Changing Economic and Business Environment in Britain - Essay Example

Running header: Britain Changing Economic and Business Environment Your Introduction Britain was the first country to industrialise initiating the first industrial period, hence was called ‘the workshop of the world’ accounting for almost all international manufactured products in the nineteenth and early twentieth centuries. The manufacturing industry was dominated by shipbuilding, coal mining, steel production, and the textiles industries. However this period of growth stagnated from the 1970s and 1980s with marked decline [See Appendix 2]. Conversely the decline in the manufacturing industry saw the rise in the service industry as more people migrated to the financial, hotel, health, and other services industries. Britain’s main manufactured export products are fuels, chemicals, food and beverages, tobacco, and aerospace products among others. According to the Organisation for Economic Co-operation and Development (OECD) Britain’s purchasing power parities (PPPs) has declined tremendously for the last few years (OECD, 2007). Accordingly Yahoo! Finance quoting UK’s Office for National Statistics (ONS), asserts the economy has shrunk by 0.3 percent within the year, much lower than that of Unite Sates and the regional European average (Yahoo! Finance, 2009) [Figure:1]. Figure 1 However the weak Sterling-pound has nonetheless seen a rebounding of the manufacturing sector as exports grew cheaper yet analysts predict a depressed future as Britain’s GDP fell to 2.9 percent by November 2009 which was the heaviest since July 1985s 4.0 percent turndown when UK’s manufacturing sector was heavily deindustrialization (ONS, 2009). Davis (2002) attributes this deindustrialisation to the prevalent lethargy in growth, escalating labour costs, out-sourcing production to lower labour cost centres, globalisation and the impact of imports infiltration. Decline in the Manufacturing Industry According to Office for National Statistics (ONS) data, the manufacturing industry accounted for just 16 percent of GDP output and only 13 percent in employment while the service industry controlled 83 percent of exports by 2003 (ONS, 2009). Although Britain is sixth world industrialised country, its manufacturing industry as in the US has been rapidly overtaken by the services industry. During the 1970s and 80s, the sector lost approximately 3.5 million jobs while the services industry created a similar number of jobs in the 1990s particularly in the financial sector the country’s largest employer [see Figure: 2]. The change in momentum from the manufacturing to services has been reflected in the geographical spread shifting from the northern regions to the southeast, southwest, and Midlands areas. Figure: 2 This economic change has been blamed on the deplorable state of the economy which has remained in stagnation while all other leading industrialised states like Germany, France and US have started recording gains within their own economies. The recovery has been hampered by the country’s reliance on the financial services sector affected by the prevailing global recession (Basketter, 2009); (OGrady & Grice, 2009). According to ONS, the manufacturing sector fell by 14.1 per cent in the second quarter of 2009 continuing a distressing trend of decline (Chamberlin, 2009). The importance of the service sector is exemplified by one the top mechanized sectors, the motor industry which is significantly dominated by supporting service jobs. According to the industry’s support body, the Society of Motor Manufacturers & Traders, there are over 800,000 employees in the industry but only 180,000 in manufacturing and additional106,000 employees in components, hence more than half a million people are found in the sales area, service bays and other support segments Northedge (2009) [Appendix:4]. The Service Industry UKs service industry has become in recent times the largest employer of most workforce as the sector dominated the economy accounting for over 80 percent of the GDP. These are mainly in the financial service of banking, insurance, transport, education and business services (Chamberlin, 2009). London has become the world’s predominant financial capital particularly the London Stock Exchange (FTSE), the London International Financial Futures and Options Exchange, and the Lloyds insurance in London being of great significance in global finance. The banking sector has the largest global network led by HSBC the world biggest bank and Barclays Plc located in most regions of the planet headquartered in London’s Docklands area. Most international conglomerates similarly have their headquarters in London including US owned financial multinational Citigroup Plc. while Scotland’s city of Edinburgh has also accumulated another large financial centre (CEE, 2007). Another service sector that has grown tremendously is tourism as Britain continued to attract large swathes of tourists (24 million by 2004) and is currently ranked at number six in global tourist destinations (UNWTO, 2008). London is the world’s most visited city recording 15.6 million visitors in 2006 followed by Bangkok with 10.4 million and Paris with 9.7 million (Blanke & Chiesa, 2007). According to Yaffe (2007), the evolvement of the country from its mainly manufacturing roots in the last thirty years is parasitic as exemplified by the downturn within the sector leading to over seven million jobs in 1979 and 3.4 million by 2005 while conversely in the serves sector there was an appreciation from 7.8 million jobs in 1979 to over 17 million in 2005. This