Anthony Hilton’s Evening Standard article, Let’s get real about manufacturing, suggests politicians – and the public – need to realise manufacturing cannot deliver the rebalancing the economy so desperately needs. Hilton claims the real rebalancing we need is a shift away from debt-fuelled consumption towards savings and investment.
While there is certainly truth in the need for a reappraisal of our debt-fuelled model of growth of the past decade, Hilton misses some important elements where manufacturing is very important.
Firstly exports. It is true that the UK, along with many other developed economies is going through a painful but necessary retrenchment in private consumption and government spending as people and governments learn to live within their means.
But this is not true for the world as a whole. Indeed there are parts of the world where consumption looks set to boom as aspiring and increasingly affluent middle classes emerge in developing economies like China and India.
This is a real opportunity for the UK. If we can export more goods and services to parts of the world that are looking to consume more, we can help drive our own economic growth. This is a key part of the rebalancing story.
So who does the exporting in the UK economy? Manufacturers punch way above their weight. 48% of total UK exports in 2010 came from the manufacturing sector. And we are seeing growth. Goods exports to China in 2011q1 were up 26% over 2010q1. This is admittedly off a small base but shows there is large potential.
Over a longer timeframe what drives an economy’s long run growth potential? Expansion of its technological frontier through investment in innovation.
How does manufacturing look here? Well manufacturing accounted for 71% of UK business R&D in 2008.
Finally what about Hilton’s warning to politicians not to devote ‘too much time to the pursuit of the impossible’?
Well our competitors are showing us what’s possible. Germany is booming on the back of its exports to China where it has a stronger foothold than the UK.
Our competitors take seriously the need to create the right business environment for manufacturing to succeed. It isn’t about ‘perversely damag[ing] those areas where we are competitive’.
It’s about our tax system reflecting the realities of modern capital investment to allow our manufacturers to keep reinvesting in modern technology.
It’s about making sure our world class financial sector actually supports the real economy as well as the inter-bank trade so that SMEs aren’t citing access to finance as a barrier to growth.
And it’s about having a demand-led skills system that delivers what the economy needs and produces a consistent pipeline of skilled young people.
Even if you support Hilton’s premise, it’s hard to see how addressing these areas would distort the economy. But it would mean getting real about manufacturing.