Rebuild British Manufacturing
A Strategy for Revival
Preface
Britain’s greatly diminished manufacturing sector has recently become the focus of much serious attention, and not before time. A range of agencies and institutions, Unite the Union (“A plan For Jobs In UK Manufacturing”), GMB (“Making It”), The Institute For Prosperity, the Manufacturing Commission, The Advisory Board to Campaign for a UK Manufacturing Led Economy, Make UK and others have all argued powerfully for a manufacturing revival, for a substantial re-shoring of production and for import substitution. This pamphlet adds a new voice to that campaign, with radical proposals for change and specifically for a revival and expansion of the role of the state in promoting and expanding British manufacturing.
When looking at what has happened to Britain’s manufacturing industries it is easy to become lost in detail, to be misled by short term trends and to fail to recognise the total and tragic picture of our manufacturing decline. Statistics on long term trends in output, trade, investment and employment, and international comparisons are however stark and show Britain’s manufacturing decline to have been extraordinary, exceptional, and alarming.
Successive governments of all colours have focused on the financial sector and the City of London to the severe detriment of manufacturing such that by 2019 e-commerce had become the country’s largest industry with an annual product of £586 billion. This pamphlet seeks to show how British manufacturing has declined and points to major causes of that decline. It highlights in particular the persistent and significant overvaluation of Sterling, especially relative to the Euro in recent decades, making our exports expensive and imports too cheap. It concludes by proposing essential steps to reversing that decline and to rebuilding a substantial and strongly based industrial sector of the economy to secure jobs, living standards and essential national economic viability for the long term.
Britain’s manufacturing decline
The dramatic de-industrialisation of Britain since the Second World War has inflicted economic damage unparalleled in other nations. The decline has been driven by government incompetence, malign neglect and malevolent destruction. It is now a matter of the greatest importance and urgency for Britain’s future that the process is halted and reversed. This will require the active intervention of government at every level to achieve, a veritable reinvention of the state.
Market forces left to themselves, driven by neo-liberal dogma, would simply drive Britain further towards industrial oblivion, with disastrous consequences for the economy and for the lives and livelihoods of millions of working class people. As a country we must re-establish the state as a driver of the economy, for its long term recovery and survival.
Leaving the European Union was the first vital step to delivering this. British manufacturing has suffered serious damage since joining the original European Common Market, now The European Union. The EU has indeed been a significant factor in that decline although not the only factor.
Our industrial debilitation had been happening before Britain joined and some statistics demonstrate the many decades of decline in stark terms. However, leaving the EU has removed some of the shackles of economic liberalism from the nation state and made possible active measures of government intervention and economic management necessary to rebuild a successful industrial economy.
The evidence of decline
Britain was the first country to industrialise, the original workshop of the world, but one only has to look at the motor vehicles passing our front doors or the appliances in our homes to see the evidence of national industrial decline. Volkswagen, Audi, BMW and Mercedes dominate our roads and Bosch and Miele our homes, with scores of other foreign-built machines surrounding us in every aspect of our lives. We still have some industry but far too little of it, and Britain is a shadow of its former industrial pre-eminence.
Our steel industry is threatened with collapse even as this paper is being written and much of what industry remains in Britain is foreign owned, as is the case with most of our public utilities. Successive governments have just let this happen and indeed have driven the process since 1979 by adopting utterly misguided policies, pursuing unremitting neo-liberal, free market, globalising strategies to the great national economic disadvantage.
Contrasts with other industrial nations is simply demonstrated. Millions of jobs in manufacturing have gone and what Britain produces has diminished with imports surging and replacing former British products.
The process began even before the industrial slaughter of the early Thatcher years.
The UK figure is all the more extraordinary because investment levels and therefore productivity growth have been lower in the UK than competitor countries so that labour intensity has been higher, thus slowing job losses. However, UK unemployment was around or below 2% between 1945 and 1970 with manufacturing providing the backbone of the high levels of employment during those years. Unemployment grew strongly thereafter, peaking at 13%, 3 million, during the first Margaret Thatcher government in 1982.
The trade balance shows the difference between net exports (+) and imports (-) and there has been a UK trade deficit with the rest of the world every year since 1983, growing strongly into the 1990s and beyond.
