A Literary review of manufacturing Decline in the UK
According to Ernst and Young (2002), the UK is the fourth largest economy in the world and a leading trading nation. Manufacturing is crucial to this position. They argue that the exchange rate is a barrier to profitable exporting.
Ernst and Young (2002), also add that the argument; which is we should simply seek to manage decline, implies that manufacturing’s importance is lessening as its contribution to the economy shrinks. They also suggest that the contribution of the manufacturing sector is still very significant. The manufacturing sector employs 15% of the UK workforce.
The Engineering Employers Federation (2002), also argue that the multiplier effect on the economy of a 1% increase in manufacturing is more than double the effect of a 1% increase in financial services. The sector is also a substantial tax payer to government coffers. Manufacturing is also the second largest contributor to corporation tax receipts, although its share of the corporation tax take has declined from 21% in 1999, to 18% in 2002. Ernst and Young (2002) also argue that manufacturing is still the biggest foreign currency earner. For example, throughout Labour’s first term, the sector attracted a steady flow of foreign direct investment (FDI). Over the period 1997 – 2001, the UK retained its leadership position in Europe, but with an ever decreasing share of total investment. They also add that there is one glaring omission in government policy which would address many manufacturing concerns; the failure to get the pound down to a more competitive rate against the euro, stating that manufacturers are paying (literally) for the government’s indecision on the euro and its consequent inability to do anything about the pound for fear of the political conclusions that might be drawn.
Whether or not it is desirable, this divergence is of course actually a very long established feature of the UK economy, in which it has certainly been more acute over the past five years from 1998 to 2002, as services have been growing at an annual rate of 3.6% since the second quarter of 1997, above the average growth rate of 2.5% since 1970. She adds that manufacturing, on the other hand, has actually contracted, by over 0.7% a year over the recent past, compared to the rather sluggish growth of 0.8% from 1970 to 1997. She also suggests that the recent pattern is unusual, since previous manufacturing recessions coincided with periods of restrictive policies and whole economy recession. Barker (2002) also argues that over the five years since the MPC was established, it has become more widely understood that it is simply not possible to set a single interest rate which suits all sectors. However, there is still a pondering thought that in setting interest rates the MPC ought to have regard to the fortunes of the manufacturing sector in particular. She goes on to state that in the long run, a regime with low and stable inflation and less volatile growth will benefit the whole economy, even if in the short-run it will not be right for everyone, and this should always hold true, in which monetary policy alone cannot produce a better outturn for UK manufacturing. Barker (2002) also states that there are two indicators which could be used to assess the UK’s manufacturing sector, and the consequences of rapid structural change in the economy.
The first is the UK’s external trade position. It is certainly the case that the balance of trade in manufacturing alone has deteriorated significantly, from a deficit of £7 billion in 1997 to around £26 billion in 2001. The second is manufacturing net rates of return, which have fallen from a peak of 11.9% in 1997 to 3.6% in 2001, lower than in any year since 1984. She adds that the pace of the structural change of the manufacturing sector had been rather sharper than usual over the five years, starting from the inception of the Monetary Policy Committee, and followed on from a period in the mid-1990s in which UK manufacturing had seemed to be enjoying something of a renaissance. A more serious point which she noted is that the rate of return in services, and perhaps especially tradable services, had been rising relative to manufacturing, attracting resources to move out of manufacturing. It is unfortunately difficult to disentangle rates of return on tradable services from the service sectors as a whole, but evidence on service sector profitability overall does not seem to support the explanation as the source of the manufacturing decline. In the early-1990s, UK manufacturing rates of return improved sharply relative to those of the service sector. Barker (2002) suggests that a broadly correct account of the recent poor performance of UK manufacturing can be pinned down to the unexpectedly strong exchange rate against the euro, to weak output growth, low productivity and poor profitability.
