It's a fabrication that Britain doesn't make things any more
Nicolas Sarkozy stung us when he claimed last month that Britain, unlike France, “has no industry”. Since the implosion of the financial sector, it has become an article of faith that the British economy is paying for its excessive reliance on services. The UK, the story goes, has irresponsibly let its manufacturing sector go to rack and ruin. Our future prosperity, goes the argument, depends on rebalancing the economy away from services such as hairdressing and banking to metal bashing and making things.
With stories about factory closures appearing every day in newspapers, how seriously should we take the decline of British manufacturing? Superficially at least, it looks like an open and shut case. Manufacturing's share of total economic output has been shrinking for years. The sector has lost more than a million jobs in the past decade alone. And the UK has consistently been posting one of the largest trade deficits in the developed world. None of these facts is disputed.
The trouble is that we cannot interpret them correctly unless we understand what is happening to manufacturing output and productivity. Consider first the long-term trend in manufacturing output. You might think, like President Sarkozy, that manufacturing output in the UK has been declining remorselessly for decades. If so, you would be wrong.
Until the global collapse in output triggered by the financial crisis in late 2008, manufacturing output in the UK was higher than it had ever been. In 2007 it was two and a half times higher in real terms than it was in 1950. And despite the surge in imports from China, production was 7.1 per cent higher in 2007 than it was in 1995.
People who believe that British manufacturing has gone to the dogs tend to pay more attention to factory closures in industries that are in long-term decline rather than they do to rising output in other parts of manufacturing. The UK may no longer be a big producer of textiles but it is still a big player in many high-end sectors. Rolls-Royce and BAe Systems, for example, are key actors in the aerospace industry. Two of the world's largest pharmaceuticals groups are British (GlaxoSmithKline and AstraZeneca). And Cambridge is Europe's leading cluster for biotechnology.
The UK even has an automotive industry - and not just in niches like Formula One, where it is a world leader. True, the demise of MG Rover in 2005 brought an end to mass car production by British companies. But thanks to companies such as Nissan (whose Sunderland plant is the most productive in the EU), the UK automotive sector produced more vehicles and engines in 2007 than ever before. Some people argue that output by foreign-owned companies in the UK should not be treated as British manufacturing. But on that logic, London is not an important financial centre.
If output has been rising, why has manufacturing's share of GDP been declining? The answer, of course, is that output in the service sector has grown by more. What explains the rise in service sector output? Part of it is outsourcing: activities that manufacturers previously carried out in-house are now provided by service providers (think of catering). But the more important reason is that as countries become wealthier, they spend a growing share of their income on services (education, healthcare, holidays, meals out and so on).
The decline in the manufacturing sector's share of GDP, it follows, is not a uniquely British phenomenon: it has taken place across the developed world. The process has admittedly gone farther in Britain than in Germany or Japan. But these two countries, where manufacturing still accounts for more than a fifth of GDP, are outliers. The UK is closer to the developed country norm. And President Sarkozy is wrong: manufacturing output accounts for a larger share of GDP in the UK (13 per cent) than it does in France (12 per cent) or the United States (12 per cent).
The public understandably frets about the decline of manufacturing jobs. But the widespread belief that this longestablished trend is a symptom of UK firms' inability to “compete” on global markets is largely mistaken. The main reason why employment has been falling is that productivity in the manufacturing sector has been growing faster than output. In other words, declining employment reflects the strength of efficiency gains in manufacturing. Productivity data refute the notion that manufacturing is the Achilles' heel of the UK economy.
If productivity consistently grows faster in manufacturing than in services, are trade unionist and business leaders right to call for a programme of “reindustrialisation”? The answer is less obvious than you might think. Services, remember, now account for 75 per cent of GDP - nearly six times more than manufacturing. Productivity must therefore grow six times faster in manufacturing than in services to deliver a similar-sized increase in living standards. This is a stretch, to say the least: it has “only” grown twice as fast over the past decade.
The point is not that manufacturing is doing just fine or that it should be ignored by policymakers. Certain structural features of the British economy have unquestionably made life difficult for the sector: for years, too many science and engineering graduates have gone to design collateralised debt obligations in the City rather than machine tools in the Midlands. The manufacturing sector, moreover, has been hit particularly hard by the global financial crisis. In January output was 12.8 per cent lower than it had been a year earlier.
Notice, however, that a larger manufacturing sector would not have reduced Britain's exposure to the current global economic downturn - as the spectacular collapse of output in industrial powerhouses such as Germany and Japan testifies. Besides, calls for Britain to “reindustrialise” are a distraction. The UK's main challenge over the long term is not to raise productivity in a relatively efficient sector that makes up a small and declining share of GDP. It is to raise productivity in relatively inefficient sectors that make up a large and rising share of GDP.