Deindustrialisation - Business Environment

The decline in the importance of manufacturing has been termed ‘deindustrialization’by many economists. The following causes are put forward for deindustrialization.

Crowding out
The argument here is that the growth in the size of the public sector has been at the expense of the private sector. The resources that could have been used to expand the private sector have instead been used in the public sector, so that the public sector has ‘crowded out’ the private sector. This was a popular argument used in the 1980s to call for reductions in public spending. With higher levels of unemployment the argument loses its validity because it is not just a matter of using resources in the private or public sector they are lying idle. As a result the ‘crowding out’ argument is less popular now. It is also argued that the higher rates of interest which might accompany higher spending on the public sector discourage private spending. Again, there is little concrete evidence that lower investment results from higher rates of interest. It could be that investment falls because of lower returns on that investment, and the returns on capital employed have been lower in the United Kingdom than in other countries.

In terms of productivity the UK has not performed as well as other countries, as the mini case study shows. Low productivity has implications for international competitiveness. It can be offset by lower wages in order to stop costs from rising which might be passed on in the form of higher prices. Although the UK wages are relatively low compared with those of many of its competitors, they are not low enough to offset the low productivity levels completely. Alternatively the exchange rate could fall so that prices remain competitive internationally. Although this happened after the UK left the ERM, for long periods during the 1970s, 1980s and 1990s the UK exchange rate was high, and hence its international competitiveness was adversely affected.
International competition
Because of competition from both the developed world and the developing world, where wage rates are lower than the UK rates, the United Kingdom has lost markets. At home much demand for goods and services is met by imports.Internationally the United Kingdom has lost markets too, as the level of its exports has fallen. There is evidence of this from the UK balance of payments. For example,in the mid-1980s the United Kingdom started to import more manufactured goods than it exported for the first time since the Industrial Revolution, and there was awidening deficit on the balance of payments in manufactured goods. High exchange rates have not helped the situation and have contributed to the decline. It is argued that the United Kingdom competes badly in both price and quality.
The United Kingdom tends to specialize in sectors which do not have great export potential; its percentage shares in sectors like electrical equipment, computers and transport equipment are less than the EU averages. The energy sector is of great importance to the United Kingdom economy.
Research and development
In the United Kingdom the proportion of spending on research and development has not changed very much over the last 20 years. This is not the case for other countries. It is also true that in the United Kingdom a much greater percentage ofR&D is financed by government rather than private industry.
The educational system
The educational system in the United Kingdom is said to be biased towards the arts and pure sciences rather than applied scientific, engineering and business-type subjects. In the United Kingdom, 30 per cent of engineers have a professional qualification, while in Germany the figure is 70 per cent. Five per cent of UK retail workers have received training similar to an apprenticeship; in Germany the corresponding figure is 75 per cent. As far as international trade is concerned the United Kingdom also lags behind other European countries in its language training.
Level and type of investment
The level of investment in the United Kingdom is low. This means that the stock of capital may be too low and that it will be relatively ‘old’.
Non-price factors
Non-price factors include quality, design and after-sales service. The United Kingdom is late compared to other countries to take up total quality management.These techniques were started in the West but then taken up and honed by the Japanese and are now being used worldwide. Quality management schemes can only be successful if other conditions are right, like a well-trained and qualified and highly motivated workforce.
Skills shortages in manufacturing
Even in times of high unemployment, there are still skill shortages. In the UK just over one fifth of employers reported a shortage of skills in their workforce in 2004 and 20 per cent of vacancies were hard to fill because of skill shortages. Shortages exist within sectors as diverse as construction and childcare.
The financial system
It is often argued that the UK banks are less supportive of business than banks in other countries. In the United Kingdom, banks tend to offer only short-term to medium-term finance for industry; the only long-term finance would be in the form of mortgages. In other countries banks are large providers of long-term finance to industry through the purchase of stocks and shares.
Lack of qualified managers
It is argued that manufacturing has not recruited the best-qualified candidates for management, although management training can overcome this to some extent.
North Sea oil
The existence of North Sea oil has had a mixed effect on the United Kingdom. On the one hand it has led to an inflow of cash which has helped the balance of payments, but it has also served to keep the exchange rate of the pound higher than it would have been in its absence. A higher exchange rate has the effect of making United Kingdom goods more expensive abroad and foreign goods cheaper in the United Kingdom. Thus there is a corresponding deterioration in the balance of payments. The high exchange rate makes the United Kingdom less competitive in international markets, and as the biggest part of what we export is industrial goods, this sector will be most affected.
Government policy
During the 1980s the United Kingdom government repeated the argument that the decline in manufacturing was not important. It was seen as the working of the market mechanism, and would be replaced by services. The government therefore took a relaxed view of the decline. In the early 1980s the adherence to a strict monetarist policy of high interest rates and cut-backs in government expenditure all contributed to the decline in manufacturing.

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