Economics of the White Paper: Manufacturing

This is the first in a series of short blogs around the economics of the White Paper. 

It might often be exaggerated but the steeper decline of manufacturing in the UK relative to many other advanced nations is real enough. Unit wage costs are significantly higher in nations like Germany, Sweden, Finland and France where labour and product markets are also more stringently regulated.  

So, if it’s not the usual suspects of wage and regulatory costs to blame, what is it about the UK economic model that’s so hostile to manufacturing? In a recent paper on manufacturing and constitutional change for the Red Paper Collective I argued that the following factors surely apply: 

1.    Lack of political support: UK political class has been hugely complacent about the decline of manufacturing and ability of services to sustain growth and create decent jobs. Industrial policy has been inconsistent and erratic. Indeed, for years prior to the financial crisis, simply using the term risked the ridicule of senior policymakers. Monetary policy has tended to be set to benefit the City and at times – the early 1980s in particular -  has simply been disastrous for manufacturing;

2.    Short-termism: the short-term nature of the UK financial system disadvantages manufacturing firms who are unable to access the patient, committed capital necessary to sustain crucial investment in R&D, capital equipment and people.

3.    What Robert Skidelsky describes as the ‘imperial overhang’: UK firms, used to exploiting captive markets, were wholly unprepared for, and unable to deal with, globalisation; and,

4.    Ownership and control: among advanced nations, the UK is quite unique in its relaxed attitude to ownership. Other nations identified by the current Chancellor as ‘more competitive’ operate regimes less accommodating of foreign purchases of indigenous firms. Migration of ownership leads to loss of control and decision making and key functions such as R&D. It also leaves workers more vulnerable to redundancy as it’s much more difficult for owners to close domestic workplaces.

 In short:

 “Other nations have been much more successful in building models that support long-term investment; workers have direct input into decision making, finance is more knowledgeable and supportive, political commitment is strong and enduring.  Other EU member states retain much higher proportions of procurement spend domestically and give more to manufacturing in state aid”.

I went on to argue that:

“…there are no quick fixes under any constitutional scenario. The factors explaining Scotland’s relatively steep decline in manufacturing are systemic, with deeply embedded economic, institutional, historical and cultural roots. At risk of stating the obvious, it is how additional powers are patiently applied to overcome these problems that will determine manufacturing’s long-term future in Scotland.

 “It’s not credible to assume that constitutional change in and of itself will boost manufacturing output and jobs. Global economic forces have acted to reduce manufacturing’s share in all advanced economies. These forces, particularly the rate of productivity growth due to technological and process innovation, will continue to constrain jobs growth whether Scotland is independent or not. Bad domestic policy may help explain Scotland and the UK’s relative performance but it’s very far from the whole story.

 I then noted that:

“Under current devolved powers, the Scottish Government already possesses the ability to support the long-term future of manufacturing in vital areas such as skills (where it holds full powers), public procurement (powers limited only by EU Directives) and finance (powers are available as the establishment of the Scottish Investment Bank testifies, but it can be reasonably argued that budget constraints seriously limit effective action)”.

 

After citing a number of areas where policy could be more supportive of manufacturing, I concluded by arguing that:

 
“Maybe the greatest opportunity is constitutional change precipitating radical change in Scotland’s business culture. Freed from the dead hand of the City, it’s possible to see a new manufacturing and innovation eco-system developing in which firms can grow organically with committed – public and private – funding partners.  As investment horizons widen, management and policymakers may start to see the benefits in an approach which works for employees, communities, suppliers and customers as well as shareholders.”
 

I guess this is why I find both the Scottish Government’s White Paper and the Economic Policy Choices paper that preceded it ultimately disappointing on the issue of manufacturing.

 

They do promise much: in the chapter in Policy Choices entitled ‘Boosting Competitiveness and Reindustrialising Scotland’ the case is set out for why ‘Scotland like the rest of the UK needs to rebalance…creating a greater role for manufacturing and securing more private investment’. The importance of manufacturing to quality employment, economic stability, equality, innovation and regional growth is correctly emphasised. The commitment seems genuine and strong.

 
However the analyses of why industrial decline has been steeper in the UK than other nations and what might be done to reverse the trends are pretty inadequate. More words are expended on the benefits (all justified) accruing from a ‘strengthened’ manufacturing sector than on how it might be strengthened in the first place – and, pertinently, exactly how additional powers flowing from independence might be applied in this respect.
 
But it’s the refusal to take on the role of finance that’s most problematic. Although Policy Choices argues that the interests of the City have been catered for to the detriment of manufacturing, there is no developed assessment of the failure of UK finance to support industry or of the disproportionate amount of resources (e.g. STEM graduates) it absorbs.

The White Paper could have been much, much bolder on structural reform of the banking sector, new public investment vehicles and how they might be funded and corporate governance reform. Models of independence or enhanced devolution which seek to retain or replicate essential elements of the current system (e.g. predominant role of finance) are very unlikely to deliver manufacturing growth. It’s interesting that one of the few clear policy priorities of the Scottish Government remains cutting corporation tax; a policy that’s likely to prove actively detrimental by further embedding short-termism and pressurising the investment subsidies which benefit manufacturing over finance.

Stephen Boyd - STUC

[STUC discussion papers on manufacturing 2007 and 2011. Presentation to National Economic Forum 2010] 

Next post: industrial policy – what does it mean?