has consequently seen a decline in British exports which fell by 3.6 percent in proportion to global exports while in contrast the emerging importance of the financial sector was emphasized by its rise from 26.4 percent in 1997 to 33 percent by 2004 (Yaffe, 2007). The prevalence of incessant labour relations disputes has been blamed for contributing to the decline in British manufacturing as the rigid and powerful labour unions persisted in their obtuse policies. According to ONS data, the service sector has generated the greatest contraction among all other sectors declining by 5.7 percent (Chamberlin, 2009). Efficiency vs. Labour The shift towards a more capital-intensive economy is reflected in the efficiency of the agricultural sector that produces 60 percent of food needs while employing less than two percent of the labour force. According to a PricewaterhouseCoopers hypothesis, in terms of appraising efficiency; Britain’s manufacturing productivity lags behind the other major industrialised countries including France, Germany and United States hence need to improve capacity. This is determined by dividing the number of hours worked with the generated output (Hibbs, 2009). Efficiency in production has been enhanced through the use of automation especially employing computers. According to Goodridge & Clayton (2004), ‘analysis of Office for National Statistics (ONS) micro-data suggests firms with automatic links between their e-commerce networks and operating business processes enjoy higher labour productivity’ (pg. 47). There has been an emphasis to shift from the labour intensive production methods to more efficient and environmental friendly systems. A report commissioned by the Department for Business Enterprise & Regulatory Reform (BERR) found that although the low carbon and environmental goods and services industry (LCEGS) employs almost 900,000 employees, there was a potential of increasing the number to over 400,000 utilising more efficient and less carbon emissions (Sharp, 2009). Europe and Britain lags behind the US in terms of innovation in 11out of 15 indicators which include ‘stage venture capital, tertiary education, high tech exports, patenting and business expenditure on R&D’ (Donnelly, 2008, p. 1). Figure 3: UK: GDP, Employment and Total Working Time Trend Source: ILO – 1997 Although fewer workers engaged in the production sectors, technological innovation has meant that more enhanced output (90 percent) is generated [See Appendix 2]. However an analysis by the Centre for Economic Performance (CEP) revealed that UK production performance or ‘output per hour worked in the UK is still about 13 percent lower than Germany’s, 18 percent below the US level and 20 percent below that of France (CEP, 2007, p. 1). They attributed this to lower modernization and proficiency within Britain as compared to the other industrialised countries. Macdonald & Salt (2004) assert that ‘the level of UK productivity in 2003 was lower than all but two of the EU-15 Member States’ (pg.1). They also accuse the industry poor capital investment, skills, and mismanagement. David & Wright (1999) allege that the effect of enhanced innovation has resulted in less labour intensive production. Higher productivity was first noted in the early twentieth century, 1920s and 1930s when the effect of electrification resulted in improved production as compared to the period prior to the First World War (pg. 12). Feinstein, et al (1997) alleges that electrification was the key stimulus in enhancing higher production output [Figure: 4] (ILO, 2003). Figure 4: The current global recession has led to a considerable decline in UKs manufacturing sector which fell by 7.4 percent in 2008 the heaviest since 1981. The Confederation of British Industry (CBI), representing more than 240,000 private businesses that engage approximately one third of all private enterprise workers attributed the decline to the international contraction of overseas markets not withstanding the depreciation in the Sterling pound. The Department for Business Enterprise and Regulatory Reform (BERR) underscored the significance of these development noting that the sector ‘accounts for 13 percent of UKs GDP and half of its exports while lying second to United States in terms of drawing direct foreign investment to the country. This has growth has been cumulative for over 300 hundred years of its existence (Chamberlin, 2009). Impact on Labour UKs manufacturing sector, particularly the motor industry, like its counterpart in the US, decline has been blamed on its inflexibility. At its peak in the 1960s, the car industry in the UK employed over a million people or five percent of the entire country’s labour force. Conversely now only 80 percent of the UK car purchases are imported while almost all the country’s auto industry is foreign owned (Northedge, 2009). By 2002, the entire manufacturing sector contributed only 15 percent to UKs labour force. KPMG’s Ian Greaves asserts that, ‘manufacturing is perceived as an industry of the past and not of the future’ (Clark, 2002, p. 1). The International Monetary Fund’s projection of economic downturn by 2.8 percent means that many more jobs are at risk even as unemployment levels appreciate considerably with analysts predicting a loss of over 700,000 jobs mainly in the car industry (Wighton, 2009). Nevertheless, the car industry is still a significant employer with over 800,000 employees though just over 180,000 are in the manufacturing sector as opposed to 200,000 in 1960. The Engineering Employers’ Federation chief economist Steve Radley however asserted