When Will We Learn?
The imminent crisis in what is still laughingly called the British steel industry is being greeted just as other similar developments have been for decades – with consternation and anger, with concern for the implications for social cohesion in general and for workers’ families in particular, but with no recognition that this is just the latest episode in what is now a depressingly long saga.
As one British industry after another has either passed into foreign ownership or closed down, or – as in the case of the steel industry – both, very few recognise that this is not just a one-off but is part of the long and not so slow de-industrialisation of Britain.
As we emerged from the end of World War II, the UK’s share of world trade in 1950 was a respectable 10.7%. It is now just over 2%. Our share of trade in manufactures has fallen by a similar proportion.
Manufacturing accounted for 32% of national output in 1972, but that proportion is now about 10% and still falling. In Germany, the figure is 21%. No other major developed country attempts to maintain its developed status with such a low contribution from manufacturing industry.
Not surprisingly, we run a huge deficit in our trade in manufactured goods. Much of that deficit arises in our trade with the other developed economies of the European Union – the countries that, we are told, will stop trading with us if we leave the EU.
The consequence of the decline of manufacturing is that we have run a perennial trade deficit in every year since 1982. We have, in other words, traded at a loss and failed to pay our way in every one of the last 34 years. That deficit, the country’s and not the government’s, is of course the one that really matters – yet it is now so much part of the familiar economic landscape that it scarcely warrants a raised eyebrow.
How do we get away with pathetic rates of investment (a net rate of nil) and productivity growth (almost zero), and with running at a loss year after year? We don’t. We have to borrow from overseas and sell off our assets to foreigners to close the gap. We have sold over £600 billions’ worth of assets over recent years. This is a rake’s progress that cannot be sustained for much longer.
On the few occasions that the matter is raised, we are given reassuring answers. We can’t compete in manufacturing against low-cost, low-wage competitors, we are told – so how come the Germans can, and that some of those “low-cost” economies now enjoy higher living standards than our own?
Then we are told that it makes sense to concentrate on high-value activities like financial services rather than on dirty, smelly manufacturing. But doesn’t that leave the economy too narrowly based and isn’t it special pleading on the part of the City of London which in any case hogs all the benefits and leaves the rest of the country, in both social and geographical terms, scrabbling for a crust?
So, if we were for once to take these matters seriously, what is to be done? The first essential is to understand why de-industrialisation continues to gather pace.
The stark truth is that we can’t pay our way because we can’t persuade enough customers, either at home or abroad, to buy British-made products at the prices we ask for them. And that, in turn, is because it costs more to make goods in Britain than it does elsewhere. And why is that? Because we say that it should.
About 70% of the costs in manufacturing are domestic costs, such as the costs of labour and so on. Those domestic costs are translated into international prices by the exchange rate – and, in the end, we set the rate.
If the rate for sterling was higher, our goods would be even less competitive, so that our market share in international markets would fall further, as would profit margins on international sales. In the long run, if the rate is kept at too high a level, it will inevitably fall, but not necessarily to the point where we could start again with a level playing field.
If the sterling rate was lower, sales and profit margins would pick up – a lesson learned by many other countries which have grown at our expense. So, why don’t we learn from them, and manage our exchange rate so that it doesn’t prejudice our economic health?
The answer is that we set a high exchange rate because it seems to suit our interests – or at least of some of us. It suits those who hold assets, but it means that wage-earners are made to bear the whole burden of trying to improve competitiveness by accepting lower wages – a major factor underpinning widening inequality.
But the exchange rate is decided by the market, we are told – we couldn’t change it even if we wanted to. But if that were true, how is it that other countries have engineered lower exchange rates without difficulty and do so regularly? Just ask the Chinese, or Prime Minister Abe of Japan, who has brought about a depreciation in the yen’s value of more than 30%.
There will of course be much wringing of hands and crocodile tears over the steel industry, but there will be more of the same, continuing seven decades of decline, unless we face some hard facts and take the required action.
Bryan Gould
3 April 2016