A healthy economy needs a dynamic manufacturing sector
Kaveh Pourvand, 31 July 2013
Previously, I blogged on the importance of manufacturing’s contribution to GDP. I argued that the small size of manufacturing’s GDP contribution relative to that of services is actually a sign of the sector’s strength. Why?
Manufacturing exhibits faster productivity growth than services and GDP is a measure of value or price paid. Manufacturing productivity growth means that the annual production of the quantity of manufactured goods increases over time. This decreases the price of manufactured goods on the market, a process which is captured by economic statistics as a ‘lower’ contribution of manufacturing to GDP. In the service sector on the other hand, productivity is generally static but wages have to increase in line with the high productivity manufacturing sector, leading to an increase in the price of services, which is captured as a ‘higher’ contribution to GDP.
One might say that a healthy service sector thrives on the underlying dynamism of the manufacturing sector. Nevertheless, we should be wary of the manufacturing sector becoming too small as it is crucial for paying our way in the world through trade. If this analysis is correct, then increasing manufacturing output may be even more important to Britain’s economic future than implied by the current, vague talk of ‘rebalancing’.
However, critics may point to countries such as Finland, Singapore or Switzerland. All of these are highly successful economies which appear to have built their success on services such as finance, telecommunications and tourism. Isn’t manufacturing irrelevant in these economies?
Quite the opposite. As Ha-Joon Chang has points out, they are in fact among the most industrialised economies in the world, measured in per capita terms. (It is important to take into account population because they are small countries – Singapore is never going to produce more manufacturing output than China in absolute terms.) On this metric, Switzerland has the second highest industrial output in the world after Japan. Singapore, Finland and also Sweden are also in the top five per capita manufacturers.*
Manufacturing really does matter. ‘Rebalancing’ is not just about spreading prosperity more widely in the UK, important as that is, but also about improving the economic performance of the whole country. What a shame then, that the Chancellor’s growth strategy has seemingly changed. There is now less emphasis on promoting export-led, manufacturing growth and more emphasis on increasing asset prices through the new ‘Help to Buy’ mortgage subsidy scheme.
This seems to be a return to the old debt-fuelled, consumer spending model that we relied upon for growth before 2008. The first time round, this economic model had tragic consequences for the economy. Let’s hope history is not now repeating itself as farce.
*Chang, ’23 Things you Don’t Know about Capitalism’, see ‘Thing 9’.