Britains Decline in Manufacturing - Report Example

Running Head: The British Economy The British Economy [The Writer’s Name] [The Name of the Institution] The British Economy Introduction While some industrialised countries such as Austria, Belgium, France, Italy, Norway, Sweden, and Switzerland experienced falls in industrial employment similar to those experienced in the UK, other industrialised countries such as Canada, the USA, Japan, Germany, and the Netherlands have not followed the theory, and have actually experienced rises in the level of employment in industrial industries. Furthermore, it is the economically stronger countries like the USA, Germany and Japan that have experienced increases; this suggests that the decline in manufacturing in the UK is not due to inevitable economic processes like economic maturity. Another popular theory accounting for Britain's decline in manufacturing is that of crowding out. It argues that the market in the UK has been crowded out by the public sector which has experienced a large increase since World War II. This crowding out is a problem for the whole economy because the public sector does not create market output that can be traded, furthermore the public sector has created an environment which is not favourable for manufacturers in the private sector. Raising the necessary revenue to fund the services has lead to higher taxes, higher interest rates, inflationary pressures and balance of payment problems, all of which have lead to low investment in the private sector. A good example of this is the recent rise in National Insurance tax in order to increase funding for the National Health Service. Rises in tax like the National Insurance one, takes revenue away from firms which they might otherwise spent on improving productivity through investment in research and development. However, while the 'crowding out' thesis provides a convenient answer to the decline of manufacturing in the UK, the evidence supporting the theory is not that strong. Recent government policies actually took away resources from the public sector, for example; the Thatcher government privatised BT in 1984, British Gas in 1986, British Airways in 1987, and more recently in 1996 the privatisation of Railtrack, which reduced the Public Service Borrowing Requirement by £1.1billion, and the privatisation of National Power and PowerGen which reduced the PSBR by a further £1.0billion. (Batini, et. al, 2005, 109-12) Furthermore, high levels of unemployment in the 1980's provided manufacturing with the opportunity to grow, however the lack of growth over this period could be blamed on a lack of capital investment. (http://www.economicshelp.org/uk_economy/ukeconomy2006.html) Britain Economy Decline Compared to other leading Industrial nations the UK is lagging substantially in terms of labour productivity making it less competitive in the international and domestic market. However, the UK could remain competitive if its relative unit labour costs were lower. One of the effects of the high wage rate in the UK is that increases in productivity that manufacturing achieves, are usually not seen as lower costs and hence more competitive prices, but instead in the form of higher wages. Not only does this mean manufacturers products are less competitive, companies also end up with lower profit margins, which means they have less revenue which could have been diverted to research and development making UK manufacturers more competitive. So often increases in productivity are not fully capitalised on due to the high wage demands of workers. While high wages can affect productivity over the whole economy, it is manufacturing that suffers the most as it is the industry most exposed to foreign competition. As a result of this manufacturing in foreign countries have become a more attractive prospect to companies and many firms including some in the UK, are taking advantage of this fact and moving manufacturing operations out of the UK. However, the importance of this kind of competition for jobs, especially in third world countries, may be overstated as they have a relatively small share of the world market. The OECD attributed just 15 per cent of manufactured imports to third world countries. (Oliner, and Sichel, 2000. 169-76) Index of Production (http://www.statistics.gov.uk/CCI/nugget.asp?ID=198&Pos=1&ColRank=2&Rank=896) Manufacturing and Productivity Issues Problems with productivity do not come solely from high wage rates. Another factor is the relatively poor level of education and training in the UK compared to other leading industrial nations. Another significant problem for manufacturing in the UK has been the financial environment over the past few decades, with one of the largest problems being the views and attitudes of the 'city' with regards to manufacturing. It is argued that one of the reasons manufacturing has suffered so badly in the UK is due to the city's reluctance to invest in UK manufacturing. (Richardson, C. and Bowman, J. 2000, 89-99) Many believe that the decline of the manufacturing sector needs to be halted and preferably reversed in order for Britain to be a prosperous and important economic power. Manufacturing employs around four million people, is responsible for 60 per cent of UK exports and 80 percent of R&D. (O'Mahony, 1999, 122-25) Manufacturing contributes large amounts of revenue to improve the balance of payments of the UK, while the service sector contributes relatively little, as most services can not be exported . The Role of Investment in Economic Decline One of the most important "pillars" is that of investment, which the government is very keen to promote in manufacturing. (Buiter, 2000, 77-80) It is hoped that initiatives like the R&D tax credit will give larger firms