Effects of the 1980s and Early 1990s Recession on British Manufacturing - Essay Example

? Effects of the 1980s and Early 1990s Recession on British Manufacturing al Affiliation Recessions have profound effects on nation’s economies. The late 1980s and early 1990s recession had a great impact on the British manufacturing industry. Prior to the recession, the United Kingdom was the world’s top manufacturing nation. As the manufacturing industry suffered in Britain from the effects of the recession, competitors from other nations such as the United States, France, and Germany overtook it. The depression had been caused by the great value of the pound, towering rates of interest, a firm fiscal policy, the economic boom and bust, high charges of mortgage interests, and the use of the Exchange Rate System Since the recession in the 1980s, British manufacturing has not been able to regain its position as the world’s top manufacturing nation. Although the decline experienced by Britain has been inevitable, a number of measures have been taken to improve British manufacturing. Among these is the New Growth Economics, which focuses on growth policy, convergence and catching-up, social capability, human capital, and investment. The United Kingdom has also made efforts to sustain a high level of foreign direct investment, which is one of the foundations to the revival of British manufacturing. Keywords: Recession, British Manufacturing, Gross Domestic Product, Inflation, Manufacturing Sector, Competitors, Unemployment, Economy A recession is a “downturn in the business cycle during which real GDP declines, business profits fall, the percentage of the work without jobs rises, and production capacity is underutilized” (Tucker, 2008, p.252). GDP means, “the value of a country`s overall output of goods and services during one fiscal year at market prices, excluding net income from abroad” (“gross domestic product (GDP),” n.d.). GDP can be measured on the basis of expenditure, income, or output, where measures depend on the amount of money used, amount of profit earned, and amount of goods and services sold respectively. According to Keynesian analysis, if there is a decline in AD, this means that there will be a decline in the real GDP. What affects the real GDP is the AS curve slope. Low Aggregate Demand (AD) causes a slight reduction in real GDP when the economy is close to full capacity (“Causes of recessions,” n.d.). Source: (“Causes of recessions,” n.d.). A recession consists of two quarters, whereby the decline in the GDP; during a recession the economy is functioning inside and further away from its production possibilities curve. During a recession the economy is affected in a downfall, demands begin to slowly go down; this is because the market is saturated and the demands for goods and services becomes weak (Montgomery, 2011). Factors that lead to the recession in Britain during the 1980s and early 1990s include: 1. Great value of the pound: This reduced the demand for exports since they became more expensive. British manufacturing was the sector that was mostly affected. 2. High rates of interest: Inflation in the UK was above 15% in 1979 (“Causes of Recessions,” n.d.). High inflation was inherited by the conservative government, which made a commitment to reduce it. The government focused on tight fiscal and monetary policies, which reduced inflation, but caused a reduction in investment, spending, and output. 3. A firm fiscal policy: The government focused on reducing its borrowing level to reduce inflation, which was necessary for the economy. To achieve this, taxes were increased, consequently reducing consumer spending due to the fact that their disposable income was reduced by the tax increase. 4. Economic boom and bust: There was rapid economic growth during the 1980s. As a result of this inflation increased above 10% (“Causes of Recessions,” n.d.). The UK government embarked on reducing the inflation by increasing the rates of interests, which led to a reduction in spending. 5. Use of the Exchange Rate System: The UK government committed itself to maintaining the towering value of the pound, which required interest rates to be high and therefore led to a reduction in Aggregate Demand. There was consequently less demand for UK exports, which had become very expensive. 6. High costs of mortgage interests: This was as a result of high interest rates, which caused most people to sell their property, reducing the prices of houses. Consumer wealth reduced as a result of the falling house prices. There has been industrial change in the UK since the 1980s and early 1990s recession. This can be seen from the fact that employment in UK service industries has grown, but in the manufacturing industry, it has relatively declined. “Between 1971 and 1999 almost 4 million jobs were lost from UK manufacturing industries….Over the same period the proportion of total value of UK output produced by manufacturing industries fell from 41% to around 20%” (Moynihan & Titley, 1995, p.357). The loss of jobs was mainly as a result of the 1980s economic recession. If a country’s manufacturing