The trade surplus in services has been consistently smaller than the deficit in goods and it has been the surging trade deficit in goods, substantially manufactures, which has been the cause of our trading weakness.
The growing significance of the EU in our trade deficit is clear and the high proportion of that deficit specifically with Germany is notable.
The money figures do not take account of inflation but the trends are unmistakeable.
Trade figures show dramatic decline in manufacturing
Disaggregating the goods trade figures to show the part played by manufacturing provides an even more dramatic picture and that it really is manufacturing where the change in our trade has occurred reflecting the contraction of Britain’s manufacturing sector.
In the 1970s manufacturing accounted for 25% of our economy which had reduced to 10% in 2016. Total employment in manufacturing fell from 7.1 million in 1979 to only 2.7 million in 2016.
This table demonstrates the substantial relative fall in exports and rise in imports during the decade of the Thatcher Conservative governments. This followed directly from the destruction of much of Britain’s manufacturing in the years 1979- 82 caused by the damaging and utterly misguided policies of then Chancellor Geoffrey Howe.
The trade balance continued to be very substantially negative thereafter, the bulk of the deficit being with the EU and most significantly with Germany. The trade disaster shows in stark terms the abject economic failure of successive governments and their absence of concern about the disappearance of much of UK manufacturing.
Flawed relationship with EU
A primary factor in this trading travesty has been the belief that the advantages of belonging to the EU outweighed the disadvantages, failing to recognise the UK’s deeply flawed economic relationship with the EU.
What attention has been given to UK/EU trade has been a constant focus by the political establishment on a need to sustain exports to the EU by remaining in membership while persistently ignoring the real problem which has been the much greater volumes of imports undermining UK manufacturing.
Governments have played on a lack of appreciation of this reality, even in Parliament, as they have sought to sustain the utterly false prospectus of the value of EU membership to UK manufacturing. The country now has an opportunity to begin the process of rebuilding British manufacturing, starting with urgent measures to save and protect our vital steel industry.
Exports are vital too but they are outstripped by imports and the problem, the deficit, has been getting worse. Even the Society of Motor Manufacturers And Traders has described our trade deficit in automotive products as a “chasm”, widening from £12.6 billion in 2018 to £15.5 £billion in 2019.
It is abundantly clear that the UK’s trade problem is in manufacturing and has been largely, although not entirely, with the EU, driven primarily by the overvaluation of Sterling relative to the Euro. This is reinforced by the effectively rigged undervaluation of the Euro.
There is much to do to lay the foundations of a renaissance of British manufacturing but fixing the currency problem will be a crucial first step in restraining imports and boosting exports.
Britain's Investment Failure
A major factor in Britain’s long term economic weakness in manufacturing has been investment. The gross inadequacy of Britain’s investment levels was evident decades ago, as comparisons with other industrial nations clearly demonstrate.
The OECD recorded that in the three decades to 1990 UK investment was the lowest of all the (then) 23 OECD nations. The dismal performance has continued.
The UK was the lowest of all the 34 listed OECD nations and even well below Italy, the second to bottom nation. Britain’s long term investment failure is clear and astonishing.
The country’s persistent failure to invest, especially in manufacturing, has been a key factor in our relative economic decline throughout the post-war era and investment levels have remained chronically low.
That problem has continued to undermine Britain’s manufacturing to this day, and manufacturing output as a proportion of our national economy has fallen massively so that as a country, we have increasingly devoured large volumes of imported manufactures.
As is referred to earlier, the most savage attack on our manufacturing industries occurred in the first years of the Thatcher government when Geoffrey Howe as Chancellor raised interest rates sharply, driving an upward leap in the Sterling exchange rate. This immediately made UK manufactures uncompetitive, forcing factory closures, massive job losses and up to a fifth of UK manufacturing to disappear. Unemployment surged to 3 million.
Howe’s first act in office had been to abandon exchange controls leading to an immediate and massive outflow of finance capital. We are still suffering today from the impact of the Howe chancellorship.
The ERM debacle
Even Margaret Thatcher was privately shocked at the industrial devastation of those early years of her Downing Street tenure and Howe was later replaced by Nigel Lawson. The Pound was then progressively depreciated, and some economic recovery occurred (although not in manufacturing) before the next profound government mistake, joining the European Exchange Rate Mechanism in 1990.
