Economic Institution and Policy - Essay Example

?ECONOMIC and policy (British economy) Table of Contents ECONOMIC and policy (British economy Table of Contents 2 Introduction 3 Contribution of UK’s Manufacturing Sector, 1970-2010 3 Reasons behind the Decline of UK Manufacturing Sector, 1970-2010 6 Could the British Government have avoided the Decline? 7 Recent Government Policies 8 Conclusion 8 References 9 Introduction The manufacturing sector of England had historically been the primary pillaring strength of the nation. The sector not only accounted for a lion’s share of the gross production of the nation but also contributed a huge percentage to the net export revenue of the economy. But the sector experienced a tragic downfall during the post-war period which continued till mid-1980s. However, the trends improved post 1983 and continued to develop till 1990 when it once again underwent a bust period (Buxton & Mananyi, 1998). Many researchers blame this erratic behavior of the supporting sector of UK to the economic policies adopted by the decision makers of the nation and thus, the present paper will attempt to outline the trends of the nation over the decades between 1970 and 2010. Contribution of UK’s Manufacturing Sector, 1970-2010 The contribution of UK’s manufacturing sector could be assessed from a few statistics aligned to the sector. The adjoining graph depicts the change in the gross value added by the manufacturing sector over the years between 1970 and 2009. The trends so depicted denote an overall heavy impact created by the manufacturing sector over the years. However, the difference is found to be rather stark from 1970 to 1980 and then 1990. In other words, these three years depict huge differences in the gross value added figures. On the other hand, the figures corresponding to the years between 1990 and 2009 are found to be quite near to each other. The year 2000 is characterized by a peak but is followed by a slight dent at the end of 2009. Nonetheless, the figures are found to have improved by almost a multiple of 10 between 1970 and 2009. The following diagram shows the growth in industrial production of UK over the years, which is suggestive of a gradual improvisation in its position. Although the above diagram for gross value added shows a downfall from 2000 to 2009, the present one shows a positive growth occurring between 2000 and 2010. This clearly indicates that there had been a hike in industrial production between 2009 and 2010. The above graph depicts the contribution of manufacturing sector of UK in absolute terms. However, to draw a more robust comparison, the ideal method would be to form a relation with the GDP of the economy. Such an interpretation could help in making an assessment of the contribution of the sector to the economy. The bar-graph alongside shows the contribution of the manufacturing sector as receding over time. The decline is a consistent one over the years thus implying the gradually falling importance of the manufacturing and industrial segments of the nation. The declining importance of the manufacturing sector of UK is also prominent from its receding contribution to the employment share of the nation. The adjoining bar graph shows the trends in the share of employment rate accounted by the manufacturing sector of UK. The decline is found to be the greatest from 14980 to 1985 followed by that from 2000 to 2005. As per the latest records, the employment share of the sector to the gross economic value stands at 9.83% which is almost 20% below that in the year 1975. Given the historic importance of the manufacturing sector behind the economic development and growth of UK, a decline in its popularity over the years took a toll upon the net disposable income of the economy. Net disposable income of the economy is found to be traversing through a negative phase after having reached a peak during 1980. This is an obvious indication of the increased costs of structural unemployment in the economy. Another prominent indication is that of a declining percentage change in gross capital formation of the economy. Lower the rate of employment in the segment, lower will be the capital formation in the nation. The adjoining bar graph clearly shows that the growth rate of capital formation in the economy has been negative since 2000, which could be regarded as a cost of increased structural unemployment. Given the high rate of unemployment in the nation and a high potential for industrial production as well, this gap could have easily been recovered had there been a nominal amount of structural unemployment. Social benefits and transfers are natural consequences of increased economic disruptions. The adjoining bar diagram shows the extent to which these benefits forwarded by the national government have fluctuated over the years. The figure shows the growth rate or percentage change to be the greatest during the decade of 1980s while it continued to decline over the latter years. However, a slight increase in the percentage has been noted during the last decade ending 2010. This could be attributed to the closure of Blaenavon Big Pit which highly contributed to the gross industrial production of UK. Since its inception, the coal industry of Britain had been one of the most supportive of all industrial segments. However post the Great Depression of 1930s, the coal industry of UK was pushed into a phase of recession owing to reduced demand for Welsh coal as well as increased foreign competition. This led to a series of close-downs of coal pits in Blaenavon between 1970 and 1980. Finally, its last pit in Blaenavon was declared as closed on February 1980, when it still employed 250 people (UNESCO, n.d.). Thus, the coal industry which once had been one of the most pillaring of all industrial segments in the economy collapsed completely in 1980s, thus leaving the sector in a state of turmoil. The coal mines which remained were absorbed in high end politics which became starkly clear through the UK Coal Miners Strike (1984-85). At that time the industry happened to be publicly owned. But the strike triggered privatization moves by the government and soon it led to a large scale lay-off of coal mine workers. Thus, the social as well as financial cost of the move the economy had to pay was quite high. In fact, the share of total employment in UK is found to have