Will a dose of manufacturing do the UK economy any good?
A service sector led growth experienced by the UK cannot be a sustainable source of economic growth for a nation, nor can a purely manufacturing led growth for that matter. However, mismanagement in the structure of the UK economy can and has inevitably led to many socio-economic impacts. As the UK experiences deepening levels of unemployment, manufacturing has helped economies with large manufacturing bases like Germany where they have recently experienced the lowest level unemployment since 1991. Also, for a country where their trade deficit is larger than the GDP of Zimbabwe, we can learn from Germany who takes pride in the fact its current account surplus is greater than China as a proportion of its GDP. An export led growth can only benefit the economy by bringing sustained long term growth and rebalancing the withdrawals from the UK economy. Reestablishment of the manufacturing sector would provide that much needed catalyst solving the large regional disparities in unemployment between the north and the south of England and areas where there is a high concentration of unemployment due to factory closures. Whilst helping to break down the divide, it will provide secure long term employment for many of those left out of work due to structural change in the UK economy and provide that much boost to school leavers in the labour market.
There are traditional methods in which manufacturing could be boosted within the UK economy, for example subsidising the manufacturing industry or lower taxes paid by manufacturing firms who employed a certain amount of workers in the UK. However, this may be controversial amongst the public by prioritising one sector over another, especially with a Conservative government serving as a tool to the extreme right wing Jack Osborne. However, providing a joint venture scheme where opening up of new factories or industrial plants and estates is partially funded by government would be a more subtle incentive to boost manufacturing in the UK. This would allow firms not to bear the full financial burden of expanding production, and more importantly give them the confidence to start investing. A joint venture scheme where shares in the initial investment can be bought back by the firm after a certain number of years, will ensure firms are not be tied down by the government when making decisions. Although these plans have hints of Socialism, government intervention is the only way to restore balance in the manufacturing sector.
Starting from the bottom up
At first glance, these proposals of strengthening the manufacturing industry through government policy almost resemble the ones set out by Clement Attlee’s government which nationalised key industries. However, direct intervention from the government to strengthen the industry through nationalisation can only lead to problems suffered by China such as a lack of innovation and loss in efficiency. Thus, it could be argued that Jean Michel Severino’s theory of social policy, which is becoming a large proponent of main stream economics, can come into fruition. Conventional reasoning dictates that fiscal policy is the solution; however, through looking into countries such as Germany, social policy can also be the cure.
Education, Education, Education
The Conservative government, still resentful from the late 1970s, dealt a final blow to the manufacturing industry by downgrading engineering diploma in an announcement made by Michael Gove, the Education Sectary. To the anger of many renowned engineering firms, who still have manufacturing bases in the UK, the value of the diploma has been reduced from 5 GCSEs scores to a single GCSE score. Such drastic measures were to prevent schools from ‘playing the system’. However, rather than dealing with the deep rooted problems of target driven schools, it acts as an anchor in holding back students from exploring a new career in manufacturing.
Therefore, UK school leavers who choose not to go to UK university, join the queue outside the job centre; whereas, counterparts in Germany who are not looking to go in higher education are given an opportunity to leave school early and attend a well-run apprenticeship scheme. Students attend a Berufsschule (a vocational school) for half the week to learn the theoretical skills required and work in a part time paid job, in a real industry, to gain the practical skills for the rest of the week. This “dual system” provides a platform for young people to start work in specialised industries, where young and innovative thinkers can be bought into firms to increase efficiency and competitiveness. Hence, this will help reduce unemployment within the age group where unemployment has hit hardest. It has been a great success, as figures from Germany indicate half of school leavers will go into the apprenticeship schemes offered in one of 344 trades, resulting in youth unemployment being at 8.2% compared to 22.2% in the UK.
The close, harmonious collaboration between firms and universities in Germany has led to an increase in the innovative processes, suggesting German firms are leading the way in technological advances in the world manufacturing industry. This has not only been beneficial to firms but to universities and the students themselves. The partnership will provide vital funding for universities research and give students industry experience when they leave university. So how can such a model be adapted for the UK? This can be done through endorsement of engineering and technology course at university or possibly a revival of polytechnics.
