Impact of the British Deindustrialisation - Essay Example

Economic Business Table of Contents Economic Business Table of Contents 2 Chapter Introduction 3 Chapter 2 - The British Manufacturing Sector:Emphasis on Steel Units 4 2.1 Factors leading to British deindustrialisation 6 2.2 Impact of the British deindustrialisation 7 Chapter 3 – Growth of the British Tertiary Sector 8 Chapter 4 – Conclusion 9 Bibliography 10 Chapter 1 - Introduction Britain is unanimously considered to be one of the pioneers in the field of industrial growth and development. The nation has a long history of manoeuvring the expansion of hard-core manufacturing units characterised with an intensive use of technology so as to enhance the productivity levels of the factors of production. Initiation of the Industrial Revolution between 18th and 19th centuries is proof enough to suggest about the leading role that the nation played in the development prospects of the industrial sector of the economy as well as introducing the benefits of industrialization to the rest of the world. Industrialization in Britain had paved up ways for both labour intensive and capital intensive methods of production. In addition, there had been constant technological changes thus enabling the augmentation of labour as well as capital productivities, so that higher quantities could be produced employing the same amounts of factors of production. But the manufacturing units that required the use of proportionally more labour than capital base were found to be performing worse than their capital intensive counterparts. This change was noticed since the latter part of the 20th century. The deterioration of the labour intensive units proved to be a serious drawback in the path of the economic growth potentials of UK, since these units had almost been like a bastion behind the nation’s industrial base. One such industry that used to be a stronghold for the nation’s secondary sector was the steel industry. The nation which used to be the largest manufacturer of steel in the world has been outstripped by China in total quantity of crude steel production. In fact, it has also fallen back from its initial status of the world’s largest exporter of steel – the nations that have outshone the British steel giant are China and Japan, accounting for 52 and 35 percent of the total steel exports, while the figure for England lingers around 32 percent. The losses that it had to face in recent years throw some light upon the pessimistic turn that lies ahead in the future for the industry. On account of this gradual slide of the British steel sector from the industrial forefront, UK, which happened to be the most powerful and strongest of all economies even a century back, is now lurking at number six among its contenders. The deteriorating position of the British manufacturing unit has forced in the opening up of newer avenues to keep the flow of income smooth within the nation. This is the reason behind the country’s upcoming tertiary sector that often has been argued to have the potentials for surpassing the nation’s manufacturing sector. The reason mainly cited behind this is the relatively lower investment that the producers need to put into the latter area, thus automatically leading to the rise in the profitability levels of the sector. The gradual decline in the position of the British manufacturing sector and a simultaneous growth in the relatively newer concept of the service sector is the main subject to be explored in the present paper. The discussion will be carried on behind the garb of the slow deterioration of the steel units in the nation corresponded with a fast growth in the national retail sector like that of fast-food chains. Chapter 2 - The British Manufacturing Sector: Emphasis on Steel Units British steel used to be like a separate brand in itself from quality as well as price perspectives. In fact, the truth is that, the nation has still not dodged from its previous position as far as the grounds for quality are concerned. But some internal and external developments have led it to eventually fall back from its premier status. The ongoing fallback in the contribution of the steel industry in the national income is evident from the declining proportion of income being generated from the domestic manufacturing sector. The manufacturing sector in UK used to account for 32 percent of GDP in 1973, but just twenty years later, in 1993, its role was only 21% in the domestic income of UK. As far as 2008 figures, the contribution of the sector has slightly expanded to 22.8% of the gross domestic product (GDP), but clearly, the difference is not significantly large enough to comment anything about the sector’s slow but steady ascent to its previous position. The production of steel as already briefed in the previous section has also shrunk considerably. In 2007, while the country produced 210 million tonnes of steel, in the following year, its contribution fell down to less than 200 million tonnes (198.0 million tonnes). At present, the nation is posited second in the aggregate production list, just after China, but the truth is that, Britain is struggling to keep up with its current position too, with Japan and USA lurking behind at numbers three and four and producing 102 and 92 million tonnes of the alloy respectively. But these changes did not take place on a single day; rather they were the consequence of a string of subsequent economic policies, multiplied with certain exogenous factors aimed to serve some other purpose, but affected the steel industry as an aftermath effect. Some such factors or rather causes behind the deteriorating position of the British steel industry are jotted down in the subsequent section. Figure 1: World Steel Production in 2008 2.1 Factors leading to British deindustrialisation 1. First and foremost, steel is basically a labour-intensive industry. Though the manufacture of steel is impossible without the incorporation of efficient machines, but the operation of those machines are almost manual in all cases. This is the reason why an availability of cheap labour is essential for the industry to carry on with a profitable business. However, with a surge in the labour price globally, especially in developed nations, the prospects of the labour intensive manufacturing units in such nations like Britain are at stake. The output of the steel industry although has declined, there has been a rise in labour productivity in the overall manufacturing sector by around 90% over the past fifty years. According to the theory of marginal productivity, in a competitive market framework, the amount of real wage (nominal wage corrected for inflation levels) that a labour receives is equal to the marginal productivity of the labour, i.e., W/ P = MPL. But, to serve the rising wage levels, the producer needs to earn enough revenues that depend not only upon the productivity of the labour employed, but on a wide range of other factors as well. Due to some exogenous factors cropping up and affecting the output levels of the units, it was no longer possible for the British steel manufacturers to enhance their revenue amounts. Thus, employment in the steel sector earned an overall unpopularity among the labour class. 2. The demand for steel declined to a large extent with the initiation of the oil crisis in 1973. Steel is mainly used as a raw material in the processing crude oil. However, the oil crisis, which sky-rocketed the price of oil, making it unaffordable for most of the developing nations and even curtailed the demand among the population of the developed nations, resulted to a subsequent fall in demand for steel. 