March of the makers wrong-footed

This is my Perspective column from this week’s Fund Strategy magazine.

Whatever happened to the march of the makers? Back in March 2011, Chancellor George Osborne proclaimed in a parliamentary speech that an industrial renaissance was central to the Government’s plan for growth:

“We want the words: ‘Made in Britain’; ‘Created in Britain’; ‘Designed in Britain’; ‘Invented in Britain’, to drive our nation forward. A Britain carried aloft by the march of the makers. That is how we will create jobs and support families.”

If this pledge were being realised, it would be expected that Britain would be heading towards an export-led recovery. Manufacturing would be leading the way towards creating a more balanced and vibrant economy.

Yet two years on from the pronouncement, the trend is, if anything, in the opposite direction. The latest trade figures showed the current account deficit at a 25-year high. The deficit on the trade in goods is widening rather than narrowing. In other words, the British economy is becoming even more unbalanced than when the chancellor made his pronouncement.

Osborne should certainly take a share of responsibility for this failure but it also needs to be seen as part of a broader trend. Manufacturing has suffered a long-term relative decline since at least as far back as the early 1970s. It is not, as some critics have claimed recently, a trend peculiar to Margaret Thatcher’s time as prime minister from 1979-1990. It started before Thatcher came to power and continued after she left.

Nor is it unique to Britain. On the contrary, all the developed western economies seem, to a greater a lesser extent, to have moved in a similar director. Even Germany, the industrial powerhouse of Europe, has also suffered a manufacturing decline in relative terms although its share is still higher than Britain’s.

Before considering what drives this trend, it is necessary to distinguish between different types of relative decline. Some of them pose a problem while others do not.

The relative decline of British manufacturing output as a share of global output is, paradoxically, a welcome development. That is because it is part of a trend for production to increase and become more diversified ?on a global level. With the rapid industrialisation of China and other emerging nations it would be expected that the Britain’s global share would fall.

By this measure, Britain has a smaller share of a much larger cake. On balance, both Britain and the world are benefiting from the global trend towards greater prosperity.

The decline of manufacturing employment in Britain is in itself not such a clear positive or negative. Employment in manufacturing fell from 5.7m in 1981 to 2.5m in 2011. That represented a fall from 22% to 8% of the workforce.

Yet if those who lost their jobs found work in other areas, it would not necessarily be a problem. The key goal from a labour market perspective should be to achieve low unemployment overall.

The form of relative decline that is most clearly a problem relates to the economic output. Manufacturing accounts for a much smaller share of Britain’s overall economy than in the past.

Some explanations for this trend are convincing while others are not. For example, when Ken Livingstone, the former Labour mayor of London, blames the banks for this decline, he gets things upside down. The long-term rise in the importance of the financial sector was a symptom rather than a cause of manufacturing decline.

Nor will it do to blame the rise of low- cost producers such as China. A vibrant manufacturing sector would be resilient in the face of competition. It would revitalise its existing output and also find new areas in which to produce. Growth in emerging economies should also mean substantial new export markets for British firms.

This failure to adapt relates to one of the most formidable genuine problems in relation to British manufacturing: the lack of long-term investment. Rather than create the basis for future expansion, many firms have preferred to simply cruise along in the present. Such an approach may work in the short-term but over the longer term it means manufacturing becomes increasingly uncompetitive.

Government policy has exacerbated this trend. The authorities have typically preferred to pump money into the economy through high spending or low interest rates rather than promote restructuring.

The final part of the puzzle is cultural rather than narrowly economic. Society has become increasingly uneasy with production. The manufacturing process has become associated more with pollution and waste than ingenuity and prosperity.

Rebalancing the economy towards a greater role for manufacturing will require kicking back against some of these trends. Pronouncements such as those by Osborne are pitifully insufficient.

From a corporate perspective, it means more willingness to invest for the long term. Simply drifting or responding to events will not do.

For governments, it means being willing to take hard decisions. These include promoting economic restructuring rather than simply pumping money into the economy or shoring up failing businesses.

More broadly it requires a cultural shift.