An efficient set up of the current post-16 apprenticeship scheme will aid young people to starting work in the manufacturing industry; also reinstatement of the value vocational diplomas will go some way in pushing school leavers into the industry. An overall reform of the education system where young people are better prepared for working in industry rather than purely targeting the education system just towards going to university would see a larger expansion in the UK share of the world’s manufacturing industry.
Another way to develop growth is to explore overseas and learn from foreign successes. The success of manufacturing has brought Germany high, sustained economic growth and low unemployment. So how does Germany compete in the manufacturing industry against emerging markets like China where the price of labour is about 20 times less of that of Germany? The simplistic answer is the manufacturing of unique and high value goods in a niche market. This concept can be further explored using the Mittlestand model. The Mittlestand model comprises of small to medium sized enterprises that have been the hidden German economy. The success behind this model is that they provide high quality and reliable technological advanced goods, which the cheaper labour markets cannot simply offer. This has been done through long periods of investment into Research and Development, where it has been seen that they outspent their competitors on R&D to a ratio of 2:1. As Prof. Bernd Venohr claimed “to keep moving, not to say goodbye, not like the gold diggers in the United States, who dug gold and left the town”. He underlined the need to upgrade, not seize production, and instead of using the example of gold diggers in the US, it wouldn’t have been so wrong to use the closure of many of the British Factories in the early 80s as an example. It’s not so much of a policy that the government can force upon the firms themselves but a policy that should be taken up voluntarily by firms. For example, for firms to not work towards short term profits in order to please shareholders, but working towards long term goals through investment in R&D. This can be seen in the Mittlestand model, as vast majority of the firms are family owned and involved no other parties, therefore not opening up to stock markets have allowed them to create something that will survive to be passed down to generations. As it was put by Peter Drucker “Profit is not an objective of a business, but a constraint”.
A quick fix for rising unemployment?
Deregulation of labour markets allows firms to maximise efficiency as they can create flexible work arrangements for workers to be used when there is work available. This will give confidence to firms for them to start hiring labour as they will not be tied down by contracts, more importantly it will give the unemployed a chance to get back into the labour market and build up lost skills they may lost due to a prolonged period of unemployment. Unemployment should not be seen as a burden on a country but an opportunity to increase the country’s productivity. Thus, German policy-makers planned to reduce unemployment figures via increasing wage and working hour flexibility. This created more temporary work and thus, there have been vast improvements in the employment figures. To supplement the increase in flexibility, there have been reductions in state welfare payments to create a greater incentive to work. Therefore, a deregulation of the labour market will mean that the unemployed will be earning money, the government paying out less transfer payment and mostly firms will be able to recruit labour on flexible arrangements. This should increase their confidence to expand production.
The sun still sets in paradise
In the final analysis, a combination of fiscal and social policies is required to encourage a large proportion of the UK economy to be formed of the manufacturing industry. This is because correct balance between manufacturing and services is needed to create sustainable growth, something which has been executed well by countries such as Singapore and Switzerland. Both countries have been commonly perceived to have achieved growth through expansion of the service sector, but it is not known that they have the 2nd and 3rd highest manufacturing output per capita. Thus, a perfect balance has been struck. Even countries such as Germany haven’t been seen not to correct the balance. For instance, their domestic demand driven services sector look to be their limiting factor when it comes to economic growth for the future. This was followed up by predictions from the OCED, of their growth falling below 1% by 2020. Where the UK learns from Germany about manufacturing, the Germans learn from the UK with regards to services. Major structural changes such as these, will need the government to be prepared to fund training schemes for workers who are wanted to enter the manufacturing industry to aid the process, already conducted by firms. Implementation of such changes will mean Britain will once again be the front runner in world manufacturing.
Contributed by Minuk Lee