3. In the initial years of 1980s, a global recession set in leading to a change in the existing rates of exchange between currencies. The fall in the amount of liquidity or rather the availability of credit within the nations led to a rise in the respective domestic rates of exchange. The prices of foreign currencies in terms of domestic currencies soared up so that it became almost impossible to carry on with international transactions. The amounts of imports were negatively affected and this impact was felt in the British steel sphere as well. Since a large proportion of demand for British steel came from abroad, the sudden fall in the demand for imports hampered the demand for steel, thus leading to a fall in the aggregate production of the commodity. This fall in aggregate production had a multiplied effect on the manufacturing sector of the nation, where steel was considered to be the industrial stronghold. 2.2 Impact of the British deindustrialisation Fall in the demand for British steel around the world since the latter half of the twentieth century led to a fall in the total production of steel within the nation. But this led to the sufferance of the manufacturing units as a whole, not only because steel is the premier manufacturing unit in the economy, but also because it is used as a raw material in a number of other units as well. However, with diminishing demand and rising cost of production (on account of expensive labour and cost of technology), price of the commodity shot up, hence leading to a rise in the cost of production of other British manufactured goods as well. The fall in the level of profitability led to a loss of the competitive edge that British goods used to enjoy previously. Hence no sooner the demand of British steel declined, most other British manufactured goods started losing their world market positions as well. Another problem that cropped up on account of deterioration in the position of the market for British steel is that of unemployment. With most of the manufacturing sectors facing a downslide, they started retrenching the labour force thus leading to widespread unemployment problem within the nation. The fall in the general price level also led to a stagnation in the level of real wage within the nation despite a fall in the nominal wage rates. Moreover, real wage is downward rigid in nature and hence people preferred to choose voluntary unemployment rather than accepting work at a lower wage. However, another factor that worked behind people’s behaviour to choose voluntary unemployment was the gradual growth of the tertiary or the service sector. Chapter 3 – Growth of the British Tertiary Sector The tertiary or the service sector gained popularity with globalisation and liberalisation seeping into every nook and corner of the world. The service sector is considered to be one of the cheapest of all sectors, since it requires a comparatively lower investment in infrastructure than either manufacturing or agriculture. Moreover, the objectives for liberalisation adopted by most national governments has helped in augmenting the circle of people or customers to serve, so that any such unit, located in the farthest corner of the world can serve a client sitting back at another corner through networking. Thus, not only has the liberalisation move helped in augmenting the prospects of the service sector, but the sector’s comparative low investment requirements has made it a favourite among nations facing a critical situation or those which are developing. The importance of the service sector in the British economy is such that in 2006, when manufacturing sector contributed a little above 2 percent to the country’s GDP, the service sector accounted for nearly 80 percent of the same. Service sector significantly comprises of the tourism industry, education, health, social work, recreational activities, financial intermediation (banking and non-banking financial units), research and development, real estate, retail services and computer services. Unlike the manufacturing sector which is dependent upon the availability of cheap labour and of constantly updating technology to stick back in competition, there is no such need arising in case of the tertiary sector. Though some amount of labour and technology is necessary for the successful operation of any sector, the quantity required is not as huge as that for the manufacturing sector. From the large variety of components of the tertiary sector, it is quite evident that the impact of any external factors will have a very minimal effect on the sector. In fact the recent global recession also had a marginal impact on the British tertiary sector relative to the aftermath faced by the manufacturing units and the agricultural units to some extent as well. There was a fallback in the total revenues generated from the real estate sector, since this happened to be the epicentre of the crisis. The effect was felt in the financial units as well since many such units went bankrupt at that time, from the consequences of sub prime lending. However, the other units remained almost unaffected from the grasps of the crisis. In fact, research and development experienced a boom due to a widespread call from the people to save them from the aftermath effects of the financial recession. The retail sector, tourism industry and other recreational units however had a nominal impact of the crisis on their business since people had very little money in their hands to spend on luxury items; they were more eager to save for their future and the subsequent inflation that almost always follows a recession. But soon after the recessionary shock was over, the nation’s tertiary sector started recuperating and soon was found to be outshining its manufacturing counterpart. This growth was highly experienced in the luxury sectors of the economy, as people started spending more and more on luxury consumer products. Chapter 4 – Conclusion Manufacturing is a core industry that requires the availability of factors of production at suitable prices so as to enable the productive activities at a smooth pace. Liberalisation has opened up avenues for the accessibility of suitable resources for production purposes but there happens to crop up constraints in the form of exogenous factors and economic policies. These economic policies are solely guided by the overall financial and economic situation in a region so that any particular policy prescription might act against the developmental prospects of a particular unit. However, steel being an important manufacturing unit of UK, could not be slighted in a similar fashion like many other smaller sectors often are found to be. Rather the national government is expected to frame policies so as to protect its commercial stronghold. But the decline in the demand for the same happened to take place on account of a number of exogenous factors, with the primary one being the financial crisis. On the other hand, the service sector is one of the least affected of all sectors since, the demand for the sector is high even in the domestic arena. Manufacturing sector is involved with the production of heavy industrial goods, rarely used by common people. But the kind of work that the service sector is involved with is highly demanded among the residents of a nation as well, which is why there is a very low probability of the sector getting affected due to exogenous factors, making it safer for the labour force. This is the reason why a recent study has found the service sector employs more workers than the steel industry in Britain today. Bibliography National Statistics (2000) ‘The UK Service Sector’ [Online] Available at: http://www.statistics.gov.uk/downloads/theme_commerce/UK_Service_Sector.pdf (Accessed: 05 December, 2009). Read More