This brought on another recession and more damage to Britain’s industries as interest rates were forced up to eye-watering levels in desperate attempts to defend the Pound’s new fixed parity against the Deutschmark. Unemployment surged, the housing market crashed, and the government was forced to abandon the ERM after two years of serious and unnecessary economic bloodletting.
Needless to say, all this misguided economics did nothing to improve Britain’s investment performance and manufacturing suffered again. It might have been hoped that the Blair/Brown governments after 1997 would have sought to reverse Britain’s industrial decline but this proved not to be.
Between 1997 and 2020 UK manufacturing as a proportion of national economic output astonishingly halved, from 20% to 10%, and one and a half million manufacturing jobs disappeared.
The Euro problem
Having been a substantial net exporter of manufactured goods before the 1970s, imports to the UK began to rise strongly and exports were squeezed by the perpetually over-valued Pound. That fundamental problem has underlain Britain's manufacturing trade deficit and the decades of industrial debilitation with the overvaluation of Sterling most significantly in relation to the Deutschmark and, more recently, to the Euro.
Indeed, the Euro is, the Deutschmark in disguise, anchored to a falsely low parity by having been cemented at its inception to the currencies of permanently weaker economies in the rest of the EU. This has given German manufacturing a built-in competitive advantage against Euro member states as well as manufacturing nations outside the Euro area such as the UK. A dissolution of the Euro with member states restoring their own national currencies and able to adjust their currencies to values appropriate to their national economic needs would be a rational step. A new Deutschmark would inevitably appreciate, benefitting the other former Euro member economies, and, of course, British manufacturing.
A rare sensible UK government economic decision of the last several decades therefore was to reject membership of the Euro. Had Britain joined at the Euro's inception, Sterling's likely parity at that point would have been close to €1.50 to the pound with incalculable and devastating consequences for UK manufacturing in subsequent years.
Indeed, had Britain been in Euro membership during the 2008 financial crisis, many of Britain's remaining industries would have been crushed in an economic collapse of historic proportions.
As it happened, Sterling rapidly depreciated by 30% against the Euro and UK industries were given a degree of protection, just surviving in most cases. It is however certain that the UK would have crashed out of the Euro had we been a member and the whole Euro edifice may have crumbled as a result.
There are historical precedents of currency crises affecting Britain. Coming off the Gold Standard in 1931 following the collapse of the Ramsey McDonald Labour government was one of the most notable. “Golden Wednesday”, otherwise dubbed “Black Wednesday”, when we crashed out of the ERM in 1992 was the another.
However, the pound is still overvalued, again as has already been emphasised, and a priority for a successful industrial strategy must be to manage the Pound’s exchange rate downwards to a competitive level, with the Euro in particular, and to sustain a sensible parity thereafter. Academic analysis of the currency problem has been made by economist John Mills in a series of fine books and other writings over many years. His recent book, “Britain's Achilles Heel - Our Uncompetitive Pound” published by Civitas in 2017, details the issues in compelling terms.
An effective industrial strategy for Britain
Once the currency problem has been properly addressed, there is much else to do in saving and rebuilding Britain’s industries. The rest of this text sets out steps to be taken by government, beyond the occasional hand-wringing and ineffectual exhortation in evidence during the last many decades. Now Britain has left the EU it is vital to use the freedoms that now beckon to take strong, practical, and effective measures in a meaningful industrial strategy.
Public procurement - buying British
EU compulsory competitive tendering must be completely abandoned, with government and public agencies at every level required to make maximum use of British products in ordering of equipment. Even within the EU, other member states have been quietly doing this, despite EU rules, while Britain has foolishly been purchasing vast quantities from the rest of the EU with little regard or concern for UK manufacturers.
Public procurement must be led by government, with legislation as necessary to drive the process. It should also be monitored and regulated to make sure the strategy takes effect and continues for the future. Some obvious targets for public ordering from British manufacturing should include shipbuilding.