that, ‘the motor industry is still a major employer, not just in itself but through the supply chain’ (Northedge, 2009, p. 2). The decline in manufacturing is mirrored in unemployment as more people lost their jobs in the industrialised countries [Table: 1]. Despite numerous efforts across the years by British governments to revive the production sectors, the endeavours have been unsuccessful even with copious injections of capital. This has been particularly evident in the car industry which has largely collapsed and fallen into the hands of foreign firms who have not also been able to revive the industry (Berlinski, 2009). According to ONS data, manufacturing jobs fell by 212,000 or 6.7 percent between March 2008 and March 2009 representing a 0.6 percent to the total 455,000 or 1.4 percent decline [Appendix:3]. In the service industries, losses were recorded in the hospitality industry, catering and more heavily in the financial services sectors however there was an appreciation in the public administration and educational sectors. UK Aerospace Industry The UK aerospace industry (UKAI) is one of the few surviving successful manufacturing industry sectors. The aerospace industry encompasses over 3.000 companies that employ either directly or indirectly approximately 500,000 people within the UK; and directly 255,000 people by 2005. The industry accounts for seven percent of UK exports which adds more than eight billion pounds value to the economy annually. The UKAI is major exporter creating a trade surplus of over £2.5 billion in 2003 while conversely the larger manufacturing sector recorded only trade deficits (House of Commons Trade and Industry Committee, 2005). The aerospace industry generated £18.42 billion in 2001 as its global market share of the annual $78 billion industry increased from nine percent to 13 percent from 1995 to 2001. According to a DTI sponsored report conducted by the Aerospace Innovation and Growth Team (AeIGT), ‘UK’s raw productivity (sales per employee) has increased by 140 per cent and value-added productivity (value-added per employee) by a remarkable 200 per cent.’ (AeIGT, 2003, p. 1). Among the aerospace industry is the UK civil space industry which represents upstream customers including research, design and consultancy and ground segment suppliers; while the down stream segment includes, satellite broadcasting and communication systems (Thornton, 2009). According to the British National Space Centre (BNSC), the body charged with coordinating all British civil space policies, the sector employed 16,200 employees in the space supply companies by the end of 2004-2005 period (BNSC, 2006). Shift in Labour Patterns Analysts predict that the growth in the emerging new economies of BRIC’ economies (Brazil, Russia, India and China), will be the dynamic new economic force. The Economist Intelligence Unit (EIU) predicts that by 2020 these nations in conjunction with the US and EU will control approximately 20 percent of global GDP computed as per the Purchasing Power Parity (PPP) with China leading the rest (Barysch & Grant, 2006). In a new shift of a division of labour, the Eastern European countries and Asian nations are gradually taking up many production activities due to the predominant cheap labour within their borders. Similarly, millions of East Europeans have migrated to the much affluent western European countries particularly Britain in such of jobs. This has impacted heavily on the domestic job market as the emigrant populace makes labour cheaper as the acronym ‘Polish plumber’ has become synonymous with cheap labour and emigration (CLR, 2007). Though many have fretted about the new developments, Barysch & Grant (2006) argue that this cooperation has been beneficial to both sides as most European consumers benefit from cheaper imports while the new emerging economies in Asia and elsewhere provide markets for European products (Pg.34). In China, many European products are assembled there taking advantage of cheaper labour-intensive production but contributing to huge trade deficits to the countries escalating to €157 by 2007. However there has been widespread concern about the Chinese violation of intellectual property rights (IPR) with many products pirated from other countries. According to US trade representatives, 85-93 percent of all copyright products sold in China are pirated. Analysts argue that the loss of factory jobs has not been principally a consequence of outsourcing or offshoring to the cheaper labour intensive regions of China, India and Mexico; but due to the ‘underlying shift from a labor-intensive to a technology-enabled economy’ or enhanced efficiency induced by technological innovations (Collins & Ryan, 2007). Pianta & Vivarelli (1997) have described how the information and communication technologies (ICT) has enhanced efficiency in production through various innovative technologies and strategies as the sector has also created many jobs serving the various industries. Conclusion Modern production patterns have seen a widespread decline in the significance of manufacturing sectors as more capital intensive highly innovative methods mean more efficiency, higher production but less labour utilsed. 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Retrieved November 27, 2009, from Permanent Revolution: Yahoo! Finance. (2009). Britains Q3 GDP drop revised down. Retrieved November 27, 2009, from Yahoo!: Appendices Appendix 5: Britain Still in Recession: Decline Continues Source: Office for National Statistics/Telegraph Online Appendix: 6 Appendix: 7 Appendix: 8 Appendix: 9 Read More