Analysis of the British Economy - Case Study Example

Introduction There was a time when the United Kingdom was synonymous with manufacturing excellence. Many countries looked to the UK for machines and other manufactured equipment and the British industry itself served as a role model of sorts for countries that aspired to their own manufacturing success. Today, however, British manufacturing is a sad reflection of its former self and with icons of British manufacturing such as Rolls Royce and Rover already sold to foreign companies, it is clear that the industry has fallen far from its lofty heights; even so, there are those who believe that all is not lost and that there is a possibility of reviving the manufacturing sector in the United Kingdom once again. Historical success The post-World War II era has often been highlighted as one of the high points for British manufacturing. In particular, there was a post-war boom between 1945 and 1952 that has garnered a lot of attention (Higgins 2003, p52). The competitors of the United Kingdom in the postwar years, in terms of productivity, seemsto have lagged behind that of the UK. However, “the latest evidence shows that whereas these had an average labour productivity of just 90.6 per cent of the UK average in 1950, by 1980 their average trading performance exceeded that of the UK by just under 40 per cent” (Higgins 2003, p52). In addition, trading performance in the manufacturing sector was not very good as the UK’s share of world exports of manufactured products declined from 25.5 percent in 1950 to 10.2 per cent in 1980. At the same time, “between 1955 and 1980 import penetration in the manufacturing sector increased from eight to 30 per cent” (Higgins 2003, p52). A balanced picture, however, is necessary. A study of the long-run profitability of the British manufacturing sector, suggests that the picture is not as bad as it might seem, at least, up to 1992. This is particulary the case for certain manufacturing sectors. According to Cameron and Proudman (1998), “the industries with above-avergage productivity tend to remain the same over time, particularly for TFP (Total Factor Productivity). For example, in all 23 years of the sample period, Computeing and Pharmacueticals are ranked first and second respectively in terms of TFP” (Cameron & Proudman 1998, p153). In fact, even today, manufacturers account for as much as 60% of the country’s exports and as noted, following World War II, when manufacturing played a much greater part in the economy, it accounted for about “40% of the UK economy. The sector also employs considerably less people than it used it. At the end of the 1970s, it employed just under a third of the total UK workforce. And in the last year alone, an estimated 150,000 manufacturing jobs were lost” (The facts about UK manufacturing http://news.bbc.co.uk/1/hi/business/1861801.stm). Signs of decline In the 1970s, there were already signs that the UK manufacturing sector was not as robust as it could be. Some of the explanations given at the time had to do with input price shocks, the increasing attention paid to services, and lower capital investment. While some claim that the apparent decline was actually mismeasurement, Cameron (2003) “In the 1970s, it is often argued, institutional rigidities, strong trade unions, lax competition policies, corporatist government interventions and a slowdown in technological advance led to a growth slowdown” (Cameron 2003, p122). All of these factors might have played a role. It is also possible that in a very small way, production from Japan, which was the first of the Asian countries to make its mark in the field of manufacturing had slowly began to affect other markets. In Cameron’s assessment, “When input prices rose in 1973 and 1974, there was a downward bias to an upward bias in measured valued added growth. The trend rate of growth fell by around a third in the 1970s, and much of that fall can be attributed to a slowdown in the rate of growth of R&D capital. Again, this reversed to some extent in the 1980s, leading to higher trend growth, helped by de-unionization” (Cameron 2003, p136). More likely, the above factors mentioned by Cameron (2003) worked together with other factors, such as the impact of the Asian Tigers of South Korea, Taiwan, Hong Kong and Singapore. In any case, as the pubication "Sectoral Overviewof the Economy 2009) reveals, "Since 1970, the structure of the British economy has change in three princiapl ways..The share of financial and business services has grown from 12 percent of GDP to around 20 percent. The share of manufacturing has falled from 34 per cent to just over 20 per cent." (http://www.archive.official-documents.co.uk/document/dti/dti-comp/chap3.htm). The following chart provides an indication of the changes in the contribution of manufacturing to GDP. [Source: Sectoral Overview of the Econonmy - DTI - Competitiveness Forging Ahead http://www.archive.official-documents.co.uk/document/dti/dti-comp/c3-24.htm] To help make the picture, clearner it must be noted that between 1979 and 1994 there was a growth in manufacturing output of 9% stemming from shifts in the manufacturing sector. As the report "Sectoral Overivew of the Economy 2009" notes, ""Demand for office machinery has been stimulated by the appearance of the PC and the dramatically falling cost of processing power. Whereas the price index for manufacturing has doubled, high-technology industries -- aircraft, pharmaceuticals, office and computing equipment, radio, television, and communication equipment - accounted for an increasing proportion of manufacturing output in the 1980s" (Sectoral Overview of the Economy http://www.archive.official-documents.co.uk/document/.htm) In fact, friendly relations among the Asian Tigers and the United States helped them to obtain financial assistance as well as a favourable reception for their goods not only in the United States but in other parts of the world. While companies in the United Kingdom were fighting for wage increases in the 1970s and 1980s, the Asian Tigers had a large pool of both skilled and unskilled labour that they were ready to use to the advantage of their nation. “This enticed multinationals seeking foreign bases with a cheap but well-educated labor pool to set up operations there” (Lessons from East Asian NICs’ Export Success 1990, p43). There was also a strong link between the governments of these territories and the business sector and the fact that they had made export a deliberate part of their strategy made it easier for them to manufacture products that would meet the demand and taste of the foreign market. The lower cost of labur also made it possible for them to make good products at attractive prices, which made them more attractiv in many cases than domestically produced products for Western markets such as those in the UK and the United States. In 2001, the UK manufacturing sector, which in a traditional sense, is involved in making products derived from raw materials or through the use