As Unite the Union has said recently, “Fleet support ships must be entirely UK built to protect UK shipyards”. A new fleet of UK patrol vessels to police Britain’s reclaimed fishing waters should also be ordered from British shipyards. Unite has set out a plan for specific sectors of industry for the future with a strong emphasis on green investments.
Onshoring production
Much of what is still produced in Britain is made by companies which are foreign owned who have to be persuaded that producing in Britain will be beneficial to them. Britain with a population of 68 million is a substantial market and cutting imports with a lower Pound and a domestic public procurement strategy will be greatly advantageous to producers based in Britain.
A lower Pound will also be an inducement to onshoring supply chains. It remains the case that too much of British industry is focused on relatively lower value-added assembly, with much higher value-added component manufacture based abroad. A measure which could be effective during the onshoring process would be to require the proportion of domestically based value-added to be recorded for each product and made publicly available. The valuable work by “Made in Great Britain Ltd.” must be referenced.
Expanding the skills base
To ensure sufficient home-based skills are available for a rebirth of a more substantial manufacturing sector, intervention by government will again be essential. Providing better and technically appropriate education and training, and more of it, cannot be left simply to the vagaries of market forces This must start in schools, with good careers advice and encouragement to pupils to take up STEM subjects. A particular emphasis on the early development of good mathematical skills and scientific understanding in primary education must also be part of the strategy. Well-paid and publicly subsidised apprenticeships must play a large role in the industrial revival.
There is much evidence to support such an approach in other industrial nations, identified as long ago as the 1980s in research undertaken By Professor Sig Prais and others and published by the National Institute of Economic and Social Research. A simple comparison in this research between Britain and France, industrial nations with similar populations, shown in the table is striking. Comparisons with other industrial nations show a similar picture and such differences persist.
The shortage of necessary industrial skills in Britain is of profound concern and implies a seriously deprived workforce. This shortage must be addressed if a revival and expansion of manufacturing is to succeed.
Training levies should be extended across a wider range of industries and subsidised skills training improved to ensure it is effective. Companies will only invest in high-skill, high value-added manufacture if education and training are geared to future industrial needs.
Leaving education and training simply to market forces will not work. The process must be driven by the state and sustained by the provision of necessary resources and a substantial upgrading of Further Education in particular. The prospect of well-paid jobs, and interesting, rewarding, and secure employment would follow, with millions of young people inspired to look to industry for their futures once again.
State aid to indistry and regional industral support
State aids to industry by member state governments have been strongly opposed and indeed largely forbidden by the EU. There has been a degree of avoidance of these constraints by some member states, as with public procurement, but Britain is now freer to decide for itself how it should help to sustain its domestic manufacturing. State aids should no longer be a forbidden practice. Regional industrial aid, including manufacturing investment grants, introduced by the Wilson Labour governments had a measurable positive impact on reducing regional inequalities, especially in employment and regional industrial aid must play a large role in rebuilding manufacturing.
The EU had been pressured by the UK to introduce some measure of regional funding – structural funding as it was later termed - but the actual amounts were not large and were determined on a formulaic basis decided and regulated by the EU Commission.
The Structural Funds were to some extent a reluctant acknowledgement of the malign impact of the substantial imbalances between member states of net EU Budget contributions rendered by the enormous levels of spending on the Common Agricultural Policy (CAP). These imbalances had a strongly negative impact on the UK, inflicting a permanent and substantial net Budget cost of billions of pounds every year. Even the Thatcher government later became so alarmed at this that a UK rebate was negotiated although this still left Britain paying a large net sum to the EU Budget in all subsequent years.
The Structural Funds were to some extent a reluctant acknowledgement of the malign impact of the substantial imbalances between member states of net EU Budget contributions rendered by the enormous levels of spending on the Common Agricultural Policy (CAP). These imbalances had a strongly negative impact on the UK, inflicting a permanent and substantial net Budget cost of billions of pounds every year. Even the Thatcher government later became so alarmed at this that a UK rebate was negotiated although this still left Britain paying a large net sum to the EU Budget in all subsequent years.
The Structural Funds had a modest net mitigating effect but were not targeted according to nationally determined needs. These payments were little more than a token and were simply used as EU propaganda with the gold stars on blue logo symbols dotted around wherever modest payments were made, as the UK was in effect being given back small sums from its own large contributions to the EU Budget.
