Britains Economic Structure
The manufacturing sector is considered important, because it employs the majority of the population. The different industrial units engage the lower and middle class labor which forms a major part of the workforce. The skills that these people have acquired throughout the years have made them efficient and productive in their respective industries. Their economic prosperity is directly linked to the growth of the secondary sector. They depend on it, because they do not have the formal education that is needed today to get employed in the services industry. Thus taking this argument into consideration, many economists consider it mandatory that the manufacturing sector should grow so that the major chunk of the labor force is not unemployed. However, it happened that during the 1980s the when the rates of the growth in the British economy were high the increase of production levels in the manufacturing sector was only 0.5. What followed was a continuous wave of unemployment over the years.
The exchange rate mechanism era, as it is called, started during the early 90s and it adversely affected the manufacturing sector. The high interest rates prevailing at that time raised the cost of capital for local manufactures, whereas their foreign competitors were paying lower rates. Thus, the average costs of production for the British manufacturers were much higher and this made them uncompetitive. Also, the exchange rate management during the era hurt the export potential of local businesses. An overvalued Pound Sterling made British exports appear expensive in the foreign markets and a major source of earnings was lost.
It is true that the limited growth of the manufacturing sector may, in part, be attributed to the market evolution. Some economists consider de-industrialization to be a stage in the economic development process. They say that just as the industry moved from the agriculture to the manufacturing sector during the industrial revolution, this too is simply another move from the secondary sector towards the services sector. However, others claim that the pace at which de-industrialization has occurred in Britain has been too rapid to be attributed to the revolution. There is considerable debate going on over the issue, what is required is more concrete and valid information on the subject.
Sometimes it is difficult to classify something as being primarily tertiary or secondary. As in the case of McDonalds, it is a part of both sectors since it is delivering valuable intangible services to the customer and is making tangible food items for consumption. So in some cases the dividing line between the two opposing sectors is thin and the ongoing debate does not apply to these sectors. But, such examples are rare and there are services that may be classified as one or the other. These from a major part of the economy and hence are the focus of the essay. For manufacturing firms too use services when they market their product, prepare the budget and have inventory checks.
Mr. Peter Lawrence, the Chairman of the Associated British Industries has identified an important trend in the British economy. He points out that manufacturing businesses used to employ night watchmen, laborers, cleaners and maintenance workers but this is no more the case. Todays manufacturers outsource cleaning services to specialized firms, the lease on full maintenance trucks and cars, and hire labor on a contract basis now. All this has resulted in a decrease in the number of people employed in the manufacturing. It has also led to a reduction in the value added by the sector. It seems that the manufacturing sector is shrinking while the Services Sector grows. New practices such as outsourcing have led to a gradual decline in the industrial base in the UK.
According to Professor David baker, a business economist at the University of Birmingham, de-industrialization is a phenomenon that is currently prevalent in the British economy. He believes that as the situation develops, the manufacturing sector will keep on losing its share in GDP. He describes a process where the smaller firms will go out of business first and then eventually the bigger players in the industry will follow. He believes that the British economy is now in the state of de-industrialization. However, Britain is not the only one experiencing this state. The United States and other major economic powers of the world are in a similar situation. So why are some elements in the British economy worried about it Because what Britain is experiencing is called negative de-industrialization, which is a state where the sectoral pattern of employment is changing just like in positive de industrialization, but as opposed to positive, negative deindustrialization leads to a low growth in output and even lower growth in rate of growth of productivity.
Some believe that de-industrialization is just an inevitable stage in the process of development but not Mr. John Wells. An Economist at Cambridge, he believes that de-industrialization can be prevented. He claims that the underlying assumption behind the whole concept of de-industrialization is that as living standards rise, the consumers demand becomes more sophisticated. They now start demanding more of the tertiary goods and so the economy comes to the final stage of the growth process where the market starts supplying the required services that the consumer demands. The rising demand for services means that consumers are moving away from manufactured goods and, hence, aggregate the demand for manufactured goods is decreasing. However, the condition in Britain is opposite. Statistical data show that the demand for manufactured goods has been rising in Britain instead of falling as suggested by the normal situation of economic progress. Mr. Wells points out that the data supports the view that the aggregate demand for manufactured goods has been rising at approximately the same rate as tertiary goods. The anomaly actually was that as demand for manufacturing and the tertiary rose, the tertiary output was increased to a level to fulfill that demand, but manufacturing output didnt rise enough compared to the demand. So those who are of the view that consumption patterns are switching away from the manufactured to the tertiary goods are mistaken. The real problem is that the British manufacturing units are not efficient enough to compete at the international level and so are losing market share. The overall decline in Britains share of world trade in manufactures supports this view.
