REBALANCING THE ECONOMY : LESS PAPER, MORE IRON / THE ECONOMIST ( HIGHLY RECOMMENDED READING )

Rebalancing the economy

Less paper, more iron

Politicians want to boost British manufacturing. Easier said than done


Jul 7th 2011 | from the print edition

GEORGE OSBORNE has manufacturing, albeit of a rarefied sort, in his blood: his father’s wallpaper company furnishes the homes of the well-to-do. Still, the chancellor’s championing of industry (Britain must “make things again”, he keeps saying) is odd for a free-market Conservative, and a measure of how much the country has changed since the financial crash. In good times, politicians only faced issues of distribution: how to spend the tax receipts from a booming banking sector. They are now grappling with questions of production: where will, and should, growth come from? The popular answer is industry, rather than flighty finance.

This ardour for “rebalancing” is understandable. Although manufacturing, at around 12%, is still a slightly bigger part of the economy than finance, its proportion has halved since the early 1990s. When finance is measured together with business services, such as auditing and consultancy, the combination is a bigger share of GDP than manufacturing. After a revival last year, helped by sterling’s decline, industry is struggling again. On July 5th Bombardier, a trainmaker, announced plans to cut more than 1,400 jobs at its factory in Derby.

Unlike the British banks, whose combined balance-sheets dwarf the national economy, manufacturers do not require ruinous state bail-outs. Their wares have a plain usefulness that the frothier bits of finance cannot match. An industrial revival would scatter wealth around a country currently dominated by London and the south-east.

There are telling prompts abroad, too. As Britain slouches its way out of recession, Germany zooms by, propelled in part by its export industries.

Exactly how Britain can achieve this rebalancing is less obvious. Mercifully, no mainstream politician espouses a return to outright protectionism. Bombardier’s cutbacks come after it lost out to Siemens, a German rival, for a British government contract. Such lack of favour to a domestic firm would be politically unforgivable in some continental countries; in post-Thatcher Britain, it is normal, if unpopular.

The government’s other options for boosting industry are limited. Mr Osborne is funnelling some money into science and apprenticeships. He is backing new high-speed rail lines, which could provide some immediate demand for manufacturers. By supporting the regions outside London, where manufacturing is often located, his “enterprise zones” might also help.

Whether all this is enough to reverse the decline of manufacturing is doubtful. It may be that policy can achieve only so much.

Culture and history also help to decide the sector in which a country has a comparative advantage. Though Britain produced the Industrial Revolution, Germany has more recent form, with first-rate training of apprentices and decades of good relations between industry and labour. These cannot be replicated quickly.

Neither is it clear that industry is a safer bet than finance for Britain. On a recent visit to Downing Street, the foreign head of a multinational firm was asked by his hosts which country he thought had the better economic prospects, Britain or Germany. He chose Britain, arguing that its knack for finance and services would take longer for emerging economies to emulate than Germany’s industrial specialism.
Arguably all the government can do is consolidate Britain’s existing industrial strengths, which lie in sophisticated goods such as lenses, pharmaceuticals and space technology.

In a report on economic rebalancing published last year, the National Endowment for Science, Technology and the Arts (NESTA), in partnership with Oxford Economics, a consultancy, examined the viability and desirability of four scenarios between now and 2020. “Business-as-usual” would bring respectable growth but exacerbate regional inequalities and only slowly increase employment. A broad-based manufacturing revival—with the sector growing to 15% of the economy—would avoid these problems, but strikes the authors as implausible. More promising are scenarios where high-tech industry booms, or innovation drives growth. Even this will require the state to invest in human and physical capital and give business incentives to do the same. Losing Britain’s current specialism—by over-taxing and regulating the City—will be easier than building a new one.