Now that Britain has left the EU, the country will in time be able to use the large sums previously gifted to the EU to help support a domestically determined regime of regional industrial aid aimed specifically at the rebuilding of a strong manufacturing sector. A new re-vamped regime of state aid to industry should be targeted particularly at those regions most damaged by de-industrialisation and which remain most economically disadvantaged.
The EU has however extracted a commitment from the UK to continue paying vast sums into its coffers for some time ahead as a price of leaving. These enormous sums are unreasonable and unacceptable but regrettably the deal has been done and it is time now to look to a future when UK revenues can be used to sustain and rebuild our own manufacturing sector.
Some of the recaptured revenues must however be used for other national purposes. Much more needs to be spent on our public services as well as industry. There has also to be a complete recasting of agriculture support to reflect national needs and priorities. More additional public spending is needed going well beyond the cancelled EU Budget contributions but there will in due course be a significant net financial benefit of leaving the EU.
A sensible place to this process is to reference successful UK policies of state aid to industry and regional economic assistance.
Public ownership, in-sourcing and state investment
An extensive expansion of public ownership must have an essential role in rebuilding British manufacturing. The British steel industry, though much reduced from its historic role, is still vital for Britain's future and its current precarious situation must be addressed. The unanswerable logic is for the industry to be taken into public ownership to guarantee its future. Other domestic private sector manufacturers dependent on British steel have been pressing the government to act and public ownership is now urgent.
There is a precedent for a Conservative government nationalising a vital industry when Rolls Royce Aero Engines was on the verge of collapse in 1971 and was taken into public ownership by the Heath Conservative government of the time.
Even more remarkable was a barely remembered draft Parliamentary Bill published by the Heath government in the early 1970s which made radical proposals for state intervention and support for industry. Tony Benn unearthed the Bill and presented it to Labour’s Socialist Campaign Group of MPs during the first Blair government. The Bill quickly disappeared in Heath’s time and was never enacted, perhaps a last act of a leftish civil servant supressed by the new breed of neo-liberals starting to take over the levers of power.
Other industries have spent some time in public ownership if later being privatised and allowed to wither and decline, but a degree of state ownership and state investment must play a part in underpinning sectors of industry to ensure their future. Taking public stakes in selected major companies with government representation and trade union representation on boards should have a role in Britain's industrial future and include companies with large components of foreign ownership. This will enable oversight of the performance of these companies and provide necessary direction and assistance where appropriate.
State holdings in industrial concerns and even substantive state ownership is found in other industrial nations. Britain is quite exceptional in its degree of privatisation and its outsourcing of public utilities, and public services in particular. Restoring much of what has been privatised to public ownership and an in-sourcing drive would contribute greatly to rebuilding domestic manufacturing, especially in facilitating public procurement from British producers
EDF (Électricité de France) is 83% owned by the French State and now owns much of Britain’s energy sector. The French government also owns 25% of Renault and has a 13% in PSA the large French automotive group which owns Peugeot-Citroen and much else including ... Vauxhall!
SNCF (French railways) is 100% state owned as is DB (German railways). DB also owns and operates much of Britain’s bus industry. Taking substantial sections of Britain’s economy back into (British) public ownership would not therefore be especially radical and some state holdings in the manufacturing sector would be unexceptional but help guide the process of recovery and expansion.
A new National Commission for Industry
To monitor the performance of sectors of manufacturing and of specific manufacturing companies in the future a new national body is required. The former National Economic Development Council (NEDC or ‘NEDDY’) was abolished by the Thatcher government when the dogma of neoliberal economics gripped every level of political and institutional power.
The Civil Service had been overtaken by a new generation of mandarins schooled in neoliberal ideology, as Keynesians, social democratic statists and any vestigial remnants of democratic socialism were stripped out of the universities and the whole establishment bent the knee to the religion of the market and market power.
NEDDY had been a relatively weak talking shop with staff seemingly quite carefully screened to ensure that those who might make a case for a stronger state role in the economy were kept in check. Nevertheless, NEDDY and its sectoral Economic Development Committees (‘Little Neddies’) did represent some corporate concern for national economic performance, however modest. This was completely absent as rampant neo-liberalism was given free rein and the former degree of democratic power of the people through Parliament over the economy was cut off at the knees.
