Robert Rowthorn

["Ian Murray" <seamus2001@xxxxxxxx>]

Manufacturing matters

Robert Rowthorn
Monday November 5, 2001
The Guardian

The downturn in the US economy has destroyed the myth that information
technology means the end of the business cycle. Now is a good time to
take stock and compare the longer-term economic performance of Britain
and America. In order to do so, it is important to understand the
importance of manufacturing.

Productivity in our service sector is below the American average, but
the gap is closing as Britain becomes a more efficient producer and
develops high value-added, knowledge-based services. In 1990 the UK
had a trade surplus of £7bn in insurance, finance, computing and other
knowledge-based services. By 2000 it had risen to £28bn.

The picture is different in manufacturing. Britain seemed to be
catching up for a time but has now fallen back again. Between 1995 and
2000 output per hour in US manufacturing increased by 27%, compared
with 11% in this country. American manufacturing workers produce about
twice as much as British counterparts.

The contrast is not a recent phenomenon but goes back to the oil shock
of 1973. British manufacturing never recovered from this shock but for
the Americans it was merely a hiatus. Since 1973, British and American
manufacturing output have increased by 14% and 114% respectively. The
US experience gives the lie to the claim that manufacturing is of
vanishing importance in advanced economies.

Although it has tailed off a bit recently, labour productivity has
grown rapidly in British manufacturing since 1973. Yet output has been
almost stationary. American firms now produce more than twice as much
with the same number of workers as they did in 1973, whereas British
firms produce almost the same as before with only half as many
workers. Productivity growth in Britain has been almost entirely of
the labour-shedding variety. This has perhaps been the greatest
failing of our economy and is the area where we have most to learn
from the American experience.

Does the weakness of British manufacturing matter? Why can our country
not become a highly specialised service producer, importing almost all
of the manufactured goods we require and exporting knowledge-based
services to pay for them? This is a theoretical possibility. In
practice there are objections. Despite their impressive performance,
knowledge-based services account for only a fraction of total export
earnings, less than a third of our receipts from manufactured exports
and only a quarter of our expenditure on manufactured imports in 2000.

It seems unlikely that knowledge-based services will ever be large
enough to compensate for the weakness of our manufacturing sector.

There is also the issue of diversity. Many economic events are
inherently unpredictable. Activities that seem full of promise may be
buffeted by unforeseen shocks or go into unexpected decline. To hedge
against this type of risk it is wise to maintain a diversified export
base that includes manufactures and services. The growth of service
exports is to be welcomed, but complete reliance on such exports would
expose us to unacceptable risk. For reasons of economic security we
need a strong manufacturing sector.

Finally, there is the regional question. Although most parts of
Britain have benefited from the growth of knowledge-based services,
this expansion has been skewed towards the south. Few of the new
services are located in the areas hit by the decline of manufacturing
employment. If the manufacturing decline continues, the task of
reviving these regions will be even more difficult.

For reasons of national solvency, economic security and regional
development, the weakness of our manufacturing sector is a cause for
concern. The old balance of payments problems, which for so long
haunted us, may yet return. The old north-south divide is still with
us. Both are rooted in our poor manufacturing performance.

· Robert Rowthorn is professor of economics at the University of
Cambridge