The most crucial factor that has hit many firms in Britain is the cost of wages. Labor costs are very high in the UK due to the higher standards of living and higher minimum wages prevailing in the country. Compared to Britain, developing countries, like of India, China and Brazil, have very low labor costs, since the population levels there are high, workers are not trained, there is massive unemployment and the minimum wages are very low. So these developing countries are considered to be more suitable for manufacturing labor intensive products, hence, many western firms have moved to these developing countries looking for better profits. These goods are exported to developed countries, like the UK itself, where they can easily compete with more expensive British products.
Mechanization has also hit the local labor in the UK. Due to the advanced technical machinery available today, many tasks that used to be done by manual labor are done with a machines now. So the local labor that was employed in the manufacturing sector started seeing job cuts. The simple reasons for the change can be many including saving time, costs and increasing efficiency. As machines have made the production process faster, cheaper and easier in many cases, firms have substituted capital for labor. However, labor is still needed to make the machinery work, so labor is not completely out. However, it is a fact that todays labor force is not the same as that in the industrial era, todays labor needs to be highly trained , skilled and efficient and so acquiring such skills has become mandatory for everyone.
Therefore, what if Britain is under this negative de industrialization situation Britain is suffering a lot due to this domestic economic phenomenon. It was pointed out by the House Of Lords Select Committee investigating de industrialization that this situation would lead to major economic problems for the nation. The manufacturing trade balance has been positive over the years, balancing the overall deficit that occurs due to shortcomings in the other sectors. However, since 1982, the share of output in the current account has declined and gone into a deficit and now there is no other element to plug the rising balance of trade deficit. As the deficit on the current account and eventually the balance of trade expands, this can become very harmful in the long run.
The gap left by the decreased manufacturing output just cannot be filled by the services sector. Trade in the services sector is a relatively new phenomenon and countries are trying to get to understand the workings of the system. But because the situation is new, there isnt much regulation with regard to the international trade in services hence, countries are not really trading services at a substantial level. So, with the lack of manufactured output and little trade in the tertiary sector, the balance of payments for Britain may go into a permanent deficit. Countries that have experienced prolonged deficits, countries like Argentina and Ecuador have borrowed heavily from international lenders and have been servicing debts heavily ever since. The rising interest rates have consumed most of the income of these nations and left them with little for investment into infrastructure and development, their standards of living dropped as well. Britain is far from reaching the stage seen by Latin American countries, but if budget deficits persist and the deficit value grows, there is no telling where Britain could end up.
Professor Nicholas Calder, a well known economist pointed out a strange link between the rate of the economic growth and the growth of the manufacturing sector. Caldor pointed out that manufacturing is special to the extent of the benefits that can be derived from the economies of scale and from experience. Only the manufacturing sector can truly take advantage of economies of large scale and division of labor. The services sector, on the other hand, is dependent upon the number of service providers and the amount of service that they will provides. Also, he noticed that productivity growth in the tertiary sector has averaged around half of the growth rates seen in the manufacturing sector. So the smaller the manufacturing sector the less it can avail economies of scale, leading to a slow overall economic growth.
Thus, it is established that de-industrialization is a significant problem that needs to be resolved. One of the correction methods has been of nationalization and public ownership. During the 70s there was a wave of nationalization in the country and the government took control of some production units that were running in losses. However, nationalization only made the situation worse. The firms started seeing even more losses, politics came into the running of the organization and the running of the units became politicized. There was little growth in productivity, output growth declined sharply and overall industrial operation got out of hand. There was also some research and development (RD) by the state but it failed miserably.
Later, some economists like Harriet Harman came with their own conclusions. They noticed that the three things that were required for the manufacturing growth, ones which were absent from the British economy, were RD, investment and skills training. Therefore he proposed that the government provide the private sector with some support in the above three fields. Why should the tax payers money be used in the rescue Firstly, because these companies do not have the required funds for investing in product development and research, or in skill training. This leaves them behind foreign competitors who have invested their profits into skill development and research programs. This sort of package would enable the British manufacturers to move out of their current state of low investment, low profitability, low productivity and get out of this circle of poverty. Secondly, British firms may not be investing back their profits in RD and skill development because of the current government policies of nationalization. The government wants to bring companies under the public sector so that they maybe run in a better way. This has alerted private investors who avoid putting a lot of money in such long term projects because of fear of the government takeover in the future. So, such an insecure environment is disturbing to the growth of the manufacturing sector. Others suggest that instead of taking over firms, the state should have a supportive investment climate and introduce investment incentive programs like tax rebates or accelerated depreciation allowances. This way the trust of the local entrepreneurs can also be won who are now sure that their companies wont be nationalized, and the sector will receive the required boost it needs to improve.
