Dr Leslie Budd, reader in social enterprise at The Open University Business School, ponders the challenge of re-manufacturing manufacturing’s public image and dispelling myths about its role in the future of the UK economy.
In 1988, Edward Herman and Noam Chomsky published their book Manufacturing Consent: The Political Economy of Mass Media which investigated the concept of news media as business. The title however inspires a different and timely debate in my mind; that of challenging the consent about manufacturing, especially in the United Kingdom.
The arguments about the role of the manufacturing in an advanced economy are well documented and rehearsed but in spite of the heroic efforts of business groups, industry associations, trade unions and some policy makers, there still seems to be a common consent that British manufacturing declining.
It is more than a little surprising that, in the interests of re-balancing the UK economy in the aftermath of the financial crisis and global recession, manufacturing is not the centrepiece of current economic policy. The kind words of the Prime Minister about a number of manufacturing companies notwithstanding, if the government budget is to balance by 2015 then manufacturing will have to play a central role in boosting the performance of the economy. According to government figures, investment will have to grow by 44%, while export will have to grow at 4% per annum with a concomitant above trend annual reduction in imports. Yet at the level of public commentary British manufacturing seems to remain a poor relation, particularly when compared to its European counterparts.
Why is this so? There are three common consents about manufacturing that need challenging:
1.Manufacturing is part of old industry, services are the new economy:
This view stems from the all too frequent assertion that manufacturing and services are distinct activities. They are not: they are complementary and symbiotic. For example, computer software is seen as a service but it is also a manufacture. The UK is one of the world’s leaders in computer gaming whose software is manufactured in the games that consumers access around the world. As both the manufacturer’s organisation, the EEF, and the Confederation of British Industry (CBI) point out, as the development of outsourcing and global supply chains shifts a number of internal activities that had counted as manufacturing are measured as services once they become external.
2.The terms of trade for manufacturing determine its role in the economy:
The terms of trade are the concepts that measure the value of the ratio exports to imports. The exchange rate is the relative price of goods and services that are traded between nations. A lower exchange rate makes exports cheaper and imports more expensive and vice versa. As manufacturing accounts for 60% of UK exports, a competitive exchange rate is deemed an imperative for the balance of payments. However, the exchange rate is an outcome of trade and not its determinant. It is apparent that it is just not the price of traded products which is important but their quality, technical sophistication and so on, as the example of Germany forcefully demonstrates. The other complexity is the development of global commodity chains and production platforms so that there is often a high import component of many exports from, say, China which means that relying on measuring the terms of trade of manufacturing leads to underestimating its impact on the economy. One example is the shoe industry, with brands like Church’s and Loake using parts made in China but the higher quality finishing being done in Northampton.
3.The UK should only specialise in high value-added manufacturing:
One of the current myths is that if the UK is to have a manufacturing capacity, it should only specialise in high value-added activities. Emerging economies may have a unit cost advantage in lower value-added activities but once the demand and supply elasticises then the initial cost advantage may lessen. Moreover, domestic demand for the lower end of the market is an important source of revenue for manufacturing. For example, the products of the high-end hi-fi brand Quad is manufactured in China, whilst Arcam produces most of its output in the UK, whilst the medium range Cambridge Audio combines both. What the value-added myth overlooks is the importance of co-location of activities and the external benefits this generates along the value-chain. All the evidence shows that the pursuit of absolute rather than comparative advantage produces less economic welfare.
What is to be done? Detailed policy proposals and plans have been advanced by British industry and business groups which have elicited strong support in debates in the House of Commons. The EEF proposal for a national investment bank for manufacturing, with the possible addition of financial assets as part of its credit creation, is a very important intervention. Given the changing environment for higher education, there is also a strong argument for setting up a few manufacturing grandes ecoles, along French lines. But just as important is a national effort to change the culture of how manufacturing is viewed, and information about its centrality to a modern economy disseminated, in all forms of media. Despite efforts to promote the importance of manufacturing the message does not seem to becoming embedded in the public realm. The Financial Services Authority (FSA) has a statutory duty to educate the public about financial services. Perhaps a Manufacturing Production Authority (MPA) attached to a national investment bank could have a statutory duty to educate the public about manufacturing.