Comment: Does manufacturing still matter?

Britain's manufacturing industry is again in the dock. On Sunday, Michael Heseltine, President of the Board of Trade, acknowledged that an unpublished DTI report on the state of manufacturing industry in Britain had concluded that there were serious weaknesses in the sector.

He also said that he agreed with its main findings, which apparently were that the main source of new products in Britain were imports, that products and management were inferior, that productivity was far below that of Germany or France and even further below Japan and the US, and that the weaknesses would take years to correct.

The fact that news of the report should come immediately before the Budget has inevitably given rise to questions about the Budget - what should it do to improve industry? But in reality this is not a budgetary matter, for in so far as a problem exists this is a microeconomic issue and the Budget is a macroeconomic exercise. Industrial weakness, however, does have macro-consequences, for if British industry is unable to satisfy consumers any increase in demand is likely to show in increased imports rather than in more demand for British goods.

What, then, should one make of this sort of report, particularly in the light of

the apparent evidence that the recovery in demand that has been taking place since last summer does seem to be largely benefiting importers?

The trouble with this whole debate is that it has become intensely politicised, with disagreements over both analysis and policy prescription.

As far as analysis is concerned, one side would agree with the DTI view and claim all is dreadful. The other would point to the fact that the long decline is being reversed - that Britain achieved faster growth in productivity during the 1980s than any other large industrial nation and that, with Japanese investment, the renaissance is now in sight.

VALUE ADDED

On policy, one side argues that the only way to correct the balance of payments and reduce unemployment is to boost manufacturing, though just how is less clear. The other claims that manufacturing is not doing badly, and that even if it were this would not matter for it is fundamentally a low valued-added sec

tor that will increasingly be carried out by the Third World. Instead, Britain's future lies in high value-added services.

In fact, both these apparently incompatible views may be right, but on a different time-scale. Looking back over the past 15 years it is probably right to say that manufacturing was run down too fast, with the two recessions claiming victims that could have survived in a more stable growth profile.

The result is that for the next two or three years growth will have to be constrained by what we can produce. But on a longer view we might be rather relieved that we have made the adjustment of slimming down industry early, for we will as a result have fewer problems later on.

Consider first the balance of payments

issue. Most people do not realise that Britain earns more from exports of invisible products than from visible ones.

Back in 1970 our visible exports, mostly either finished manufactured goods or semi-manufactured ones, accounted for 62 per cent of export receipts, but by 1990 they were down to 47 per cent. Invisible exports, which include earnings from services and also from interest, profits and dividends from abroad, were 38 per cent of total earnings in 1970, but by 1990 were 53 per cent.

Much the same pattern of trade has happened on the import side. Visible imports were 66 per cent of the total in 1970 and are 52 per cent now. Invisibles were 34 per cent then, 48 per cent now. In other words, not only do invisible exports provide more of our earnings than visible, our whole trade account seems to be shifting away from trade in manufactures towards services and other payments.

As Sir James Ball and Donald Robertson pointed out in a recent paper*, Britain is no longer a country that imports raw materials and turns them into manufactured goods. We import manufac

tured goods and we export manufactured goods, but we rely increasingly on services and other income to pay our way.

To point out these figures is not to claim that manufacturing exports are unimportant. Rather it is to say that mathematically they are less important than other sources of foreign earnings, and that trade in services is growing much faster than in goods.

FEWER JOBS

Indeed, viewed from the other end of the telescope, it could be argued that it is dangerous to rely on exports to keep industry going - that is the present problem of Japan.

Next, consider employment. Here the plain fact is that manufacturing is not going to increase employment and will almost certainly continue to run its labour force down. Every mature industrial country in the world is employing fewer people in manufacturing than it was five years ago. In contrast, countries with strong service sectors have been rather good at developing new jobs.

Not many people appreciate quite how good Britain is at providing employment. We have gone into the recession early, and so have lost employment before other countries. But if you take 1990 figures, with in effect the same population as France and Italy, we managed to employ about four million more people.

Indeed, with a population of 57 million we managed to provide almost as many civilian jobs as Germany did with its 79 million. The central point is that service- oriented economies are very good at generating new jobs. As the economy recovers that is where they will come from.

None of this means that Britain should be complacent about the faults detailed in the DTI report. It should be published, because it is only by acknowledging problems that they can be tackled. Manufacturing, while relatively much less important than a generation ago, is still contributing nearly 30 per cent of GDP. It does matter to some extent.

But, as international competition shifts from production of goods to production of services, so having a manufacturing sector that is not particularly large will matter less and less.

*Manufacturing Industry and the Balance of Payments Adjustment: the United Kingdom Case, James Ball and Donald Robertson, London Business School, 1993.