Decline in Manufacturing Sector the United Kingdom during 1970-2000 - Report Example

Decline in Manufacturing Sector: A Study of United Kingdom during the period 1970-2000 Introduction The United Kingdom manufacturing sector is diverse consisting industries ranging from aerospace, automobiles, chemicals, etc. In the year 2000, 4.14 millions Britons were employed in manufacturing sector mainly aerospace industry with revenues of US$12.8 billion and 1,500 companies in United Kingdom. Construction industry is also increasing dramatically with nearly 1.8million Britons employed in construction.1 The UK’s manufacturing sector is improving dramatically in past decade or so after 30 years of resistance. Between the years 1970 – 2000,2 the United Kingdom experienced steep fall in the manufacturing sector bringing the average annual rate of 0.18 %.( Cameron, et.al.1997:7) The manufacturing plays an important role in determining economic activity and creation of wealth in the United Kingdom as it accounts for 3/5th of all exports from the UK, 1/5th of total domestic output, employs 1/6th of the total workforce in UK, cause for the various types of jobs in other service sectors, and is the major contributor to innovation and technology.3 Kaldor’s ‘flying wheel of growth’4 described the manufacturing sector as driving force for sustainable regional development through output, employment, trade, investment performance and its potential for productivity growth and technological progress. According to Coates, manufacturing sector is the key strength to the prosperity, employment and growth internally and externally. (Andy and Tomancy, 1998:169) Basing on the above stats, it is necessary as to assess what caused the decline of such diverse manufacturing sector in United Kingdom which caters to the need of nearly half of the population. Causes for the decline The decline was not only in UK, it was also visible in some major developing countries. The graph shows that the share of manufacturing in GDP was on declining trend from 1973 to 2000. The figure presents that G7 countries were facing manufacturing crisis during that period and the worst affected was Italy. The United Kingdom was affected because manufacturing sector accounted for 1/3rd5 of the total economy output. Many factors have been attributed to this downtrend in United Kingdom, some of which may be changes in exchange rate, macroeconomic policy and industrial relations law.6 The other causes which lend support to the cause of decline in manufacturing sector are- Changing pattern of domestic demand – There was a significant increase in the rate of disposable income as expenditure increased on luxury goods and other wide range of services which reduced the demand for domestic goods. Globalization played a spoilsport in UKs economy as most of the major players of UK economy shifted their base to low cost countries. Introduction of innovative methods and products with technological improvements were welcomed thus contributing to long term decline in prices of manufactured products. This decline in prices reduced the share of manufacturing sector in total GDP resulting in closure of some of the manufacturing companies. The UK in the process of meeting the consumer demand imported variety of products on a very large scale, which led to trade deficits. UKs weak trade performance during this period was another major cause of decline in the sector.7 This was due to all this developments that Britain was nicknamed as “sick man of Europe” as it was overtaken by the major countries of Continental Europe in terms of GDP. The above causes also led to the increase in unemployment and inflation heading towards 25% which in turn led to the stock market crash. The above graph shows that there has been drastic decline value added share UK worst affected among European Countries with the decrease in value added economy from 34% to 16% approximately. This trend invariably affected the employment rate among with employment rate falling from almost 32% to 18% approximately. (Brooks and Robinson, 2003:12-19)8 UK during 1970 – 2000 During this period, the UK economy suffered huge loss due to manufacturing crisis which drastically affected the GDP and productivity. The process of de-industrialization was rapid in UK during this era as compared to any of its competitors. The rate of employment further deteriorated in this period when most of the countries actually progress rapidly. The rate of employment decreased in manufacturing sector between 1966 and 1986 and share of total civilization employment further declined from 34.9% to 22.5%. This was one of the reasons for massive deindustrialization of UK.9 The sector has always been regarded as the source of employment for common people with 7 million employed in 1921 to 8 ½ millions in 1960s. Initially at the start this period, North West, Yorkshire, Scotland, and Northern Island there was absolute and relative decline. The clothing industries recorded decline in employment from 397,000 in 1971 from 683,000 in 1921, a decline of 285,000. Decline in employment for manufacturing sector was on high with 37,00010 persons in Spinning and weaving industry, 55,000 thousand in clothing, 32,000 woolen and worsted, 56,000 thousand in Motor vehicle industry, 50,000 in other machinery industry, 36,000 in iron and steel industry, 30,000 in other mechanical engineering industry being the major sufferers during 1971-76. (Law, 1981 :109-120) Mrs. Thatcher tightened the macroeconomic policies, but