Economic development and deindustrialization
Contents |
Does Manufacturing Matter?
Measurement Issues and Interpretation
- There is a theory that labor productivity gains are faster in MFG than services which will result in the costs of manufacture falling faster relative to services and so the share of mfg employment will fall as companies do more with less.
- Measuring services is difficult because there is no output. Service for instance is qualitative.
- Can be due to changing income structure. As people become wealthier and greater proportion of income goes on services. Is Britain therefore a wealthier nation. Contrast with developing nations whose GDP will rise faster and be skewed towards manufacturing.
- Decline of mfg could also be just more activities subcintracted out to services and get reclassified as such. But evidence is mixed. It can work the other way when TV's replaced the service of movie theatres. It may also reflect uncompetitive manufacturing companies going out of business.
The trends
Only in the UK since 1960 has growth of mfg been less than services.
For Kaldor MFG acts as the engine of growth as it exhibits increasing returns whereas services only constant returns although this is disputed. But growing economies will tend to invest more and improve processes and products.
In the UK mfg controbuted 13.3% less in 1993 than it did in 1960 and 19% in employmemt. In Europe it was 9% and 7%.\
Causes of Deindustrialization
- Market imperfections- lack of supply side, unionization. Govt interference
- Chronic underinvestment and lack of industrial policy
Free Market - Publis sector has crowded out jobs in the private and mfg sector. By getting tough with unions restrictive practices increaded labor productivity (Crafts 1996, Eltis 1976,1996). Howevr was this just an intensification of labour. eg. getting same output from fewer workers.
Keynesian - Failure to manage and regulate the economy and train and invest. e.g manuafcaturing net investment has been falling gradually since 1960 and went negative during the early 80's. So a skills deficiency and a lack of investment and capital stock that other countries had led to a failure to compete.
Policies to reverse deindustrialization
- Devalue currency and interest rates
- Target growth and jobs not interest rates and inflation
- Union practices have little impact given that there are few real competitors and product quality and relationships are more important than price.
Recession and economic revival in Britain
In the past the economic targets were Growth and Employment. Latterly the focus has been on Inflation and Interest Rates from which Growth and Employment can happen. Regulation would cause distortions and instability and disequilibrium. Crafts (1990) said that interventionist and protectionist policies probably reduced growth in the long run and conversely the supply-side policies of the 80's increased long term growth.
Comparative economic performance
The unemployment and growth patterns of the 1930's and 1980's in the UK look broadly similar and it could be argued that based upon the same counting method unemployment was worse in the 1980's
Policy during the 1930's
A fuller discussion can be found below but the depression in the UK was milder because it had not grown as fast as the US during the 20's and was not impacted as much by the collapse in agricultural prices. An average 2pc decline compared with 6pc for the rest of the world. This could be accounted for by the suspension of the Gold Standard and devaluation. Interest rates were set to meet domestic not international conditions i.e. Cheap Money There was also an increase in the level of protectionism that may have had a beneficial impact. The UK was also lagging technologically behind the US so there was room for catch up without causing any overheating. The automatic stabilizers such as unemployment benefit helped maintain demand.It has been argies that these measure however lacked policy coherence.
Productivity growth and long run productive potential
Crafts 1990 said that macroeconomic policy of the 1930's led to poor productivity. But under conditions of underutilization a policy of expansion will increase demand for what otherwise would be unused resources. Better misallocation than unallocated. The picture is one therefore of effective macro economic policy (expansion of demand) but flawed industrial policy (no effective competition policy and no initiatives were implemented piecemeal)
In the 1980's the focus was eliminating the misallocation and redistribution effects caused by endemic inflation through the control of the money supply. This meant hat demand had to be reduced in the economy through tax rises and lower government expenditure. The problem was that this was enacted at the same time as a world slow down and rising input prices. Also the correlation between the supply of money and inflation was not as close as one would expect (probably commodity prices skewed it) The result was the government in the short run did not see much return for its policy enactments. Later tax cuts boosted the economy and with a upturn in the world economy there was even a boom that bust in the 1990's primarily caused by an overvalued pound. Although growth and productivity grew during the period it may not be as high given the pain that had to be endured for the years ahead of that. However, it could be argued that it did lay the foundation for a prolonged grwoth period lasting for 15 years.
The similarities and differences between the 2009 global economic recession and those in the 1980s and 1930s. Is deindustrialisation a positive or a worrying sign of weakness?
Commentary
For all the similarities between 1930’s 1980’s and late 2000’s recessions in terms of the causes, impact, policy responses and recovery there are as many dissimilarities. I tried to construct a rough grid to compare the general themes as they relate to the UK. Feel free to criticize it.
What stands out in each recession was that they were a global phenomenon outside the control of the UK Governments but also exacerbated by their policies at the time. In the 1930’s the UK had not boomed like the US in the 1920’s but was impacted by the collapse of the US economy in the 1930’s. The policy mistake here was the UK rejoined the Gold Standard at an overvalued currency rate. In the 1980’s the UK was hit by Oil price rises and a slowdown in the world economy at the same time it was trying to deal with a high levels of government debt and expenditure, but slowed down the economy too much. In the 2000’s the UK Government increased public expenditure and ran higher deficits during the growth period, which left it no room to applying an expansionary fiscal policy when the US-initiated Financial meltdown took root.
In terms of the impact of De-industrialization I offer some pros and cons Some benefits:
- It is easier for UK service-based industries to compete and gain market share than for manufacturing companies to do the same. E.g. Foreign companies cannot compete against UK-based ones when it comes to restaurants, plumbing, UK-based tourism, etc. Service industries can be labour intensive and less prone to automation like manufacturing companies (Although in an increasing ‘self-service’ economy that may not be true.
Some possible consequences:
- Balance of Payments: If manufacturing goods are imported and not reciprocated by the export of financial and other services then currency devaluation or asset sales need to make up the balance.
- De-skilling. It can be argued that in some cases service jobs require less training and skill for those employees who would otherwise be earning their living in manufacturing. The consequence of this is more competition for the same jobs and lower wages.
- Over reliance on one sector may cause instability: An over reliance on the service sector can lead to deeper recessions compared with more balanced manufacturing/service sectors. The recent UK recession was greater than some countries because the collapse of the banking sector impacted jobs and tax revenues.
- The extent to which Britain is deindustrializing is open to debate. Although only 10%-12% of employees are now employed in manufacturing, it disguises the fact that output per employee is significantly higher and the extent of de-industrialization may be exaggerated.
