Low costs have attracted investors to Britain, but at the price of quality growth, argues Larry Elliott
ONE of comedy’s finest moments is the scene in Fawlty Towers in which Basil flails his broken-down car with the branch from a tree. The year was 1975, the car was British and the moment seemed to sum up everything wrong with industry at the time.
Michael Heseltine, the deputy prime minister, certainly sees it that way, and he told the Confederation of British Industry meeting in Harrogate this week just how the government’s reforms of the past 17 years have turned the sick man of Europe into the envy of the world.
The Conservatives’ view is simple: look at our record. Since 1979, Britain has halved its productivity gap with Germany, exports are at a record level, the UK is taking 40% of inward investment in Europe, unemployment is down. What is more, Britain has a vibrant service sector, with the City and retailers showing Europe the way.
It shows what you can do when you control costs by taming the unions, making labour markets more flexible, and opposing the minimum wage and social chapter.
Shadow chancellor Gordon Brown sees things differently. Labour accepts that industrial success has to be built on a vibrant market economy, but the Conservatives are taking Britain down a blind alley. Mounting competition from Asia, Latin America and Eastern Europe means there is no long-term future in being a low-cost, low-wage country, Brown said.
Relative manufacturing productivity may have improved in the past 17 years, but Britain’s output record is the worst in the Group of Seven leading industrial nations.
The shrinking of the industrial base has meant manufacturing trade has been in the red since 1982 and this has had a knock-on effect on the current account. There is a simple equation here: net exporters of manufactures – Germany and Japan – run current account surpluses; net importers of manufactures – Britain and America – run current account deficits.
In the 1980s some felt that manufacturing had ceased to matter. Services were the future, and here Britain reigned supreme. This argument has two big drawbacks. First, global manufacturing trade is four times as big as trade in services. Second, Britain’s record in services is not all it is cracked up to be.
A recent four-country study by the National Institute of Economic and Social Research showed that, in terms of productivity in marketable services – finance, transport and the distributive trades – Britain lags further behind France and Germany than it does in manufacturing.
The government pays lip-service to the idea that Britain should be going upmarket, but at the same time its low-cost philosophy is damping down industry. This is true even in hi-tech industries, where the emphasis on being a low-cost centre has meant Britain attracted plenty of screwdriver plants but has yet to break into the research and development end of the global production process.
Perversely, this trend has been accentuated by de-unionisation. A stronger voice for labour, coupled with the introduction of a minimum wage, would help Britain move upmarket. It would mean firms would have to focus on reskilling and retraining staff, perhaps even giving them a say in the company’s future.
The objective reasons why Britain lacks skills are easy to detect. According to research by Ken Mayhew and Ewart Keep, more than half of Britain’s workforce will be part-time, self-employed or temporary by 2001, research and development spending is massively concentrated in a handful of industries, 25% of training lasts for less than a day, and more than one-fifth of jobs are in the low-paid, low-skill personal and protective services sector.
Labour’s corrective – the university for industry, re-skilling, the minimum wage, a better deal for the unions – depends on the right mesh with the demand side of the economy. It could run aground. But at a time when the government seems intent on treating employees like Basil treats Manuel, the opposition is posing the right questions.