UK: LEAN AND FIT BUT STILL FLAGGING. - Individual firms are doing their best but industry overall lacks a sense of direction.

by Roger Eglin.
Last Updated: 31 Aug 2010

Individual firms are doing their best but industry overall lacks a sense of direction.

Not everyone agreed with it but in the 1980s the Government certainly had an industrial strategy. Its central assumption was summed up by the now celebrated phrase: the market will decide. Thatcherite doctrine ruled that there was nothing to be gained from government intervention which attempted to second guess the market. If a company or an industry slipped into decline, and management could not save it, then so be it. The market had decided.

It was a harsh strategy. Jobs went by the tens of thousands. Companies closed in their hundreds. But after the cosy years of tripartism, many came to accept that this spartan regime was just what manufacturing needed. Moreover it seemed to be working. What was left of the manufacturing sector, in the words of the other celebrated phrase, was leaner and fitter. After years of steadily declining productivity, the rise through the 1980s suggested the short, sharp shock treatment was working.

What evidence there was seemed to support the conclusion that an industrial renaissance was at hand. Manufacturing productivity which crawled up by 0.6% in the 1970s rose by 3.7% in the 1980s. Every industrial sector improved its performance and in some cases spectacularly so. Chemicals doubled productivity growth. Basic metals turned a negative trend into a 7% improvement. Across the board, from transport to agricultural machinery, the engineering industry began to show positive improvement.

British manufacturers were catching up, closing the gap on rivals like Germany, France and even Japan as their productivity gains slowed. But productivity in itself is only a step along the road to the final goal of selling more in the marketplace and, sadly, the evidence is growing that the productivity gains, and all the pain of cost-cutting, have not been translated into improved trade performance. 'Despite the improved productivity performance which most UK manufacturing industries experienced in the 1980s, almost none of them has experienced an improved trade performance,' say the authors of a recent study, The Competitiveness of UK Manufacturing, from the Centre for Business Strategy at London Business School. Though the productivity gap closed, the British economy failed to match the trade performance of either Japan or Germany. The study has compared trade performance according to the respective economies' relative use of knowledge or innovation, capital, raw materials or unskilled labour. During the 1980s, Japan's pattern of trade changed sharply, increasing its market share of knowledge-intensive export trade to over 30%, while its share of export sectors using much unskilled labour had dwindled to 5% by 1990. Britain's share of knowledge-intensive exports has slipped and is now only about half that of Germany.

The consequences of this dismal performance are profound. Though manufacturing productivity has risen there are few indications of this being translated into higher output and employment. In hi-tech manufacturing where the economy's greatest hopes of stealing a march on less skilled industrial rivals must surely lie, employment actually fell over the decade, from around one million to little over three quarters of a million.

Numerous explanations have been advanced for the turnaround of productivity in the 1980s: better industrial relations, more capital investment, more innovation and rigorous cost-cutting. But this is a picture of what was happening at the level of individual firms. The study's contention is that the economy's true competitiveness is more than an amalgam of what was happening at corporate level. In short, companies may have been getting leaner and fitter but few benefits of this were reflected at national level. It means that the negative industrial policy of the 1980s was flawed. Leaving decision-making to the market was not enough. There are many other factors that have to be considered in rebuilding economic competitiveness ranging from the availability of skilled labour to the dissemination of scientific research and the rate at which industry puts new knowledge to work. The 1980s were essentially a decade of cost-cutting. The mistake is to treat this as the end in itself. It makes no sense to be the proud maker of the cheapest widgets if the competition are making a better one.

What's needed is a more rounded industrial policy for the 1990s which recognises that national economic performance is underpinned by a range of factors. British manufacturing is poorly co-ordinated. Hi-tech firms need to co-operate more closely for mutual benefit. There needs to be more debate about broad industrial strategy and sharing of experience.

Industry is trying to move in this direction. The CBI's Competitiveness Forum, launched at its national conference in November, is a useful move in replacing the important work formerly done by NEDC. It will help to disseminate best practice as well as staging inter-company forums. But what is conspicuously absent is a government-inspired debate about national industrial strategy. Individual firms may be doing their best but what British industry lacks is any sense of the overall direction in which it should be moving (see also p36).

The need for this is becoming ever more urgent. The economy starts a new year with the twin millstones of budget and balance of payments deficits hung round its neck. Until productivity can be made to spell profit, the inexorable decline of the economy, already rated at a lowly 16th for competitiveness among the OECD's 22 members, will continue.

Roger Eglin is associate business editor of the Sunday Times.

THE ECONOMY - A time bomb ticks under Government finances.

Longer life expectancy and a declining birth rate will increase the average age in industrialised countries over the next 30 years. As a result the number of retired people relative to the number of people of working age (dependency ratio) is set to increase significantly. For the seven major industrial economies the dependency ratio is expected to increase from 21% today to 36% in 2025 say Schroder Economics. Such projections are a time bomb under government finances as tax revenues will fall while payments to the elderly increase. All major economies, except the US and Japan, rely on pay-as-you-go public pension schemes, where those in work pay the pensions of the retired. These schemes are already in deficit in the UK, Italy and Canada, and those in Germany and France are expected to follow soon. The chart shows the sharp increase in the dependency ratio against the current shortfall in state pension funds based on current contribution rates and benefits. Significantly higher contributions are clearly needed to meet current obligations. The hole in the UK's pension scheme is on a par with Japan despite a much smaller increase in the dependency ratio. This suggests that the root of the UK's problem lies not so much with the fact the population is ageing but with the current National Insurance system which is inadequate to meet present let alone future obligations.

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