Economics: Britain must manufacture its recovery

IT SOMETIMES seems that the book British politicians have taken most to heart is Darrell Huff's How to Lie With Statistics. Norman Lamont's foreword and the Conservative central office briefing paper 'The Performance of British Manufacturing' are designed to stop the outbreak of economic whingeing and show that, since the early 1980s, British manufacturing has been on a strengthening long-term trend.

The study would have stood a better chance of success had it preferred solid evidence to statistical sleight of hand. It picks and chooses not merely the most convenient base years for its comparisons, but also the most felicitous end years - even when more up-to-date figures are available. Indeed, it deploys six different periods of comparison in the space of a single A4 summary page. Here is a selection with my commentary:

British manufacturing exports increased by 66 per cent between 1981 and 1991, more than any other of the big six economies (and fell by more between 1979 and 1981).

Manufacturing output grew by 30 per cent between 1982 and 1990 (and fell by 18 per cent between the second quarter of 1979 and the first quarter of 1981. It has also fallen again by 7.5 per cent since 1990).

Manufacturing companies are up from 144,000 in 1980 to 171,000 in 1991 (and were down in 1979 to 1981 and last year).

Manufacturing import penetration between 1985 and 1990 grew more slowly in Britain than in any of the other big six economies (and is leaping ahead again: the Treasury's own forecasts project that imports will meet 35.5 per cent of total domestic spending next year, against just 32.5 per cent in 1991).

Between 1983 and 1990, manufacturing's slight decline as a proportion of GDP was mirrored by similar declines in all the other big six economies (but the large decline in 1979- 81, which ensured that we began from such a low base, was not).

Now, there are many possible lines of attack on this view, but that chosen by Labour's Gordon Brown was not strong. He argued that Norman Lamont's case was exploded by the fact that 650,000 manufacturing jobs had been lost so far during this recession, and that one in three manufacturing jobs had disappeared since the Conservatives' 1979 victory.

This is not necessarily so. It is like arguing that the decline in British agriculture from employing 3,470,000 people (or 26.5 per cent of the workforce) in 1861 to a mere 264,000 today (or 1 per cent) is evidence of its failure, even though they manage to produce more food than their forbears. The destiny of industries where output per person can outstrip the demand for their products is that they should shed labour.

It is, though, right to worry about manufacturing, simply because it is our most important trading sector, earning nearly two thirds of all our foreign currency. If it cannot compete in overseas and home markets, it cannot earn the foreign currency we need to buy imports. We then have to limit imports by curbing the growth of domestic spending. That in turn stymies growth in non-tradable sectors such as distribution, transport and restaurants.

Indeed, the role of our trading sectors will be particularly important in the 1990s. The legacy of housing debt means that spending at home is likely to be sluggish, so that our overall growth will be unusually determined by our success in overseas markets. Poorly performing manufacturers will condemn the whole economy to poor performance. Manufacturing matters.

One often-used measure of manufacturing success is the growth of output per person. Productivity tends to surge during booms and sag during recessions, because there is usually a minimum of labour and other overhead costs that has to be employed in any activity. So it is important to make proper allowance for the cycle.

The most recent UK study suggests that productivity growth of labour and capital speeded up in the 1980s: the annual average rate was 0.7 per cent between 1973 and 1979, a decline of 1.6 per cent between 1979 and 1980, and a rise of 3.3 per cent a year from 1980 to 1990*. A similar picture emerges from an older OECD study.

High productivity growth should in principle help to make businesses more competitive and allow them to sell more. But some sceptics have argued that part of the improvement during the 1980s may have been due to the 'batting average' effect: if you only play your top batsmen, the average score rises even though the total score (which wins matches) may fall. Ultimately, the real test of success is whether we sell and make more than our rivals.

The graphs show that, for Britain, the picture is dominated by the appalling period of 1979-81 and a subsequent catching-up during the 1980s. Since 1979, we can claim to have caught up with France, but that is not much consolation since France has performed so poorly. (Europe's relatively poor performance is only partly a sign of weakness: both the US and Japan have expanding populations and need rising production to maintain living standards.)

However, the graphs necessarily take an arbitrary starting point - the peak of the cycle at the time of the first oil crisis, or the British peak in July 1979. Any given point of comparison can be distorted because countries are at different stages of their own economic cycle. (Britain, for example, is now earlier into recession than the continental countries.)

The best basis of comparison between countries is thus to look at their performance over each country's cycle from peak to peak, so that the distortions to the trend caused by boom and bust are eliminated. Using the OECD figures, each of the G5 countries had a manufacturing peak in 1973-4, 1979-83 and 1990-1.

In the first cycle, Britain was clearly the worst-performing country, registering a drop in manufacturing output of 2 per cent. There were rises of 6 per cent in France, 9 per cent in Germany, 21 per cent in the United States and 26 per cent in Japan.

The second cycle was stronger for all five countries. British output rose by 10 per cent, a better performance both absolutely and relatively. France lagged with a rise of 6.3 per cent compared with 26 per cent in Germany, 31 per cent in the United States and 41 per cent in Japan. The only caveat is that Britain's growth figure may have been artificially inflated by the peculiar strength of the late-1980s boom, and may now be succeeded by a longer period of subdued growth to compensate.

Our undoubted successes in attracting Japanese investment are a key reason for the modest relative improvement in manufacturing. Since we keep all of the value added paid by Japanese firms to workers, plus much of the cost of components, the implants are good news even if they expatriate their profits.

But British manufacturers - particularly British-owned companies - still have problems. As I argued last week, it is not clear that we can earn enough foreign currency to keep us in the style to which we have become accustomed. There is a strong case for more effective policies to encourage training, research and development and the growth of small firms.

* Productivity and Competitiveness, by John Muellbauer, Oxford Review of Economic Policy, autumn 1991.

(Graphs omitted)