Neil O’Brien: The view that manufacturing is a relic of the past is itself a relic of the past

22 Mar

Neil O’Brien is co-Chairman of the Conservative Party’s Policy Board, and is MP for Harborough.

“Nothing so much contributes to promote the public well-being as the exportation of manufactured goods”. From the King’s Speech at the opening of Parliament, 1721 (drafted by Robert Walpole).

Here’s a funny thing.  Wages and productivity in manufacturing are higher than the average across the whole economy. Productivity has also grown more quickly in manufacturing. But places where manufacturing is a larger share of the economy have, on average, lower wages and productivity.

The answer to this seeming paradox is that manufacturing provides an outsized proportion of the better paid jobs in poorer areas. And that they typically started with even more manufacturing, and lost more from deindustrialisation. Might manufacturing now have a particular role in levelling up poorer places and getting private sector growth going there?

Put simply, if manufacturing is a bigger chunk of the economy in less affluent places, and if you could do some things that caused manufacturing to grow faster then, other things equal, that would tend to particularly help worse-off places.

That’s not to say government shouldn’t also work hard to grow other sectors – just that manufacturing might be particularly helpful in levelling up.

Between 1978 and 2019, output per job grew an average of 0.36 per cent a quarter across the economy as a whole, but not far off twice as much (0.64 per cent) in manufacturing.  It’s not just the UK: looking at 26 OECD countries since 1996, all but one saw faster productivity growth in manufacturing.

Why? Much of the economy consists of people-intensive local services.  While there’s productivity growth in cafes, pubs, gyms, leisure and so on, it’s harder to achieve. A café is quite like it was 50 years ago.

Your smartphone really isn’t. There is no theoretical upper limit to how atoms can be arranged in new and more productive ways. Physical goods can also be exported in a way that haircuts can’t: so they can be traded in a more dynamic global market with stronger competition and more transmission of knowledge. That’s why manufacturing accounts for 42 per cent of our exports and two thirds of business investment in R&D.

But manufacturing is particularly relevant for levelling up because that higher productivity in manufacturing is particularly marked in less prosperous areas.  For the UK outside London, output per hour is 20 per cent higher in manufacturing than the economy as a whole.

Reflecting this, wages are also higher.  For example, in the North East the median wage in manufacturing was 22 per cent higher than average, in Wales 16 per cent it was higher and so on.  This earnings premium applies across qualification levels too: it’s not just more workers in manufacturing having higher qualifications, they’re earning more than similarly qualified people.

You might say, that’s all very well, but isn’t UK manufacturing doomed to shrink? Isn’t manufacturing too small to drive the wider growth of the economy much?

Having declined relentlessly as a share of the economy between the 1970s and 2010, manufacturing’s share has actually held pretty steady since then.

While it is now a relatively smaller share of employment (nine per cent of hours worked), manufacturing accounts for a larger share of output and a much larger share of productivity growth in poorer regions of the UK – accounting for more than 40 per cent of productivity growth between 1997 and 2017 in places like the West Midlands, Wales and the North West, creating a big multiplier effect on incomes and jobs in their local area.

Growth in manufacturing might particularly help places outside our large cities. As the UK economy has deindustrialised, higher productivity jobs have tended to be in professional services, typically located in large city centres. Across Europe, capital cities have grown faster than their countries.

The rise and then fall in manufacturing as a share of the economy since the Second World War was mirrored by a fall and then rise in differences in productivity: the shift to services has caused the richest region, London, to forge ahead, while deindustrialisation has seen poorer regions fall back.

The same effects are underway in smaller cities.  Between 2002 and 2018 productivity grew 76 per cent in Glasgow and Edinburgh and 62 per cent in the rest of Scotland. In Cardiff and Swansea it grew 59 per cent compared to 47 per cent in the rest of Wales. And in Belfast it grew 72 per cent compared to 49 per cent in the rest of Northern Ireland. Productivity grew 54 per cent in England’s large cities and 49 per cent in the rest of England outside London – even including the relatively prosperous south east.

It’s great to see our cities revive, powered by services growth. But we need to make sure places outside city centres grow faster too. Manufacturing is space-intensive, so more likely to locate outside the centres of the largest cities. It’s one high productivity activity in which less urban areas may have a natural advantage.

And those are just the sort of places our new majority is built on.  Nationally about one in twelve jobs are in manufacturing – but in the seats we gained in 2019 it’s higher: one in eight jobs.

Some say deindustrialisation is inevitable for all rich countries, so emphasising manufacturing is pointless.

While many richer countries have deindustrialised, almost none did so as much as the UK.  In 1970, the UK had the sixth largest share of manufacturing in the economy in the G20. Today, it is second from bottom.

Countries as diverse as South Korea and Ireland have caught up or overtaken our living standards while growing the share of manufacturing in their economy. Rising countries like India and China have seen manufacturing growing as a share of the economy share.

And many other rich countries have deindustrialised far less: manufacturing is about 10 per cent of GDP here, about 22.5 per cent in Germany.  In the Blair years this was actually seen as a UK strength. But post financial crisis it doesn’t look so smart, as productivity there has grown faster.

Another objection might be of principle. What would Margaret Thatcher think of all this?

Well, while Mrs T (rightly) let go lossmaking industries, it’s worth remembering she also worked hard to replace them. She used taxbreaks, factory start up costs (and lots of her time) to woo Japanese carmakers here.

She backed life sciences, founding a government-backed biotech company (Celltech) and using pharmaceutical pricing to lure pharma businesses to the UK.  In telecoms, Thatcher drove the adoption of the GSM standard at an EEC summit in 1986 to help create a huge market for equipment makers, and then let UK companies like Vodaphone charge yuppies a fortune for calls, meaning tha they had pots of cash to buy up more heavily regulated rivals overseas.

In 1981, she appointed the world first minister for IT (Ken Baker) and funded the “micros in schools” programme.  That put rocket boosters under the company that won the government contract to manufacture the computers, (Acorn), enabling it to create ARM, now one of the UK’s largest tech firms.

In aerospace Thatcher moved heaven and earth to sell British Aerospace products overseas, flying to Saudi Arabia to secure their biggest ever order. Visiting the factory, she said she would love to have flown a harrier.

Today, there are still massive security arguments for keeping the capacity to make things, underlined by EU threats over vaccine supply. But even without those arguments, the 1990s/2000s view that it would be fine if British manufacturing became a thing of the past now seems like… well – a thing of the past. The truth is that in many parts of the UK, making things goes hand in hand with making a decent living.