a greater incentive to make significant investments in improving productivity. There are also initiatives to help smaller manufacturers such as the Manufacturing Advisory Service (MAS), which will provide free information for UK manufacturers as well as practical information for small and medium sized firms. (Tevlin, 2000, 140-44) A large proportion of an increase in investment will go in to funding innovation in various fields in manufacturing. The UK has a good science base and by encouraging the transfer of technology from different sources into manufacturing it is hoped that improvements in productivity and advancement in new manufacturing fields will occur in the UK. Regional Development Agencies in the UK are currently trying to promote clusters, where similar manufacturers can operate in close proximity to each other with the aim of promoting R&D and increasing productivity. (Brookes, M. and Wahhaj, Z. 2001, 95-108) Balance of Payment (http://www.statistics.gov.uk/CCI/nugget.asp?ID=198&Pos=1&ColRank=2&Rank=896) In order to take advantage of advancements in R&D and new fields, the skills and education level of the workforce in the UK must be improved, as well as an increase in the use of best practices. One of the main factors in the initiative to improve skills and education is through the promotion of vocational and technical training which will hopefully begin in post-16 education. There is also a plan for regional Learning and Skills Councils (LSC's) which will train workers in areas of skill required by local manufacturers. And by increasing the use of best practices in the workplace firms should be managed more efficiently enabling them to maximise the productivity of the manufacturer. (Broadbent, B. and Walton, D, 2000, 43) Infrastructure and Market Framework The final areas in which the government hopes to improve the productivity of manufacturers is through improving infrastructure and having the right market framework. It is hoped that the infrastructure can be improved through better transport networks and increased adoption of broad-band internet connection, and that the right market framework can be created through strengthening the level of competition, through such means as the Enterprise Bill. While it maybe true that most western countries have experienced declines in manufacturing over the past twenty five years, Britain has suffered the most. Through a mixture of economic processes, Government policy and International pressure, manufacturing in Britain has experienced a massive decline. The experienced decline in manufacturing should not be resisted , which opposes the view of the Government who believe that great effort should be undertaken to reverse recent trends of decline. (Bloom, N. and Bond, S. 2001, 2-5) Some however believe this can not be done and the best that British manufacturing can hope for is a halt to decline, although some predict that a 10 percent share for manufacturing as a proportion of total employment in twenty years time is a very realistic prospect. (Wadhwani, 2000, 184-98) With the increase in the international trade and the strong pound, British exports are more expensive than other international goods. This has resulted in a poor image reducing investment and there it makes it difficult to modernise and attract new blood. Also cheaper labour costs abroad have encouraged Companies to move production operations to Eastern Europe or Asia. The types of manufacturing firms are still competing effectively. The main types of manufacturing companies that are competitive are in the aerospace, high technology and pharmaceutical industries and also the car production. The largest is the production in of food, beverages and tobacco. (Bloom, N. and Bond, S. 2001, 2-5) The loss of jobs, particularly in manufacturing has been replaced by part time jobs in the service industries; very significant proportions of these part time workers are women. A proliferation in temporary work, home working and teleworking further features of an increasingly flexible work force. This flexibility is one factor in the break down of distinction between core economies that is, highly advanced economies, and peripheral regions; areas stubbornly committed to manufacturing and agriculture. (Lansbury, et. al. 1997, 33-34) Britain is not alone in this transformation, the industrial structure of many countries changing in the last decade. Ireland is a prime example of industrial restructuring and the successful transition from peripheral to core region, realising that to compete and succeed in an ever-changing economy necessitates the transition from old to new ways of productivity. A new economy is due to many factors, technology but one. At such moments, social conflicts of the most apparently unrelated kinds determine the direction of technological development for the following decades. Conclusion The economy of the past decade and undoubtedly decades to follow will be determined and dominated by high technology industries. Major economic powers in the US, Japan and Western Europe creating work institutions revolving around the restructuring of the labour process, work organisation and consequently the business cycle. These advanced economies well aware that the foundations for their successful manufacturing employment and increasing productivity lay firmly rooted in the appropriation of knowledge. The new economy in Britain today is certainly due to the majority of employment within the service sector, the advent of e-commerce, and an increasingly technological and networked globe. We cannot however afford to dismiss the manufacturing industry, which is still a substantial contributor to the national economy. Difficulties and confusion arise when determining the distinction between manufacturing