Amicus Research (2004), argue that a strong manufacturing sector is the backbone of all successful economies; stating that the UK needs a manufacturing strategy with the government bringing together business and unions to save manufacturing and defend British jobs. They also add that the decline of the UK’s manufacturing sector is reaching a critical point and, if allowed to continue, will threaten the futures of entire communities in industrial heartlands. Amicus Research (2004), argue for stronger employment protection and greater investment in research and development and skills and training to boost UK manufacturing productivity and make redundancies a more difficult and expensive option. They also argue that the MPC decisions on interest rates have not taken sufficiently into account the need to support the manufacturing industry. They believe that the remit of the committee should be widened to take account of regional and sectoral impacts of their decisions on interest rates. The British Chambers of Commerce (2005) argues that manufacturing output is forecast to grow at a modest pace: 1.8% in both 2005 and 2006, after 1.3% in 2004, adding that the sectors performance in recent years has been very disappointing, and there are risks that the outcome will be. They also add that in the fourth quarter of 2004, manufacturing recorded a slight quarterly rise of 0.2%, rather than a fall, after falling 0.8% in the third quarter, and was 0.5% higher than the fourth quarter of 2003. They stipulate that the revised manufacturing figures for December 2004, confirm that the sector is not in recession, but its overall performance remains most disappointing. The crucial fact they suggest is that manufacturing is persistently failing to sustain recovery.
In the fourth quarter of 2004, manufacturing output was 3.5% below its end of 2000. The share of manufacturing in GDP fell below 16% in 2002. According to the Hampton Review (2005) the UK chemical industry is the country’s largest manufacturing sector, accounting for 11% of the value added by the whole of the UK manufacturing industry. It produces and sells products worth £34 billion annually. Although many major international chemical producing and using companies operate and manufacture in the UK, over 80% of companies employ less than 50 people. This shows how important the chemical manufacturing sector is to the UK economy. Becker et al. (2003) argue that while the UK is outside EMU there is an incentive for foreign firms to diversify their investments between both the UK and Europe so as to minimise their overall risk. Once the UK joins EMU then this incentive disappears and more of the investment will go to the area with the higher rate of return. In theory, joining EMU could lead to either higher or lower inflows of investment to the UK. They also add that an increase in the volatility of the euro – dollar exchange rates tends to relocate R & D investment from the Euro Area into the UK. A rise in the covariance of the euro and sterling, which would be a certain consequence of the UK joining EMU, will increase foreign R & D investment into the UK. Other factors identified to have significant effects on foreign direct investment in R & D are real long – term interest rates, output fluctuations, net capital expenditure and government funding. In an article by the Observer (2002) it stated that while Britain still attracted the highest proportion of inward investment projects in Europe in the first half of 2001 (21 percent) its lead had been cut, as had the total number of deals. It also mentions that the case put forward by anti groups is that being in the single currency would be disastrous because the UK would lose control over its economy and be subject to a one-size-fits-all monetary policy, although this ignores the examples of France and Ireland, euro members which have done well in attracting investment since the currency’s launch. In the same article, pro-euro campaigners claim that investors choose the UK because of its flexibility, productivity and access to European markets, and would be even keener if exchange-rate volatility were removed ignoring the fact that not all investors are manufacturers or exporters. It also added that there is a huge range of views (among inward investors) about the importance of the euro. At one extreme are those who have set up manufacturing plants in the UK and are exporting to the euro zone, and on the other hand, there are companies that don’t care about the euro; those operating in the UK, those that sell in Europe, but sell in dollars.
Most importantly the article states that the importance of manufacturing in the composition of inward investors is declining, in which Invest UK figures show that in 2000 to 2001, manufacturing accounted for 223 of the 869 projects while services accounted for 293. The article mainly suggests that euro campaigners counter that UK’s abstention is the cause of the decline in manufacturing inward investment. In another article by the BBC (2005), an individual by the name Anon states that a company they worked for was laying off hundreds of workers in the UK, and moving the high-tech manufacturing to China. They state that the reason for this is that it saves the company money because China’s Labour rates are cheap. Further, they have low standards of health, safety and environmental care compared to the UK. Also arguing that many people in the UK are bitter at seeing their jobs exported. In another revealing article by Business Credit News UK (2001), it states that manufacturers in the UK see no let up to job losses as optimism about export prospects fell at the quickest rate for almost three years. Estimates based on the survey suggest a further 29,000 manufacturing jobs were lost between July and September 2001. It also adds that these cuts, which are severe even by recent UK standards, will be spread across the regions, with few exceptions. In addition the article suggests that international developments are making life very tough for manufacturers.
Tags: engineering employers federation, ernst and young, government policy, indecision, manufacturing sector, uk economy