did not help as the economy busted dramatically which was mostly due to drop in commodity prices and financial deregulation, tightened monetary policy cause the inflation to rise. Britain collapsed during the beginning of 20th century, as by 1914, US and Germany took over the United Kingdom as the richest country. Then during the European Golden Age11, wherein most of the countries flourished during 1951 – 1973, UK’s GDP stood at 2.24% as compared to France (4.92%) and Germany (5.11%). This shows that UK was going through a very bad phase of industrialization due to manufacturing crisis. Regarding the GDP per Capita, UK was far below all the major economically developed nations during 1950-1996 which shows that UKs GDP per capita has come down effectively during 1973 – 1996 with France, Germany and US surpassing the United Kingdom. (Nickell and Reenen, 2001: 3-7) The manufacturing crisis led to slow GDP growth during this period and in mid 1980s most of the figures were in negative and inflation rate was high which can be seen in the figures below. Decline in manufacturing also led to increase in unemployment ratio. All this factors combined together, high inflation, slow GDP growth, unemployment, etc. led to slow economic development of United Kingdom during this period. GDP Growth (%pa) Inflation (GDP Deflator) (%pa) UK Unemployment (%) Conclusion The slow rate of GDP, rise in inflation, change in exchange in rates, change in trade methods after the entry into Common market, high import by the country resulting in lesser exports, etc. are some of the factors and major players in contributing the decline in United Kingdom manufacturing sector during 1970 – 2000. UK economy suffered greater recession than anyone during the period when most of the countries in Europe were making great progress which was also called as European Golden Age. It is believed by most of the economists that United Kingdom was bad at manufacturing as it included huge costs of production as compared to other nations, which gave their competitors the upper hand over them. At his backdrop it can be understood that United Kingdom has experienced lot of difficulties in developing itself to where it stands today. Manufacturing can be considered as the main contributor to the prosperous economy of United Kingdom. Automobiles, chemicals, aerospace and many more consumer products are the source of employment for millions of unemployed in United Kingdom. The United Kingdom receives 1/3rd of the total economic output from manufacturing sector; therefore it is necessary to lay much emphasis on this sector. Recent trends have shown that United Kingdom has made impressive improvement after the shocking performance during European Golden Age. This can be seen from inflation trends of United Kingdom as compared to altogether G7 nations12. The rate of inflation has come down due to effective monetary policies and economic reforms to combat the crisis. Some of the measures include improved access to finance for SMEs, tax credit for research and development, recognition and public support for growth, funding for selective assistance to manufacture at regional level, etc.13 Manufacturing should be dealt with utmost importance as it is the source of research and development through funding, if manufacturing stops, R&D stops and thus new technological innovations will not take place, thus declining the entire economy. References 1. Brooks, Richard and Robinson, Peter. “Manufacturing in the UK”. 2003, Institute for Public Policy Research, London, p. 12-19 2. Cameron, Gavin, Proudman, James, Redding, Stephen “Deconstructing growth in UK Manufacturing” 1997, Nullfield College, Oxford, Bank of England, p. 7 3. Cameron, Gavin, Proudman, James, Redding, Stephen “Deconstructing growth in UK Manufacturing” 1997, Nullfield College, Oxford, Bank of England, p. 8 4. George, Desmond Kenneth, Joll, Caroline, Lynk, E.L, “Industrial Organization: Competition, Growth and Structural Change” (1992), Routledge, p. 7) 5. Law, Christopher M. “Regional Employment Changes in Manufacturing Sector” British Regional Development since World War I, 1981, Routledge, p.109-120 6. Nickell, Stephen and Reenen, John Van “Technological Innovation and Economic Performance in United Kingdom” 2001. Council of Foreign Relations, New York., p.3-7 7. Pike, Andy and Tomancy, John “The political economy of manufacturing change in UK economy” Rick Delbridge and James Lowe, Manufacturing in Transition, (1998), Routledge, p.169 8. Prof. Joe Nellis and Catarina Figueira, Research Fellow of Economics Group “Is there a future for UK Manufacturing” Management Focus, Cranfield School of Management, p.19-21 9. Prof. Joe Nellis and Catarina Figueira, Research Fellow of Economics Group “Is there a future for UK Manufacturing” Management Focus, Cranfield School of Management, p.19-21 10. Prof. Joe Nellis and Catarina Figueira, Research Fellow of Economics Group “Is there a future for UK Manufacturing” Management Focus, Cranfield School of Management, p.19-21 11. Prof. Joe Nellis and Catarina Figueira, Research Fellow of Economics Group “Is there a future for UK Manufacturing” Management Focus, Cranfield School of Management, p.19-21 12. Sentance, Andrew, Member of the Monetary Policy Committee, Bank of England. ‘UK Monetary Policy: Good For Business?’ Hosted by Dow Jones at Tower 42, London, 10th July 2007. 13. United Kingdom. Encyclopedia of the Nations: Europe (2008). http://www.nationsencyclopedia.com/economies/Europe/United-Kingdom.html Read More