However, the picture of the manufacturing sector is not so gloomy altogether. Considering the cases of industries, such as publishing and printing, aerospace and chemicals. Starting with publishing, the United Kingdom is considered a major publishing centre of the world. The industry in Britain is massive and publishes books for different international clients. Some major publishers, such as Pearson and Palgrave, have moved some of their operations to America and are giving the local competitors there a very tough time and in due course have taken over some of these local competitors.
The British chemical industry has average around a 5 economic growth since the 90s, mostly coming from the pharmaceutical sector. This is due to the rising demand for advanced medicine and over the counter drugs. There are more than 12,000 pharmacies in the drug store market throughout the UK.
The UK has the second biggest aerospace industry in the world by employment terms. The different players in the industry include the Airbus consortium for civil airplanes, and other military purpose programmes are namely Euro fighter typhoon program and the joint strike fighter programmes. Another major player is BAE systems (BAE), a major combat plane manufacturer. In 2003, the contribution of the aerospace industry to the GDP stood at 17 billion pound sterling. This formed around 4 of the total contribution by the manufacturing sector. The exports of the industry stood at around 2.5 billion pounds in 2003. Employment in the industry is around 122,000 (direct) which 0.4 of the total workforce is. Productivity has also been growing in the sector it was 50 higher than the UK average and 40 higher than the manufacturing average. The total investment in RD by the industry stood at around 2 billion pounds. The British aerospace industry holds around 10 of the global market for aerospace.
Some service sector industries that have shown good face and are considered to be the major players in the British economy include Telecommunication, E-commerce, Retail, Tourism, and, most importantly, financial services. The telecommunication sector is worth 1.7 of GDP and is worth more than 34 billion. The ecommerce market is expanding rapidly today. It is now worth more than 3 billion and there are above 9000 companies involved in e commerce and another 72000 do business over the internet. Franchises are a massive one-third of the British retail sector. There are around 40 major American brands in the UK which employ around 30,000 workers in more than 3000 stores throughout the UK. The total worth of the apparel market is today more than 40 billion.
Conclusion
As has been discussed above the manufacturing sector has seen decline over the past few years in terms of the number of people employed the share in GDP, output growth and the productivity growth. However, there are fields in which the manufacturing sector has picked up such as aerospace and chemicals. As these operations are more capital intensive they require a lower amount of labor. So, the trend here has been moving from the more labor intensive industries such as textile, steel and mining towards more technical ones like telecomm, aerospace and chemicals. However, there is no denying the fact that the manufacturing sector has seen decline in the classic industries such as textiles for which consumer demand is still very high. But in todays global village where international trade is the way forward, the British economy has a comparative advantage in the more technical productions and it should focus on that while trading it for other labor intensive products. The labor that used to be employed in the former sectors will now have to be trained and educated and moved to the capital intensive industries. However, this is easier said than done and requires major policy reforms. The services sector is the way of the future and is the third stage of the economic progress and Britain has developed a very efficient tertiary side especially in financial services. The UK used to be known as the financial hub of the world after New York before the financial crisis got to the world. British finance industries are major players in the global economic scenario and are specializing in the field of financial services. From the perspective of international trade, the tertiary sector is relatively new, but a lot of ground has been covered by these financial intermediaries who have moved their operations to different parts of the world and are running companies from remote locations. All this has been made possible by the massive technological advance made and the future of the financial services industry looks very bright. There are other players in the British services sector too, namely tourism and retail and their future looks bright as well. So I would agree to the fact that the British manufacturing has gone down, but in consequence of that the services has come up too. Manufacturing is now moving toward new industries that are more tech- based and capital intensive, hence, a structural change is required for that. Services are already developing fast and we have an absolute advantage in this sector. The goods that the manufacturing sector used to specialize in are now being produced by the develpoing countires as they now have the suited resources to produce them. Through international trade all goods can be exchanged for the other making everyone better off.