Michael Martins is an economic analyst at the Institute of Directors.
The news this week of job losses at steel works, mostly in South Wales, owned by the Indian firm Tata, is a sobering reminder of the real impact global economic forces have on individual lives. It has also been used by his critics to suggest that the Chancellor has failed in his desire, announced in his 2011 Budget, to kick-start a ‘march of the makers’. But what if the premise was wrong in the first place? Should we really measure the strength of our economy by the balance between different sectors, and is the separation between manufacturing and services even a useful one?
‘Rebalancing’ has become George Osborne’s economic buzzword, both geographically, through the regional devolution embodied in the ‘Northern Powerhouse’, and in terms of economic activity, by trying to boost the manufacturing sector. These ideas are assumed to be positive, which implies that their opposite is negative: a monolithic, service sector-oriented economy centred in London makes the UK vulnerable.
Although the UK’s economy has long been heavily service sector-oriented, this is not necessarily a bad thing. While the division between manufacturing and services has becoming increasingly blurred, on average, service sectors tend to have more flexible labour markets and are better able to adapt to change. They are less susceptible to global economic forces because their reliance on other areas’ growth is lower. Rates of unionisation are lower, so firms are better able to negotiate their wage agreements at the local level and focus their efforts and resources on strategies they think will make them successful.
Manufacturing firms, on the other hand, have to invest a lot of time and money into their workforce and their production processes, and face longer time horizons. They tend to be reliant on other areas’ growth and must compete in a global marketplace where other governments might be more willing to give their competitors a hand.
Politically speaking, the term ‘rebalance’ is in large part a code-word for reducing the size of the financial services relative to services as a whole. The motivation is to guard against some of the excesses that were seen during the run up to the financial crisis, for which there were, in fact, many people, firms and ideas to blame. If this is what is really meant by rebalancing, then Osborne can point to more useful figures. The absolute number of people working in financial services has only increased by less than 1 per cent in the last ten years, whereas 13 per cent more people work in information and communication, for example.
The real reason that rebalancing an economy and devolving power are priorities likely has more to do with domestic politics, where the Conservatives are trying to win and hold more seats in former manufacturing heartlands, increasing the efficiency of public service delivery, and as an attempt to close the UK’s large and potentially dangerous current account deficit.
Domestic politics has also driven the effort to create a ‘Northern Powerhouse’ and the uptake of devolution. When local politicians are given power to make local decisions, they are likely better placed to spend their resources to the greatest effect while also becoming more accountable to their constituents.
Devolution benefits the UK’s economy in several ways. Its cities and regions are able to be more adaptable to their local needs and are more able to adjust their approach to suit local, regional and global trends. Much like the flexibility that underpins the UK’s service sector oriented economy, local democratic and economic choices should help some of the UK’s cities and regions prosper.
Osborne also benefits. By shifting accountability (along with the concomitant growing pains that no doubt some areas will feel) to local politicians, while being seen to be making positive steps away from centralisation and closing the UK’s democratic deficit, he has hedged a significant risk while changing the rules of the game to suit the UK economy’s place in the world.
On the other aspect of rebalancing, boosting manufacturing, the tendency to focus purely on numbers of jobs makes the situation look worse than it is. Rather than small-scale firms, large firms that compete globally tend to make up the manufacturing sector. Although the employment growth statistics might not show high growth because much of the work relies on increased access to technology, these firms tend to invest more, both in their people and in the tools that they use.
So while some of the aggregate and proportionate employment numbers have declined, these are not necessarily bad trends. They likely show that the strongest UK manufacturing firms have survived the longest and most painful recession in modern history. If anything, the size, proportion and composition of the manufacturing sector is something to be championed.
The desire to stimulate manufacturing goes hand in hand with not just devolution and political objectives, but also with closing the current account deficit. Manufacturing is a global sector. Much of what is produced in the UK tends to be bought overseas, bringing in much-needed currency. So while the trade balance has remained relatively stable, the main contributor to the current account deficit has been moribund EU growth, where returns on UK held assets have steadily decreased. Internationally held assets in the UK, on the other hand, have benefited from the burgeoning British economy.
Service sector firms, by contrast, tend to cater to local markets. It’s often said that barbers cannot export haircuts, and many jobs in the recovery have come in other skilled and semi-skilled occupations like accountants, waiters, and bartenders, which again tend to serve local economies. This shift places more pressure on the current account
So Osborne has changed some things in a more positive direction. Local circumstances are more able to dictate local economic growth priorities and decisions, while the service sector has become less reliant on finance. But if regional devolution has been the success of the rebalancing drive, the nostalgic focus on growing manufacturing as an end in itself has been largely a distraction. The UK’s future success will not be built on supporting uncompetitive manufacturing at all costs. Certain types of manufacturing can be, and are, successful in Britain, but it is not intrinsically better than the service sector. The sooner the Chancellor acknowledges this, the better.