and the rising service sector. The difficulty lies in drawing the boundaries between the two. Experts predict that whilst manufacturing is on the decline, poor image and new blood lacking, in an economy which thrives on these very facets, high tech, low cost manufacturing is the considered way forward, with companies taking on board the lessons of the service sectors. Whilst the fortunes of traditional heavy industries such as ship building are no longer viable, food, beverage and tobacco manufactures can become high technology industries, competing and successfully contributing to Britain’s new economy. Britain today the working environment has changed beyond compare, the methods of acquiring profits have changed, some would say progressed. Inextricable networks, evasive and all consuming instantaneous and alienating, the search for increasingly better ways to create capital may bring Britain to a society where the pursuit of knowledge and technology is everything. Deindustrialisation and globalisation exist in a world committed to gain derived directly from high technology. The term Industrial Revolution suggests dramatic and sudden change. Change takes time, technologies are the result of transformation and interpretation and we are experiencing the continuation of the first industrial revolution. We live in a network society, IT providing knowledge, information and the means to store it, transforming lives very much as books did in the earliest days of communication. Industries, occupations and societies have reorganised and restructured this being the way of the world for hundreds of years. From the early days of pioneering Britain has striven to find new and better ways of production, technology a prerequisite and motor for this progress. The decline of manufacturing and the rise of the service sector have necessitated industrial restructuring and work organisation. Technological transformation has always been a procurer in the battle for custom and capital, from the days of the Jacquard loom, introduced in England in 1820 economic fortunes have rested upon revolutionary technology. References Batini, N., Jackson, B. and Nickell, S. (2005), 'Inflation dynamics and the labour share in the UK', External MPC Unit, Discussion paper no. 2, Bank of England. 109-12 Bloom, N. and Bond, S. (2001), 'UK investment: high, low, rising, falling?' Institute for Fiscal Studies, Briefing Note no. 18. 2-5 Broadbent, B. and Walton, D. (2000), 'How "new" is the UK economy', Goldman Sachs Global Economics p 43 Brookes, M. and Wahhaj, Z. (2001)' 'The economic effects of business-to-business internet activity', National Institute Economic Review, 175, January, pp. 95-108 Buiter, W. (2000), 'The new economics and the old monetary economics', Bank of England Quarterly Bulletin, May, 40(2). 77-80 Lansbury, M., Soteri, S. and Young, G. (1997), 'Improving estimates of the UK capital stock', Office for National Statistics NIESR 30-34 Oliner, S.D. and Sichel, D.E. (2000), 'The resurgence of growth in the late 1990s: is information technology the story?' Federal Reserve Board 169-76 O'Mahony, M. (1999), Britain's Productivity Performance 1950-1996, An International Perspective, London, National Institute of Economic and Social Research. 122-25 Richardson, C. and Bowman, J. (2000) 'E-Commerce@the.ONS.UK', Economic Trends, April, pp. 89-99 Tevlin, S. and Whelan, K. (2000), 'Explaining the investment boom of the 1990s', Federal Reserve Board. 140-44 Wadhwani, S. (2000), 'The impact of the internet on UK inflation', Bank of England Quarterly Bulletin, May, 40(2), pp. 184-98 Appendices Table 1 UK Productivity Growth (Peak To Peak, Annual Averages, Per Cent) Output per head Whole economy Manufacturing Non-manufacturing 1973-1979 0.91 0.53 1.05 1979-1990 1.77 3.91 1.20 1990-2000 2.07 2.49 2.09 1973-2000 1.68 2.58 1.50 1990-1995 2.64 3.97 2.45 1995-2000 1.51 1.02 1.74 Output per hour Whole Economy Manufacturing Non-manufacturing 1973-1979 2.01 1.43 2.17 1979-1990 2.19 4.09 1.57 1990-2000 2.49 2.72 2.49 1973-2000 2.26 2.95 2.05 1990-1995 2.95 4.05 2.73 1995-2000 2.03 1.41 2.24 Source: ONS, UK National Accounts; ONS, Labour Market Trends. Table 2 Contribution of capital deepening (I) and technical Progress (II) to productivity growth (peak to peak, annual averages, per cent)Agriculture, Business Services mining, utilities, construction, transport and communications I II I II 1973-1979 1.74 0.95 2.01 0.38 1979-1990 0.73 3.48 1.80 0.41 1990-2000 3.17 1.30 1.68 0.34 1973-2000 1.87 2.08 1.81 0.38 1990-1995 3.63 1.48 2.24 -1.05 1995-2000 2.72 1.13 1.14 1.72 Public Distribution Manufacturing I II I II I 1973-1979 0.55 0.89 1.90 -1.54 1.46 1979-1990 0.26 -0.15 1.59 0.35 0.92 1990-2000 0.20 1.45 1.47 0.52 1.04 Note 1973-2000 0.31 0.69 1.62 -0.03 1.09 1990-1995 0.72 1.40 1.51 0.66 1.17 1995-2000 -0.32 1.49 1.43 0.37 0.92 II 1973-1979 -0.03 1979-1990 3.17 1990-2000 1.68 1973-2000 1.86 1990-1995 2.88 1995-2000 0.50 Source: ONS, UK National Accounts; ONS, Labour Market Trends. Note: Column I shows the contribution to productivity growth of capital-deepening while column II shows the implied contribution of technical progress. The British economy faces its toughest year in almost three decades, the Governor of the Bank of England said yesterday. Mervyn King gave warning of “very difficult times” ahead and an even sharper recession than that of the early Nineties. His bleak assessment set the stage for further drastic cuts in interest rates — which some experts say could fall as low as 1 per cent. Unemployment rose by 140,000 to 1.82 million in the three months to September and is predicted to exceed two million early next year. The Bank raised the spectre of deflation, reviving fears of a downturn on the scale of the Great Depression of the Thirties. Read More