Decline of the UK Manufacturing Sector Over the Last 40 Years - Report Example

Decline of the UK Manufacturing Sector Over the Last 40 Years The United Kingdom (UK) which was a powerful economy in the 19th century faced a gradual decline in the manufacturing sector by 20th century. The gradual deindustrialization over the past 4 decades in UK could be attributed to various causes. This decline in the manufacturing sector could be credited to many factors viz. the growth of service industry, changing patterns of domestic demand, availability of resources, international competition and globalisation. This work examines the above factors considering aspects like technology improvements, stages of economic maturity, low-wage competition, North Sea oil, ‘crowding out’, the effect of Sterling (£) exchange rate, , labour productivity etc. for the decline in various manufacturing sectors Changing patterns of domestic demand: Changes in domestic demand have played a key role in the changes in the structure of UK’s economy. The domestic demands in the 19th century were over automobiles and machineries. The consumer demands towards 20th century shifted to manufacturing, automotive, aerospace and defence, construction and house building, chemicals, pharmaceuticals and consumer products. Each of these domains have a particular manufacturing focus. The Department for Business Enterprise & Regulatory Reform(2008, pg.20) talks about ‘changing patterns of demand with rising real incomes and increasing leisure time. Spending on consumer durables, travel and communications ……increased demand for environmental standards arising from growing real incomes and a growing international consensus regarding the economic case for action to reduce carbon emissions in response to climate change.’ Over the end of 20th century, the demand slowly shifted towards recreation, travel and communications, foreign holidays etc. leading to the growth of service sectors such as hotel and restaurants, personal services etc. which in turn lead to the decline of UK’s manufacturing sectors. In the future, factors such as ageing population, rising incomes will impact domestic demands for goods and services. Over the years, considering the age distribution of the UK population and their respective patterns of consumption, there will be demand for energy and health sectors. However, there will be a rising demand for environmental goods and services (EGS) in UK and global economy Stages of economic maturity: It is known that as economies develop over time, gradual shifts take place between the primary, secondary and tertiary sectors. At early stages of development there is a shift away from agriculture towards industrial and service activities, as the relative importance of agricultural products (food in particular) declines in people’s consumption and manufactured goods and services become more important. As incomes continue to rise, the share of manufacturing in output and employment tends to decline, and that of services tends to increase. (Needham & Dransfield 1995, p. 57) UK being the world’s oldest industrial nation, has gradually attained the stage of economic maturity over a period of time. Due to increasing involvement in service sector , there has been a steady decline in manufacturing sector over the past decades. Availability of resources: During the start of the industrial revolution in UK there were abundant natural resources and also human resources. As the economy developed, there was a shift in demand towards services and the employment in service industry increased and availability of man power in manufacturing sector declined, which in turn had an impact in UK economy. International competition and globalisation: The impact of globalisation in the UK manufacturing industry increased import penetrations and therefore increased international competition. The manufacturers in UK were forced to opt for low cost production which lead to decrease in output and increase in unemployment. Globalisation, in recent times affected the manufacturing sector and the economy declined heavily due to recession. However, the trend has been improving presently. International competition also led few manufacturers to resort to innovative ideas. …Over the last four years, Hydrapower Dynamics has turned itself from a manufacturer of hose assemblies into a provider of engineering services. The catalyst for change was a dramatic decline in business and competition from bigger companies. (BBC News 2002) Technology improvements: Technological improvements stems from continuous research and development. Research on new product line to develop the existing product in order to stay in the international market. During the late 20th century the R&D costs in UK were very less compared to its manufacturing costs. But, recently there has been a rise in the R&D costs and the technological progress is slowly being achieved. …KPMGs Mr. Greaves, who works with many Midlands manufacturers, says companies need to "change or die". "But if you are flexible and forward-thinking and open to new ideas, youre alright." (BBC News 2002) Low wage competition: One of the key concerns for the decline of employment according to Robert C. Hine and Peter W. Wright (1998) … The manufacturing sector has experienced large scale job losses: of the 7.26 million jobs in the sector in 1979, some 2.8million or 40% had disappeared by 1992. This is due to the import competition from the low wage economies. Robert C. Hine and Peter W. Wright (1998) …To the extent that low-wage competition shifts UK consumption from domestically-manufactured to imported goods, jobs in UK manufacturing will be lost. During the period, the prices of UK manufactured products were undercut by the lesser priced imported products from low wage economies. India and China being the two among the low wage developing economies have been increasing their share of global output, trade and FDI. North Sea Oil: Discovery of North Sea Oil lead to the discovery new oil sector in the UK economy. The oil sector improved rapidly that the share of manufacturing sector got depleted. After the discovery of North Sea Oil, UK which imported oil, started exporting oil. This led to the decline of manufacturing sector with respect to employment and output. Being one of the few exporters of oil made the British currency strong. But that high value made the sale of manufactured goods difficult in the international markets. Crowding out: Crowding out was a major cause of manufacturing decline between late 1970’s and early 1980s. The manufacturing sector was crowded out because of the government spending on the non-market public sectors such as health and education. The tax collected by the government from the manufacturing sectors were spent on the services provided by the government. Therefore the manufacturing concerns monitory resources were used for non market public sector was one of the causes of its decline. The effect of Sterling exchange rates: The value of pound increased during 1979/80 owing to the discovery of the potential oil sector and oil exports. Higher value of pound means higher price for goods. The UK manufactured goods became more expensive than the imported foreign products. Consumers resorting to buying imported goods had strongly affected the manufacturing industry. The table shows the value of GBP/USD over a period of years. The strength of GBP or the increasing value of pound is seen from the increasing value of GBP/USD ratio. 1 GBP in USD since 1971 Source: OANDA.COM Historical Currency Converter(Wikipedia) The inflation in UK for the past three decades is shown in the following chart. Source: OANDA.COM Historical Currency Converter(Wikipedia) Manufacturing sector and labour productivity: Output till the middle of 1980 was less than the international competitors. Therefore competition in the global market proved difficult. After 1980 the labour productivity improved due to the slimming down of the manufacturing base which resulted in the more productive manufacturing sector. Source: National Statistics (BBC NEWS world edition 2002) Even though there is a down trend in the UK economy, UK manufacturing sector could survive and has more chances of thriving in the future. The future of UK according to Price Waterhouse Coopers report, in its website ‘UK manufacturing is not dead and it will survive the current downturn… if properly leveraged, could move the UK manufacturing sector from “surviving” mode to “thriving”.’ References Emma Clark, 2002, ‘The death of British Manufacturing’, BBC NEWS, 21 March, viewed 27 August 2010, http://news.bbc.co.uk/2/hi/business/1871493.stm 2002, ‘The facts about UK manufacturing’, BBC NEWS, 18 March, viewed 27 August 2010, http://news.bbc.co.uk/2/hi/business/1861801.stm Robert C. Hine & Peter W. Wright 1998, ‘Trade with low wage economies, employment and productivity in UK manufacturing’, The Economic journal, 108, no.450 viewed 27 August 2010, http://www.jstor.org/pss/2566194 David Nidham & Robert Dransfield 1995, Business Studies, 2nd edition, Stanley Thomes (Publishers) Ltd., United Kingdom Globalisation and the changing UK economy, 2008, Department of Business Enterprise and Regulatory Reform, viewed on 27th August 2010, ‘Economy of the UK’, Wikipedia, viewed 27 August 2010, http://en.wikipedia.org/wiki/Economy of the United Kingdom ‘The future of UK manufacturing: Reports of its death are greatly exaggerated’, n.d., Price Waterhouse Coopers, viewed 27th August 2010, Read More