Michael Meacher: We can learn a lesson from US in how to protect manufacturing

Even before the recent rally in manufacturing has taken root, the prospect of the Bank of England raising interest rates this autumn threatens to choke it off. This is ominous when the manufacturing base, the lifeblood of the country, has still not reversed its long-term decline.

We have been losing 100,000 jobs a year, and there is no prospect that the services sector will ever be large enough to compensate for the weakness of manufacturing. In fact, knowledge-based services, which get far more attention, only account for less than a third of our earnings from exporting manufactured goods, and pay for only a quarter of the manufactured imports we want to buy.

The facts are stark. The share of manufacturing in total UK output has almost halved since 1979. This is serious enough, but the decline has recently been accelerating. It fell by 3 per cent in the seven years to 1986, then by 2 per cent in the 10 years to 1996, and then by more than 6 per cent in the eight years to 2004.

Manufacturing employment has fallen even faster, from 28 per cent of all UK jobs in 1979 to less than 12 per cent last year. In 1970, less than a quarter of manufactured goods sold in the UK were imported; now it is 60 per cent. Whereas in other developed countries, manufacturing output has been growing, though the service sector has been growing faster, in Britain there has been both a relative and an absolute fall in manufacturing in recent years. At this rate, if these trends were to continue, manufacturing in Britain could almost face extinction within 30 years. Yet the hollowing out of British industry attracts little or no comment.

Worse, the decline in manufacturing jobs is actually seen in some circles as a sign of healthy efficiency, not of failure. Despite the avalanche of Chinese-made goods pouring into Western shops, the free-trade lobby draws attention to the continuing expansion of manufacturing output in most developed countries, indeed in the US by nearly 4 per centa year on average over the past 15 years. Jobs have been lost, they claim, because workers are replaced by new technology to boost productivity, and labour-intensive sectors such as textiles have given way to higher-tech ones such as IT and pharmaceuticals. Low-skilled jobs have moved offshore, while higher value-added R&D, design and marketing have prospered at home.

There are several things wrong with this argument. First, China and India are not merely dominant in low-tech sectors, but are now turning out a third of a million new engineers a year and rapidly entering the high-tech and service areas as well, such as design, software and digital technologies. Moving upstream will not escape Asian competition at cut-price rates. Second, where new jobs have been created in Britain over the last decade, they have been overwhelmingly low-paid, low-skill, often part-time jobs in retail, catering, entertainment, and care services. Third, there is a regional mismatch. Manufacturing jobs have been lost largely in the North while the expansion of business and financial services has been skewed to the South. Continuing manufacturing losses combined with the lack of any effective regional industrial strategy will leave large swaths of the country outside the South and South-east increasingly denuded of well-paid and attractive jobs.

Britain moreover has been hit harder by these trends than other developed economies. It is noteworthy that, since the oil shock of 1973, US manufacturing output has grown by some 120 per cent compared with UK growth of only about 15 per cent. While US companies now achieve more than twice the production levels with the same number of workers since then, British companies produce about the same as before with only half as many workers. In other words, productivity here has been almost exclusively at the expense of labour-shedding - perhaps the biggest failing of the British economy over the last quarter century.

How can this endemic failure be addressed and de-industrialisation halted? The Government has identified the key problem as the well-documented gap in productivity between the UK and its major competitors like France, Germany and the US, and has tried to tackle it by raising Britain's traditionally low levels of skill, investment, R&D and innovation. It is true that over the last quarter century the UK seems to have closed the skills gap with the US, though there is still a significant skills gap between the UK and France and Germany. In higher skills (i.e., university level) we match them, but in intermediate skills (technical qualifications such as the Higher National Diploma) - which many experts argue are the key ones for economic performance - we are still far behind.

Another area of chronic UK weakness is investment. Britain has performed significantly worse than all its main competitors in levels of capital intensity (capital invested per worker hour). A recent cross-national research study found that in 1999 the German level was on average 32 per cent higher, the French 46 per cent, the Japanese 65 per cent, and the US 42 per cent. Against this, however, it is true that the UK record has markedly strengthened in the past decade, the quality of capital has improved, and the impressive growth in ICT investment has begun to impact on output growth.

Nevertheless, Britain continues to lag badly in R&D expenditure, which many studies have shown significantly contributes to productivity growth. Britain still spends far less of its GDP on R&D - as much as 45 per cent less than the US and Japan. Moreover, British R&D has been too heavily concentrated on defence and pharmaceuticals rather than cascaded across sectors where technological capability is now even more important than price competition.

There is a further factor too, almost wholly ignored. As the London McKinsey strategy consultancy recently commented, many UK manufacturers fail to implement management methods, including involving shop-floor workers in improving production, which rivals abroad have recognised as producing results and have taken on. Improving people management and working practices should be central to the Government agenda rather than treating it as secondary to investment, innovation, skills, and competitive labour and product markets.

Nor can one ignore that Britain's current manufacturing weakness, combined with the Government's laissez-faire, neo-liberal ideology, has exposed some of Britain's most prized industrial assets - P&O, BAA, Standard Chartered Bank, Centrica, BOC, Pilkington, to name just a few - to foreign takeover. Rather than auctioning industrial and financial jewels like these into sub-contractor status to pay off a record deficit, the scale of these losses needs to be stemmed if Britain's overall national manufacturing capability is not to be irredeemably mortgaged beyond democratic control.

Above all, a good dose of market medicine is emphatically not, as the Government seems to think, an adequate answer to Britain's manufacturing plight. That is not what successful economies have done either. The US record has been built not on unalloyed market forces, but on heavy R&D expenditure channelled through the universities, military Keynesianism, government procurement as protagonist for US industry, a resort to protectionism where foreign pressures became too great, and a low dollar exchange rate to assist exports. If that is market ideology, we urgently need more of the same here.

Michael Meacher is the Labour MP for Oldham West and Royton, and is a former environment minister