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  • The Invisible Hand

What Explains the Destruction of the UK Manufacturing Sector?

The changes in the manufacturing sector are vital in explaining the current state of our economy and it is vital modern economists understand this.

The decline of the manufacturing sector explains much of the structure of our modern economy. Problems today such as poverty and social dislocation are often caused by structural unemployment in the manufacturing sector. This is a particularly problematic issue because these problems persist through generations and once we were the workshop of the world and many have struggled to accept Britain’s changed economic position in the world. This article explains what caused the most significant change in the structure of the UK economy since the Industrial Revolution and how we can deal with changes in our economy in the future.

It was in the 1980s when the phenomenon known as globalisation began to occur. It began in Japan when they experienced an economic miracle and saw a rapid expansion in technology and car industries. Globalisation then extended to the Asian Tigers and more recently Eastern Europe. Unfortunately for the UK these countries had much cheaper labour costs and in the case of Germany and Japan they are more productive. It became impossible for UK firms to compete. Compounded with poor management and a lack of skills in manufacturing, Britain chose to import these much cheaper goods. This is seen in a persistent trade deficit in manufacturing since the 1980s. Fundamentally, the reason Germany survived these developments was because they were more efficient and highly skilled. Britain could have survived international developments but an environment was created where any weaknesses could be fatal and industry had to be at the top of its game. Globalisation acted as a catalyst for industrial decline. It would have probably still occurred without globalisation, but this dramatically sped up the process

Margaret Thatcher is notorious for her suspicion of heavy industry and her aggressive stance towards trade unions. She accepted that manufacturing should be allowed to fail and be replaced by a service sector economy. She didn’t accept that a developing country could still have a strong manufacturing sector and didn’t acknowledge the social problems this collapse would create. Manufacturing did need reforming and its productivity improving but the government could have helped strengthen this industry as Germany did rather than condemn it to failure. Back in the 1980s, the government could still control interest rates. Thatcher used this power to raise interest rates to 17% to control inflation by plunging the economy into recession. High interest rates made it almost impossible for manufacturing firms to invest and when the economy was plunged into recession in 1980 manufacturing firms’ demand dried up. Fiscal policy provided no support for manufacturing and subsidies were cut for every sector except defence. The government accepted defeat in this regard. While it would have been hard to have a globally competitive manufacturing sector, it was still possible.

Interestingly, although employment in manufacturing increased, output actually rose slightly which points to improving productivity due to greater use of machinery. This is to a large extent true, but compared to other countries managers in the UK were more sceptical about technology so underinvestment in this regard limited the ability of the UK industry. There is an argument that automation replaces labour, but the sector has more to lose from not embracing technology and those jobs will be lost eventually anyway as Britain struggles to remain competitive in international markets.

Overall, there were a few integral weaknesses in manufacturing such as poor management and training. However, it was international developments and government policy which made these weaknesses significant. Britain still has a small, but strong, highly skilled manufacturing sector. This success could have been extended to more types of manufacturing if Britain was more productive and adaptable.

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