of machinery or by hand, fell into a recession and showed the biggest annual decline in ten years. The difference between a manufacturing company and a service has become confused in some cases because some companies that make products also offer services to go with them. The graph below shows percentage changes in UK manufacturing output in the last few years. [Retrieved from: http://news.bbc.co.uk/1/hi/business/1861801.stm] Real decline? Part of the confusing about whether the manufacturing sector in the UK is failing or holding up well comes from the confusion in classifying companies. According to the report, "The facts about UK Manufacturing 2002), For example, a company such as TNT offers a logistics service for manufacturers, among other customers. Historically, this kind of work would have been done by the distribution arm of the manufacturer. Other companies that design or market manufactured goods are often classified by the UK's Office for National Statistics (ONS) as "services" but are very closely allied with manufacturers. "It is very difficult to draw a boundary between services and manufacturing," explains Andy Scott, director for international competitiveness at the Confederation of British Industry (CBI). (http://news.bbc.co.uk/1/low/business/1861801.stm) This lack of clearness affect the debate. Now, in contrast to the manufacturing sector, “The UK's services industry is seen as the engine of growth for the national economy, accounting for a hearty 66% of gross domestic product (GDP)” (The facts about UK manufacturing http://news.bbc.co.uk/1/hi/business/1861801.stm). Still, there is no question that over the last few years, there has been a steady decline in how much investment goes into the manufacturing sector. This raises the question that if there was much more investment in the sector maybe there would not be as much of a decline. It seems that many people, including the government, has given up on the manufacturing sector, thus making it easier for the sector to lose more and more productivity. The graph below shows the decline in investments between 1992 and 2000. Source: http://news.bbc.co.uk/1/hi/business/1861801.stm Even if the manufacturing sector is in decline, it still makes up about 20% of the UK economy and generates as much as one hundred and fifty billion pounds a year. In addition the sector provides employment for “four million people - representing roughly 14% of everyone working in the UK. A further 2.4 million jobs in the services industry depend upon manufacturing, says the CBI” (http://news.bbc.co.uk/1/hi/business/1861801.stm). Even so, as the following graph shows, there has been a steady decline in how much employment the manufacturing sector provides. [Source: http://news.bbc.co.uk/1/hi/business/1861801.stm] In addition to the four Asian Tigers mentioned above, other countries from Asia, in particular, those from the ASEAN nations have also made their countries into attractive places for manufacturing. This has attracted even more manufacturing companies from the West to set up in these countries, ensuring that they not only have the best in terms of labour and cost advantages but also some of the best management teams. And these countries are investing in the latest technologies in both manufacturing and logistics. As Ollinger (2007, p24) writes: “China has transformed the global manufacturing landscape. What’s less apparent is the role that smaller Pacific Rim countries – specifically Vietnam, Thailand, Indonesia, and Malaysia – have played in that transformation. While these nations haven7t nearly the manufacturing base or export volume as China, they glimmer as attractive alternatives for global manufacturers” (Ollinger 2007, p24). Can the UK compete on labour costs or would superior technology be the key to the nation’s manufacturing success? Conclusion There are those who believe that the current system of dependence on the financial sector is not healthy for the UK economy. The United Kingdom was once a great power because it had the capacity and the capability to produce what it needed. It also was able to export quality products all over the world. Now that many other countries are taking the lead in producing quality products at great prices, it seems that the United Kingdom will never again be able to return to its former leading position. Not everyone agrees though. In the current financial crisis, the government has given out some money to rescue the car industry. Niko Lambert, of Zeta, an online marketing company, is one person who believes that the UK should go back to its manufacturing roots. As Lambert says, “My view is quite simple; an economy that doesn't create wealth is in trouble. Hedge funds and financial services just create an illusion of wealth that is only sustainable if that wealth relates directly and realistically to the "real economy". If most of the workforce is selling financial products, frying hamburgers, running hedge funds or in the public sector then eventually the economy will crumble.” (British Manufacturers Must Show the World They Mean Business 2009). If Britain made an effort to manufacture most of what it needs within the country and to embrace modern technology, it is possible that the country can become a great manufacturer again. It is true that labour costs in many countries are lower than those in the United Kingdom. But rather than concentrating businesses in the cities where costs run high, is it possible for these companies to produce in the countryside or in places where costs are already low. The people in these areas will benefit from the jobs and the companies can pay less than they might have to pay in the cities. This should give them the room they need to expand. The government will also have to be flexible in terms of labour unions and their excessive demands if UK manufacturing can become great again. Ast the folowing final graph shows there is a significant fall in manufacutring output, which ought to provide a signal that any measures that need to be taken should come quickly before the sector falls any furhther. [Source: Index of Production National Statistics Online http://www.statistics.gov.uk/CCI] Bibliography ‘British Manufacturers Must Show the World They Mean Business.’ 2009. PR Newswire, Jan 29. 'Sectoral Oveview of the Economy - Competitiveness Forging Ahead,' http://www.archive.official-documents.co.uk/document/dti/dti-comp/c3- 24.htm] Retrieved March 30, 2009. Cameron, Gavin. 2003. Why Did UK Manufacturing Productivity Growth Slow Down in the 1970s and Speed Up in the 1980s? Economica, 70, (277), p121-141. Cameron, Gavin & James Proudman. 1998. Growth in UK manufacturing between 1970-92. Bank of England Quarterly Bulletin, 38(2), p145. ‘Lessons from East Asian NICs’ Export Success.’ 1990. The International Executive, 31(6), p43. Lindsay, Craig. 2003. A century of labour market change: 1900 to 2000, Labour Market Trends, 133-144. “The facts about UK manufacturing.” 2002. BBC News Online, 18 March. [Retrieved March 30, 2009] Read More