There are two reasons why manufacturing is especially important to all economies. The first relates to productivity gains and the second to foreign trade. The productivity issue is that increases in output per head are much easier to achieve in manufacturing than in most service activities. It follows that countries with high proportions of their economies devoted to manufacturing tend to have much more rapidly rising standards of living than those with small manufacturing sectors. The critical point about foreign trade is that, across the developed world, about 60% of all exports are manufactures, around 25% are services and 15% are made up of agricultural products, raw materials and fuels. Any country, therefore, which has a weak manufacturing sector is likely to develop balance of payments problems, and thus to suffer from deflation and slow growth.
2. What has happened to manufacturing in the European Union?
Right across the EU, the proportion of the labour force involved in manufacturing has fallen dramatically over the two decades since 1980. In Germany, it fell from 36.8% in 1980 to 25.1% in 1997; in France, from 24.8% to 16.4%; In Italy, from 25.7% to 18.8%, and in Britain from 26.8% to 14.5%. Because productivity has risen so much faster in manufacturing than in services, the falls in the value of manufacturing output as a proportion of national income have not been quite so precipitate. Over the same period, however, the proportion of all EU output coming from manufacturing has fallen from 26.2% to 20.8%.
3. How does this compare with the Pacific Rim?
In the Pacific Rim countries, the opposite trends are to be found. Over the same period between 1980 and 1997, manufacturing employment as a percentage of the total rose in Korea from 20.9% to 31.0%, in Singapore from 26.0% to 30.0% and in Malaysia from 13.1% to 18.4%. Hardly surprisingly, the result is that all these economies are growing far more quickly than those in the EU - with the interesting exception of Eire, where EU subsidies comprise some 5% of national income. The EU growth rate in the 1980s was 2.4% per annum and 1.9% in the 1990s, compared with 4.2% and 5.4% for developing countries as a whole, 7.9% and 5.9% for Singapore and 9.1% and 5.0% for Korea.
4. How do these trends affect living standards?
The slow growth in economic output which has resulted from the decline in manufacturing in the EU has had a profound negative impact on the growth of average living standards throughout the area. Whereas in many instances in the Pacific Rim, standards of living have doubled every ten or fifteen years, in the EU the increase has been much slower. Between 1980 and 1997 living standards rose by a total of only about 38% - well under half the Pacific Rim average. Worse than this, the last two decades have seen a significant tendency in the EU for the distribution of both income and wealth to become more uneven. This means that while those who are best off have seen their standards of living rise quite rapidly, this has not happened to anything like the same extent to those further down the income scale.
5. What about Pensions?
The slow growth in EU living standards is going to produce a particularly acute problem in future years over pensions, the values of many of which were fixed at a time when the EU was growing much more quickly than it has been recently, or is expected to achieve in the coming decades. The result is that the claims of pensioners on the rest of the economy are likely to rise very sharply. For both demographic reasons and because of the way that pensions are generally funded by savings plans in Britain, the problem looks manageable here, where pension costs are expected to be 4.5% of GDP in 2000 and 5.0% in 2040. In Germany, however, the figures are expected to be 11.5% and 18.4% and in Italy 12.6% and 21.4%. With all the other competing claims on public expenditure, who believes that it is practical for one fifth of the whole of the national income to be paid to pensioners? The only solution to these problems is a higher growth rate, so that there is enough money to pay older people the pensions which they have been promised
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6. Why has growth in the EU been so low?
If EU growth rates have been low, mainly because of the decline in the proportion of manufacturing in GDP, why has manufacturing done so poorly in the EU compared with elsewhere, particularly in the Pacific Rim. There is a straightforward answer to this question. The average costs of manufacturing a very wide range of goods are much higher in the EU than they are elsewhere. In part, this has been due to protectionist policies which have kept the costs of raw materials - and especially food - high. The main reason, however, has been the monetary and fiscal policies pursued in the EU, which have kept real interest rates up, made money tight, constrained government borrowing to 3% of GDP, caused reduced output and unemployment, and which have led to EU currencies being overvalued. While it is true that the EU still runs a trade surplus, this is only sustainable because of the deflationary policies pursued to keep demand down. These policies, in turn, have resulted from the efforts made since the 1970s - culminating in the Maastricht Treaty - to establish monetary union in the EU. The consequence has been huge deflationary pressures across the Union in order to reduce inflation in other Member countries to German levels.
7. What about unemployment?
The slow growth rate in the EU has not only adversely affected living standards. It has also led to the huge increase in unemployment seen over the last two decades. Registered unemployment in the EU is still almost 10% - and actually rather more than 10% in those economies which are now in the Single Currency area. The resulting total figure - still some 17m people - is, however, a big underestimate of the number of people whom International Labour Office statistics show would like to work if the opportunities were available to do so at reasonable wages. Many people have given up hope and are no longer looking for work. If they all tried to do so, EU registered unemployment would be closer to 30m than 17m - a true worklessness rate of some 17% - a staggering waste of talent and opportunity.
8. Is deregulation the answer?
The fashionable solution to the EU's lack of global competitiveness is to advocate deregulation and increased job insecurity, in order to drive down wage costs, while promoting investment, education and training to try to improve productivity and competitiveness. Even if these policies can be made to work at all - which, in the light of experience, is very doubtful - they are a hugely painful and socially destructive way of achieving objectives which can be much more readily attained in other ways. The real solution to the EU's problems lies not in imposed structural reform, but in using the tools of macro-economics to get the EU cost base down to levels, country by country, which are competitive with the rest of the world. This would then make it possible for all the EU economies to achieve full employment, without some of them overheating in the process.
9. How has Britain fared?
Regrettably, Britain has made the huge mistake of allowing the sterling exchange rate to get much too high, especially recently. The enormous difficulties currently faced by the British car industry show all too clearly the damaging effect this is having on our manufacturing capacity. Undoubtedly, the weakening euro is the main cause of improving prospects in the Single Currency zone, at least for the time being. There is, however, no reason why we could not get the value of sterling down if we were determined to do so. The essential requirement is to lower our own interest rates, and thus cease to make London such a magnet for the inflow of short term money - pushing up the pound as it flows in. The extra danger now is that we join the euro at something close to the present grossly over-valued rate of exchange. If we make this mistake, then the prospects for manufacturing in Britain are going to be very poor not only in the short term but for the foreseeable future.
10. What is the way ahead?
There is only one way for the EU to achieve the same increases in living standards as the rest of the world. It is to attract back its fair share of manufacturing industry. The only way for this to be done is to get the cost base in the EU, country by country - including Britain - down to the world average, and then to keep it there. The vital condition for this to be achievable, however, is one that the Single Currency countries have recently denied themselves. Without exchange rate flexibility, the prospects for the reduction in costs required being attained by each Member country is hugely reduced. This is the key economic issue about the Single Currency. Provided Britain stays outside the euro, we can retain within our own democratic control the power to implement the policies we need to make our economy grow more quickly, to reduce unemployment still further, to increase the tax base and public expenditure and to produce a fairer, more prosperous and more contented society. Once signed up to the Single Currency, we would be in the hands of unelected bankers, whose inclination has never been to pursue such policies. This is why the debate about the euro is so important, and why Britain needs to retain the self confidence to stay out of the Single Currency.
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