Manufacturing, who needs it anyway?

WHEN John Smith, Kenneth Clarke and even, sotto voce, John Major agree on something, you know it must be politically correct. There is also a fair chance that it will be wrong. The something in question is the importance of rebuilding manufacturing in Britain. This week Mr Smith won a measure of approval from the CBI by stressing that this would be the policy of a future Labour government. In one of his first speeches as Chancellor, Mr Clarke emphasised his appreciation of manufacturing - a legacy, he explained, of his Midlands upbringing. And Mr Major has indicated that the Government regards rebuilding manufacturing as a key priority.

Of course, none of them chose to go into manufacturing when they were selecting their own careers. Mr Major did choose a service industry in the traded sector, international banking, but Messrs Smith and Clarke went into the profession that seemed furthest from the hurly-burly of manufacturing. They became barristers.

The more thoughtful people with experience in industry have a rather different perspective of the future role of manufacturing in advanced countries, such as Britain. On the very day that the CBI was meeting, a quite different conference on the other side of the world was debating exactly the opposite message. In Singapore the winning essays in the annual Amex Bank Review competition were being presented at a global forum. The winners, DeAnne Julius and Richard Brown, demolished the idea that manufacturing is special, and that the present 'industrial' countries should try to resist its inevitable shift to the developing countries. Instead they should build up their service sector to offset the trend.

The credentials of both authors are impeccable. Dr Julius has worked in industry: until this summer she was chief economist at Shell and is now chief economist at British Airways. Mr Brown was an economist at the Bank of England (which is noted for its research work on British industry) and is now visiting Fellow at the Manchester Business School.

The argument they develop is so important that it is worth explaining in some detail. They start by pointing out that there are two great global shifts taking place. One is a shift within industrial countries from manufacturing to services. The impact of this on manufacturing jobs is made worse by a second, geographical, shift - the movement of manufacturing to the developing countries.

People who argue that manufacturing is special usually do so on three grounds: productivity in manufacturing is higher than in services, so any shift to services will reduce incomes; manufacturers have higher export content, so a shift to services will lead to balance-of-payments problems; and manufacturing helps to create growth and jobs in other sectors. The authors destroy each of these arguments in turn.

First, they show that traditional measures of productivity neglect differences in hours worked and levels of quality, and, if you allow for these, productivity in services is probably rising as fast as in manufacturing. They also show that people in services are happier and better paid - a KPMG survey this year of the 100 largest companies in Manchester found that workers in leisure and the media had the highest salaries and those in manufacturing the lowest.

Second, they point out that international trade in services is growing faster than trade in manufacturing, even though there are greater barriers to service trade than merchandise trade.

Third, they demonstrate that, although manufacturing has generated great productivity gains in the past, in most industries that phase has peaked. Many of today's hi-tech products are in the service sector: communications, transport, finance and entertainment. So even if manufacturing once had special growth-inducing characteristics, this is no longer true, and will be progressively less true in the future.

Meanwhile the developing world is rapidly industrialising. It is estimated that by 2020 there will be more cars in what are today's poor countries than there will be in the rich ones. As these low-wage countries industrialise, our comparative advantage will shrink and the jobs that we retain in manufacturing will be low-waged even if we continue to increase productivity rapidly. In the last century agriculture raised its productivity very quickly, releasing labour to work in factories, but agricultural labourers remained at the bottom of the pay scale.

Will the service sector create enough high-quality jobs? The authors reckon that employment in manufacturing will fall to about 10 per cent or below in most mature industrial countries within 30 years, falling fastest in countries where employment in manufacturing is currently the highest: Germany, Japan and Italy. But if the new service jobs are to be of high quality, we have to improve education levels. Instead of focusing on jobs, Western governments should focus on people, improving the flexibility and quality of the labour force so that we have people who can do the complex, high-quality jobs that the new service sectors will require.

Well, that is the thesis, and a compelling one it is. And it has several implications for this country. The first is that we should recognise that we are potentially well placed to take advantage of the two great global shifts. We have, so to speak, got much of our de-industrialisation over early - it is the Germans and Japanese who are really threatened by competition from the newly industrialised countries. Having a relatively small manufacturing sector is a strength, not a weakness. Further, much of this manufacturing is also highly customised - it is craft-based with a high skills content - and so less vulnerable. We also have a vibrant service industry sector, which we know can create jobs very fast.

But if we are relatively well-placed from a structural point of view, we still face an enormous adjustment. We must recognise that manufacturing will inevitably be much smaller a generation from now, and that there is little we can do about this. It is not only nostalgic, but also destructive to pretend otherwise. In future we must play to our strengths: activities in which we have a comparative advantage because of our culture and ingenuity.

These include finance, communications, the media, entertainment, tourism, the arts. Nowadays, Messrs Clarke and Smith, such strengths include even the law. When you chose to be barristers, the law was a UK profession. We now export more than pounds 500m a year in legal services.