declined remarkably during this phase as well. Contraction of the industry followed well into 1990s as most of the coal pits were declared uneconomic by the private bodies that came to hold them (Fine, 1990). Reasons behind the Decline of UK Manufacturing Sector, 1970-2010 The manufacturing sector of UK had once been the shining star of the nation but soon was confronted by a steady decline. One of the primary reasons behind the same is that of increasing gap in current accounts of the nation, i.e., the nation had been experiencing rising import expenditure and deteriorating flow of export revenues. This decline was initialized by the oil price shock of 1973 which went well into the year 1974. During the earlier part of the 70s decade, the deficit was 4 percent of GDP, but it worsened to 5 percent per annum during the later part of the decade of 1980s. However, the condition improved slightly post 2000, when the current account gap had been maintained around 2 percent per annum until obviously the global financial crisis hit the nation (Newton, 2009). In addition, many other reasons have also been cited behind the downfall of the British manufacturing empire. Some such reasons are inefficient managerial performance, corrupt trade union practices (an example is that of UK Coal Miners’ Strike) and a secluded financial system which did not cater to the industrial needs of the nation suitably (Turner, 1995). When the nation appeared to be marginally improving over its nightmarish state of current accounts through a regular inflow of FDI, it fell in the mouth of the subprime crisis. The crisis hit the national financial system badly and left it shattered so that the industrial houses practically had no one to turn to for realizing their investment projects. Moreover, many potential foreign investors were also discouraged following this crisis, to make investments in UK. Since the manufacturing base of the nation had also not been robust at the time, the domestic government had to bear the brunt of an increased budget deficit, thus aggravating the already worsened economic state (Newton, 2009). Could the British Government have avoided the Decline? The British government might have avoided the decline had it adopted some effective measures as implemented by Germany and France. One common reason is that instead of switching their attention to modern sectors like service, both Germany and France maintained industry as their core income generating segment. Germany had entered into a deep industrial crisis even before the oil crisis occurred during early 1970s. However, a revival took place with the nation concentrating its focus over capturing the international market. Germany planned to make its commodities tradable through putting into use the nation’s depreciated currency exchange rate. Naturally, it could take advantage of the booming economic states of Asian economies amidst transition, such as China and India and gradually established their manufacturing sector once again, as one of the top-notch systems of the world (Reiermann, 2008). In France on the other hand, the macroeconomic policies seemed to be much more stable than those in the UK. Apart from lowered rates of exchange, the French manufacturing sector was also characterized by an increased productivity of industrial workers unlike that in the case of UK. The prime reason behind this increased productivity had been the absence of militant trade union groups in the former, which also hints at France’s effective macroeconomic policies. Eventually thus, when the manufactured produce of France had been a sheer one-third of that of UK’s during 1950s, soon overcame the gap with a gigantic margin. At the beginning of 1980s, France had labor productivity 13 percent higher than that of UK (Bart, 1990). Recent Government Policies After their failure to maintain their position as manufacturing giants, the government of UK decided to follow the footsteps of Germany and France towards developing their international trade position. Two policies hence adopted by the national government are those of identifying the national manufacturing houses to their foreign peers and regular counseling by government bodies on the potential steps which could help the firms overcome the barriers of internationalization. These policies are primarily aimed at the small and medium sized enterprises of the nation. Conclusion The manufacturing segment of UK had once been at its peak prior to the oil crisis of 1970s, after which it started deteriorating speedily, especially when the domestic coal industry gave in. The nation shifted its focus towards the service industry unlike its peers like Germany and France, which too underwent similar phases. At present however, the nation is attempting at a revival of its past fame through promoting international trade for small and medium sized enterprises which happen to be the backbone of the nation. References Bart, V. A. (1990). ‘Manufacturing productivity levels in France and the United Kingdom’ [Online]. Available at http://www.allbusiness.com/finance-insurance/121038-1.html [Accessed: July 14, 2011]. Buxton, T. & Mananyi, T. (1998). “Economic policy and the international competitiveness of UK manufacturing” in Britain's economic performance by Buxton, T., Chapman, P. G. & Temple, P. (eds). London, UK: Routledge. Fine, B. (1990). The coal question: political economy and industrial change from the nineteenth century to the present day. London, UK: Routledge. Newton, S. (2009). ‘UK Manufacturing decline is the real story of the Budget’ [Online]. History and Policy. Available at http://www.historyandpolicy.org/opinion/opinion_07.html#top [Accessed: July 14, 2011]. OECD. (2011). ‘OECD.StatExtracts’ [Online Database]. Available at http://stats.oecd.org/index.aspx?querytype=view&queryname=86 [Accessed: July 14, 2011]. Reiermann, C. (2008). ‘Industry Returns as Economic Engine’ [Online]. The Spiegel Online International. Available at http://www.spiegel.de/international/business/0,1518,534811,00.html [Accessed: July 14, 2011]. Turner, R. L. (1995). The British economy in transition: from the old to the new? London, UK: Routledge. UNESCO. (No Date). ‘BIG PIT: A BRIEF HISTORY’ [Online]. Available at http://www.world-heritage-blaenavon.org.uk/en/WorldHeritageSite/TheBlaenavonStory/BigPitABriefHistory.aspx [Accessed: July 14, 2011]. Read More