), the structural change in UK’s manufacturing can be described as it like any other economy changed overtime as the pattern of demand changes due to increase in income, changes in consumer tastes and alterations in the demography of population. Apart from these variances, technological changes also could alter the goods and services that are provided from the market as technical progress, reducing the cost of production and changing the comparative advantages in the production as well. These changes were more likely to have directly affected employment and manufacturing output. According to Smith (2003), the manufacturing decline in the UK during the last 3 decades lie on the slow growth of demand for UK manufactured goods, not only at home market but also abroad. It has been reflected in the slow growth of output rather than any resource starvation due to public sector expansion (p. 391). Cheaper imports and Foreign competition Cook (1993) has emphasized that British goods were being under-cut by cheaper imports from newly industrialized countries. These countries faced lower wage bills and are seen more flexible because of longer labour working hours and workers being less unionized. Wage level is not the only matter, but productivity of labour were also significant. UK has been a low wage economy as compared with other Western European countries. As Clark (2002) noted, UK’s manufacturing has been declined steadily giving way to competition from abroad especially from countries where labour is much cheaper. When it is £4.50 and £4.75 an hour to be paid for a manufacturing employee in UK, it was only 40p in Country like China (bbc.co.uk). Smith (2003) described that the cause of fall in the demand for labour in UK’s manufacturing has been one of the reasons for its manufacturing decline and it can be seen as an example of negative deindustrialization resulting from poor industrial performance (p. 396). Government Intervention Cook (1993) found that government involvement and its attempt to stabilize the growth in the economy had led to a variety of ‘stop-go’ policies that have caused de-stabilizing the economy rather than stabilizing it. The poor investment record throughout four decades have been caused by the uncertainties and inconsistencies caused by government involvement. The Keynesian policy of active demand management has also been regarded as a factor that had long term effect on the economy and thus causing decline in manufacturing (Cook, 1993). Balance of Payment The balance of payment also was viewed as a problem behind the decline of UK’s manufacturing sector. Consumer expenditure attracted more imports from other countries and domestic producers experienced increased consumer demand at home country, that in turn causing exporters switch to the domestic market. It is how balance of payment deteriorates (Cook, 1993). The balance of payment issue can be overcome by letting the exchange rate fall, but this can cause increased prices for imports. Maturity Thesis Smith (2003) considered ‘maturity thesis’ as a factor to explain the link between UK’s manufacturing decline and general theory of economic development and structural changes. When there is growing economic development, there also can be persistent decline of agriculture. When agriculture matures, the relative importance of manufacturing can essentially fall (p. 395). Conclusion This piece of research paper has highlighted the economic factors that led to the decline of UK’s manufacturing over the last 40 years. Deindustrialization, economic changes, foreign competition, maturity thesis and government intervention are considered as major reasons behind decline of UK’s manufacturing industry. References Bbc.co.uk, 2002, The facts about UK manufacturing, bbc news, bbc.co.uk, Retrieved August 9 2010 from http://news.bbc.co.uk/2/hi/business/1861801.stm Clark E, 2002, The Death of British Manufacturing, BBC news, Business, Retrieved August 9 2010 from http://news.bbc.co.uk/2/hi/business/1871493.stm Cook, M, 1993, Manufacturing in the UK: The long way back. Contemporary Review, Retrieved August 9, 2010 from MasterFILE Premier database, EBSCOhost Great Britain: Parliament: House of Commons, Trade and industry committee, 2007, The future of UK manufacturing: public procurement, thirteenth report [of session 2006-07], report, together with formal minutes, oral and written evidence, House of Commons Papers, The Stationery Office Meyer F V, 1985, Prospects for recovery in the British economy, Illustrated edition, Taylor & Francis Price Waterhouse Cooper, 2009, The future of UK manufacturing: Reports of its death are greatly exaggerated, Observations, analysis and recommendations – Industrial Products, Price Waterhouse Cooper Smith S, 2003, Labour Economics, Illustrated edition, Routledge Read More