A new national commission for industry is needed, to monitor, advise and provide guidance as part of a national drive to rebuild manufacturing.
Conclusion
To reverse the decades of devastation of so much of British manufacturing will require a powerful a new industrial strategy, driven by the state and involving direct democratic representation of the population both through parliament and through the labour movement. Such a strategy is now a matter of the greatest urgency.
A lower and managed parity for the Sterling exchange rate, especially in relation to the Euro, will be a vital first step without which British manufacturing will continue to struggle. The re-introduction of exchange controls on flows of finance capital across Britain's borders should become part of a new currency regime, a proposal even suggested as a possibility by former Bank of England governor Mervyn King during the 2008 crisis. His predecessor Eddie George was also conscious of the critical role of currencies in economic performance and was wholly opposed to Britain joining the Euro.
A second measure in the rebuilding process should be the energetic use of state economic purchasing power at every level to order products from domestic British manufacturers. Thirdly, government must use its new freedoms from EU constraints and the return of EU Budget contributions to the British Exchequer to boost support for industry. A new and substantial regime of industrial aids to industry with a strong regional bias should replace feeble and inadequate EU structural funding and be determined according to domestic economic needs, not EU formulae and the direction of the EU Commission.
Fourthly, where essential industries are under threat, public ownership should be considered and used where necessary to sustain them, steel being a prime example at the time of writing.
Government should also look to acquire some public stakes in key major companies, as is commonplace in other industrial nations, especially in the public utilities.
Energy, water, transport and postal services should be brought back into public ownership with re-established public stakes in other utilities. Much of the UK public utility sector is actually foreign owned, a high proportion being in the ownership of foreign state-owned organisations following from so called “privatisation”.
Secure public procurement of British goods
Rebuilding a strong and much larger public sector of the economy will facilitate public procurement strategies, to the great benefit of Britain’s manufacturing as well as to the Exchequer and directly to the millions of ordinary working people who depend on all the utilities provide. A larger re-established public sector will also facilitate stronger macroeconomic management by government.
Fifthly, education and training need to be substantially upgraded to develop the skills needed for a new industrial age. Sixthly, a new national body, a manufacturing commission with representation of government, employers and trade unions, should be established to monitor and advise on the performance of our manufacturing industries.
In all these measures the role of the state must in future be central. Britain needs to rebuild a strong and extensive manufacturing sector for its future prosperity, to ensure well-paid jobs and full employment and to sustain long term viability of the economy and prosperity for working people.
Neoliberal dogma weakening
The hold of misguided neoliberal dogma is gradually weakening, and this is becoming clear even to former believers. As Oliver Sharp, millionaire Tory party donor, put it (Sunday Times May 16th, 2021) “There is no doubt that a purely free market economy does not work”. This was in an article entitled “Hedge fund tycoon who's betting big on the return of the state”.
The reality is that the post-war world after 1945 saw substantially more socialist economic strategies driven by nation state governments in most Western countries, especially in Europe. They had become nervous of the appeal of Communism to millions of working-class people and the growth of support for left wing parties across the sub-continent.
Full employment, the establishment of comprehensive welfare states, widespread public ownership - especially of the utilities, the building by the state of millions of decent homes for working people, with living standards rising at an historically unprecedented rate became the norm. In the UK real weekly earnings of manual workers doubled between 1945 and 1974.
That democratic socialist advance was halted in the 1970s and a reversal of much of what had been achieved began, most notably in Britain under Conservative governments after 1979. In subsequent decades, unemployment rose and persisted, and economic growth was slower, erratic, and sometimes negative, with repeated economic crises.
In Britain, manufacturing suffered, inequality grew, and homelessness surged. All of this followed directly from the reactionary neo-liberal ideology adopted by governments and institutions across the world. Britain was among the most radical in its commitment to that right-wing dogma with widespread privatisation and the throwing open of its borders to unconstrained free trade and the inevitable flood of imported manufactures
Now is the time to begin to recreate what has been lost and to move on to a more intelligent and socially just future, with full employment, secure and well-paid jobs and a renaissance of manufacturing.
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