Britain makes more things than you think
Evan Davis’s TV tie-in book has some surprising stats on the state of British manufacturing. But our political class lacks the cojones to invest seriously in infrastructure and innovation.
It has been a truism for as long as I have been alive that Britain has gone to the dogs. We don’t make anything anymore, it is widely assumed, and what we had been making was crap anyway. Will the last person to leave the country please turn off the lights? Thanks.
We drive Japanese, German or French cars because the last UK-owned mass car producer, British Leyland, made cars that you spent more time pushing than driving. Every consumer durable we buy today seems to come from China or South Korea; every item of clothing from somewhere in the Far East. ‘Hi-tech Britain’ seems like an oxymoron. The UK may have been the home of manufacturing during the Industrial Revolution, but it’s all gone now, to be replaced by dodgy bankers making money out of one credit-fuelled scam after another. Even Brazil, once famous only for football, coffee and pubic hairstyling, seems like a dynamic giant in comparison with Britain. A once-great imperial power now shuffles along like a pensioner with a Zimmer frame.
It is this gloomy assessment of Britain’s economy that Evan Davis endeavours to examine critically in his new book and TV series, Made in Britain: How the Nation Earns its Living. As you might expect from a TV tie-in, this is not a heavyweight tome. But it does benefit from Davis’s lightness of touch and generally balanced approach to his subject. And his conclusion is that while this pessimistic outlook is misplaced, we have some serious things to be worried about, too.
The UK economy punches above its weight. With less than one per cent of the world’s population, Britain nonetheless provides about three per cent of global output. According to OECD figures quoted by Davis, Britain’s GDP per head was $35,631 in 2008 – actually marginally bigger than Germany, Japan and France, though quite a long way behind the US ($47,186). In comparison, GDP per head in Brazil ($10,466), China ($5,970) and India ($2,780) still languishes far behind, even if those latter economies are all growing fast.
Britain’s wealth isn’t simply due to working long hours nor does it come solely through financial services. Davis uses OECD figures for 2010 to show that Britain is a middle-ranking country among the Group of Seven (G7) industrialised nations in terms of productivity – more productive per hour than Canada, Italy and Japan, but not as productive as the US, France or Germany. Americans and Italians work more hours per year than Brits. Manufacturing productivity is also rising, up 50 per cent between 1997 and 2007. In 2008, the UK was the sixth-largest manufacturing nation in the world. Moreover, UK manufacturing output has grown in 35 of the past 50 years, so we produce far more than we used to.
What has changed is what Britain produces. We are no longer a mass car producer (though British factories still made 1.5million vehicles in 2007, for the likes of Honda and Nissan). Steel, shipping, textiles and so on have largely moved east, too. On the other hand, we have world-leading companies in aerospace and pharmaceuticals. At the very top end of motor vehicles, the UK is a major player, too: Formula 1 is, essentially, British-based and it is surprisingly big business. What is also clear, though, is that manufacturing is in relative decline. Where once it made up 30 per cent of GDP, it is now just 12 per cent – although it is still a bigger part of the economy than financial services, which stands at nine per cent. Manufacturing’s share of GDP is larger in the UK than in France and the US, but considerably smaller than in Japan or Germany.
Davis also notes that how we ‘pay our way internationally’ has changed. He uses the example of ARM, whose microprocessors are practically ubiquitous in the world’s mobile phones. How many did the company make? Zero. ARM designs the chips, then licences them to other manufacturers to make, generating revenues of £400million per year from royalties. Pilkington is a world leader in glass production, but also makes most of its money from licensing its processes to other companies.
Davis provides a neat illustration of why we shouldn’t necessarily fetishise making stuff: ‘One study looked at how the $300 retail price of a particular iPod broke down… for the design, R&D and marketing, Apple gets $80. For the assembly, the Chinese get less than $5. Of the rest, $75 goes to the retailer and wholesaler and $140 goes to the suppliers of the components that go into the iPod.’ An old phrase widely attributed to former Chinese premier Deng Xiaoping – ‘It doesn’t matter the colour of the cat, as long as it catches the mice’ – would seem to apply to the British economy as much as to China’s. Whether the nation makes its money from the City of London, intellectual property or selling services doesn’t really matter in the grand scheme of things, so long as the money comes in and the jobs are created.
But, as Davis notes, it would be unwise to get too Panglossian about all this. For example, he notes that over the past few decades, Britain’s economy has exported about 30 per cent of GDP and imported about 32 per cent. Such trade deficits need not matter too much in the short term, but in the long term they can only be sustained by borrowing, storing up problems for the future. This is a slow haemorrhaging of wealth away from the UK to other parts of the world.
Moreover, while the UK as a whole may be doing a little better than most Brits seem to think, economic activity is very uneven. For example, Davis goes to Sunderland to see how a town that was once the centre of world shipbuilding has coped with the devastating job losses of the 1980s. The answer is mixed. There are new jobs – particularly in call centres – but the work is lower paid than the skilled work offered by the shipyards. For much of Britain, the shift away from old-fashioned industry has meant permanently higher unemployment and lower incomes.
Where Davis really sees trouble ahead is in the comparatively high levels of consumption which, he argues, have led to a very low level of investment compared with other countries. Given that he sees the way forward for Britain through the knowledge economy – innovating around big new ideas or even simply selling education to overseas students, which is another surprisingly lucrative activity – this lack of investment could deprive Britain of the source of its future wealth.
Yet the savings problem seems like a red herring. There is plenty of cash in UK companies, for example. The real question is why it does not get spent on new investment. That says a lot about the risk-averse outlook prevalent in the British economy today. It also suggests that there is room for the state to intervene to improve the conditions for investment or take on the vital infrastructural improvements required for any renewed, ‘rebalanced’ economy.
Yet the political class seems devoid of any sense of purpose or vision at present. The UK economy has been growing at a pretty anaemic rate for over 40 years, yet even that growth has been mainly provided in the past few years by private, credit-fuelled consumption and government borrowing. With the nation mortgaged up to the hilt, where will growth come from in the future? It seems our leaders have little clue, obsessing on how to cut public spending rather than how to generate economic growth.
There is also the problem of talking about ‘the nation’. We are not all in this together, despite what the government would have us believe. We’ve been reaching for the credit cards for a good reason: the stagnation of living standards that was going on even before the financial crisis. Now living standards are likely to be squeezed hard between relatively high inflation, low wage rises and public-sector cuts that dump more and more costs back on to the rest of us.
Davis provides a useful corrective to some prejudices about the economy. Britain remains a productive country, even if growth rates are feeble compared to rapidly industrialising countries like China and India. But if we are to have a prosperous future, we need to put in place the conditions for that prosperity, something that will require a bit more ambition than simply stopping the Good Ship Britannia from sinking beneath the waves right now.