By Michael Kitson, Cambridge University Senior Lecturer in global macroeconomics, Assistant Director of the Centre for Business Research.
If the Chancellor George Osborne is to turn his vision of reinvigorating our manufacturing sector, the so called “march of the makers”, he and his government colleagues need to develop a coherent industrial policy.
The public policy debates which focus on austerity, withdrawing from Europe, and on limiting immigration misses the target. These are short term political agendas, that are not good for long term economic growth. We need Europe as a market for our goods and services, 50 per cent of our trade is with our European partners, and we need people coming into the country to boost our talent pool.
There are too many piecemeal policies at the moment and there is too much focus on austerity, and reducing the size of public sector deficits and debt. But there is no coherent long term industrial strategy that will successfully rebalance our economy. The need to rebalance our economy is losing momentum when it should be at the centre of the agenda. We have to focus on stopping the “retreat of the makers” before we even get to thinking about the “march of the makers”
The economy is still stagnating. We are still really bouncing along the bottom, this is the worst recession and the worst recovery from recession for over one hundred years. In normal times, an economy recovering from recession should generate annual growth of three to four per cent. Sir Mervyn King, the outgoing Bank of England governor, refers to a “modest recovery” – but a modest recovery is a sign of failure.
When in March 2011 George Osborne called for a “march of the makers” he identified manufacturing as the key growth sector for the economy and announced a series of policy initiatives, such as: extending the export credit guarantee schemes; increased R&D tax credits; and the creation of new enterprise zones. But these policies have failed to generate growth because they do not deal with the fundamental problem which is the lack of demand in the economy.
The manufacturing sector has suffered benign neglect from governments of all persuasions from the 1960s and particularly from the 1980s onwards. The manufacturing sector has been allowed to decline based on the argument that markets know best and that the economy can be built on services. Manufacturing has been left to decline, whereas in the USA and Germany it has been supported. For some, the “invisible hand” of the market, will solve all economic problems – a phrase used only once by Adam Smith in “The Wealth of Nations”. Markets rely on help from government to help them work more efficiently and become more effective – the role of the State is to support markets. If we just rely on ‘market forces’, the result is an unbalanced and weak economy.
In the UK, there are sectoral imbalances: we have seen a focus on the financial services and the relative decline of manufacturing. There are regional imbalances: London has done very well over the last thirty years while the North West and the North East have not. There are also trade imbalances: we have had a big balance of payments deficit and we are not paying our way; for the last thirty years we have been borrowing from the rest of the world to fund our consumption habit.
These three imbalances – in our sectors, our regions and our balance of payments – cannot continue and we are destined to see much lower growth for ourselves and our children in the future.
Rebalancing is important, geographically for the regions and also for the economy as a whole. It is not just about manufacturing but it is also about giving our high technology services, our creative industries, a much needed push too. We need long term investment in these sectors, and this needs to come from the public sector and the private sector working together.
There is also the misplaced focus on reducing immigration. The UK economy has always been open to talent, and that talent has helped our economy grow. We need to be an open economy both to ideas and to people. Europe is one of our major markets if we withdraw from Europe it is going to harm economic growth.
What we need is a coherent strategy to invest, and although the private sector will help, a lot of that investment will have to come from the public sector and that means increased government expenditure. We must relax the current focus on austerity, and cutting deficits, the main legacy we can leave our children is not the problem of deficits, it is the problem of low economic growth. If we want to get economic growth going we need investment and we need investment now and the public sector has got to be part of that.