sector is weak, the economy will have to be constrained below full employment, since the domestic activity will draw in manufactured goods and cause a balance-of-payment crisis. Between 1976 and 1979, British manufacturing was expected to recover, but this did not work (Townsend, 1983). This is because a collapse of activities followed between 1979 and 1981 as a result of the recession. This recession affected the manufacturing output of British manufacturing, which affected the manufacturing areas and the employment (Townsend, 1983). Source: (“UK recession of 1981,” n.d). This graph indicates how inflation had risen from 1979-1990, and the fall in GDP below average. In 1982, it begins to rise and goes through dynamic changes between 1984 and 1989. Between 1980 and 1982, the rate of inflation increased by 14.76% (“UK recession of 1981,” n.d). The UK manufacturing industry has been declining since the 1980s and early 1990s recession. During the nineteenth century, the leading manufacturing nation in the world was the United Kingdom, but this declined during the recession. As the British manufacturing lost its worldwide supremacy, other nations were improving their manufacturing capacities. It was at this period that Britain was overshadowed by the United States, France, and Germany in the manufacturing sector (Pike & Barnes, 1994). Since then, British manufacturing has remained behind these nations. The 1980s recession exacerbated the decline that had begun in British manufacturing industries. The British motor vehicles and textiles, and iron and steel industries were the most severely affected. This is because these are the industries that faced the greatest competition worldwide. According to Pike and Barnes, “it is feared that the industrial base in the UK is now too small to meet the needs of the economy and any expansion will lead to an increase in imports and enlarge the already large trade deficit” (1994, p.10). The performance of British manufacturing sector is relative to its competitors. The performance of a business can be measured by the growth of output, profitability, productivity, and structural change. The major problems facing Britain’s economy are the reduction of the manufacturing industry and unemployment. Britain has lost most of its market share to its competitors. While Britain competitors retained their employment, Britain lost 40% of its manufacturing workforce (Needle, 2004). The British motor manufacturing industry suffered during the 1980 recession, and lost its domestic market share to Japanese Motor manufacturing industry. This is because the market forces forced Japan to venture in Britain. Britain’s competitors such as Germany and France paid their employees more than Britain could (Anderton, 2000). Average consumers were hugely affected by the late 1980s and early 1990s world recession. The UK textile industry faces great threat from its competitors in other nations. This was after it lost its top position as a textile and garment manufacturer. After the 1980s and early 1990s recession, Germany became the leading quality manufacturer of textiles and garments. However, later recessions have impacted the German textile and garment industry. According to Bohdanowicz & Clamp, “The French government has always heavily supported its fashion industry; more recently, the Spanish government made its fashion/textile industry a priority, pouring money into it to ensure its establishment across Europe” (1994, p.161). There is dire need to improve the British manufacturing industry. Britain’s manufacturing capabilities can be restored, even though the decline by Britain has been inevitable. According to Pike and Barnes, “to achieve this means a higher level of domestic saving and higher corporate savings if the alternative of higher capital inflows at higher rates of interest is to be avoided” (1994, p.10). There have been recent developments of New Growth Economics in Britain, and these “may provide some direction as to what future policies may be appropriate to sustain long-term improvements in manufacturing competitiveness” (Lindberg, Voss, &. Blackmon, 1998, p.286). The New Growth Economics is focussed on growth policy, convergence and catching-up, social capability, human capital, and investment. One of the foundations to the recovery of British manufacturing is the sustained high level of foreign direct investment in the United Kingdom. This has led to increased investment in the manufacturing industry. Reference List Anderton, Alain. (2000). Economics. London: Pearson Education Ltd. Bohdanowicz, Janet & Liz Clamp. (1994). Fashion Marketing. London: Routledge. Carbaugh, Robert. (2008). International Economics. Mason: South-Western, Cengage Learning. “Causes of Recessions.” (n.d.). Retrieved 3 January, 2013, from http://www.economicshelp.org/macroeconomics/economic-growth/cause-recession2.html. “Gross Domestic Product (GDP).” (n.d.). Retrieved 3 January, 2013, from http://www.businessdictionary.com/definition/gross-domestic-product-GDP.html. Lindberg, P., Voss, C. A. & Kathryn L. Blackmon. (1998). 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