Can de-industrialisation be reversed?

man in car factory Image copyright Christopher Furlong
Image caption For advanced economies manufacturing tends to become less important

A new study from the Brookings Institution argues that American prosperity is being driven by advanced industries. It raises the question as to whether de-industrialisation can be reversed.

It's a refrain that has been heard frequently in the US and the UK after the financial crisis: there's a desire to rebalance the economy away from banking and towards making things once again.

Made in America, Made in Britain, Designed in Britain are among the phrases heard from governments and businesses after the worst recession in a century.

De-industrialisation is when industry counts for less than services in the economy. When countries grow, they tend to industrialise, so they move out of agriculture and into manufacturing, which has higher productivity and wages.

Industrialisation, and indeed the Industrial Revolution, is how countries become middle class, and some become rich.

Inequality

But, for advanced economies, manufacturing starts to become less important as a share of output once they become prosperous. Business services, retail, and finance start to dominate, and workers move out of factories and into offices or stores.

This process is associated with a loss of good, blue collar jobs, increased inequality, and less innovation since most research goes into industrial production.

But, reversing de-industrialisation is challenging. Emerging economies like China can produce more cheaply and information and communications technology (ICT) has lowered the costs of logistics, so that globalisation makes it harder for rich nations to compete with lower cost producers.

In fact, Dani Rodrik of Harvard points to pre-mature de-industrialisation for some developing countries which are moving from agriculture to services, which holds worrying consequences for countries that have yet to gain a firm foothold in the middle income strata.

Recovery

So, can it be done?

According to the Brookings Institution, advanced industries - hi-tech manufacturing and skilled services - where one fifth of employees have STEM - science, technology, engineering and maths skills - have led the US recovery.

Advanced industries have grown 30% faster than GDP since 1980. Since the 2009 recession, they have added one million jobs. Even more remarkably, advanced services have created almost two thirds of all of the new jobs during the recovery.

In an era of slow wage growth, advanced industries also report earnings growth that is five times faster than the average for the US.

And they are a fast-growing part of the economy. Adding $2.7 trillion to GDP, advanced industries are the biggest part of the American economy, accounting for 17% of GDP - that's more than finance, health care, or real estate. These industries account for approximately one quarter of all US employment.

Image copyright Spencer Platt
Image caption Staying in the US makes more sense for manufacturers thanks to a raft of falling costs

Automation

But, manufacturing jobs are still about two million below their 2007 levels, according to the Information Technology and Innovation Foundation, and they attribute the resurgence to a rebound from the depths of the recession.

That was echoed by Matt Murray, director of the Center for Business and Economic Research at the University of Tennessee. He forecasts that manufacturing jobs will decline after 2017 and return to the long-term, downward trend. It's because of overseas competition but it is also due to automation, so that more output can be made with fewer workers.

That's consistent with the long-term trend where American industrial output has increased with some ups and downs since 1950 in absolute terms, but has shrunk as a share of GDP since services has grown relatively more quickly.

After all, the United States is the second largest manufacturer in the world with about $2trn in annual output, only losing its crown to China a few years ago.

But, manufacturing jobs have declined since 1980. After rising from 13 million in 1950 to peak at nearly 20 million in 1980, 2010 saw a drop to a historic low of about 11.5 million. So, the impressive rebound since then still takes employment to around 12.3 million, which is the lowest in the post-war period, lower than in 1950.

Growth

It's a similar pattern in the UK. Around 2.6 million people work in manufacturing, a figure that has halved since the late 1970s. Now, manufacturing accounts for 8% of jobs, down from a quarter of all jobs in 1978.

Manufacturing accounts for about 10% of national output, having dropped by about one third in the late 1970s. But, like the US, British manufacturing has grown in in absolute size over the past few decades.

Although hard hit in the last recession, Britain is still the seventh largest manufacturer in the world and the bulk of R&D spending, more than 70%, goes into the sector.

Compared with its share of GDP, manufacturing makes an outsized contribution to exports, accounting for nearly half of British exports. The UK still imports more manufactured goods than it exports, so there is a trade deficit.

But, the industries that sell overseas are also in advanced sectors, so technology, R&D and STEM workers constitute the new face of manufacturing too.

But, unlike the US, there hasn't been a rebound in manufacturing jobs in high-tech sectors like chemicals, pharmaceuticals, or automobiles. Only the aerospace industry has had some job growth since 2007.

Also, labour productivity, that is output per worker, is low. Britain ranks above the world average, but lags other countries like the US as well as Germany.

Middle class

I've written before about the lack of STEM workers being an impediment for UK employers who believe that it could be a brake on economic growth.

Plus, there are other favourable factors that have boosted US manufacturing such as the shale energy revolution that have lowered costs. So, even if wages in the US are higher than emerging markets, for car companies where labour costs are only 10% of the total, other costs falling in America makes re-shoring or bringing production back to the US look appealing. Besides, wages are rising in not just China but also other emerging economies that have joined the middle class in droves.

So, is it possible to reverse the trend of de-industrialisation?

Even if output grows, employment will likely face pressure from robotics and technology.

Plus, even with the resurgence in the US, manufacturing is unlikely to become the biggest part of the economy.

But, economic growth can be boosted by new engines, such as advanced industries.

There are signs that it is happening in the US. And there are lessons for Britain and other advanced economies looking to re-balance their drivers of economic growth.

For more, watch Talking Business with Linda Yueh. Details of when to watch are at bbc.com/talkingbusiness.

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