De-industrialization
A recurrent theme in Singh’s research was the concern, echoed during the second half of the twentieth century by many other British observers, that Great Britain, once renowned as the workshop of the world, was losing its leadership position and the employment it sustained in manufacturing industries. In a word, it was experiencing ‘de-industrialisation’. This theme was addressed inter alia in Singh (1977, 1987, 2000).
In assessing these phenomena, Singh stresses two quantitative indicators. One is the share of total civilian employment located in British manufacturing, the other the net balance of foreign trade on the manufacturing account. He dates the peak UK manufacturing employment share at 36.1% to 1955, after which a marked and accelerating decline set in. He observes with alarm (Singh 1987: 304) that ‘[i]n 1982, for the first time in a century ofits industrial history, Britain.. .recorded a deficit on its manufacturing trade’. Providing perspective, he observes that the USA has experienced similar vicissitudes. My own more detailed statistics yield an analogous conclusion for the USA (Scherer 1999, 2012). The share of US employment recorded in manufacturing plus mining (the latter with similar export potential, and often vertically integrated with manufacturing) rose fairly steadily from roughly 10% in 1820 and reached a peak (abstracting from a sharp decline during the Great Depression and a spurt for Second World War production) at 30.1% in 1953. It then declined more or less steadily to 11.1% in 2010. Also paralleling Singh’s data for Great Britain, the USA experienced a sharp turn to negative manufacturing trade balances during the 1980s (Scherer 1992: 4). The near simultaneity of these changes in Great Britain and the USA suggests, as Singh postulates, that fundamental economic forces were at work.
Considering why manufacturing, agriculture, and services have exhibited such vastly differing employment share trends, Singh stresses two variables (Singh ibid.: 303): the income elasticity of sectoral demand and the rate of labour productivity growth. Productivity growth has tended over time to be much higher in agriculture and manufacturing than in services. The income elasticity of demand for agricultural products in prosperous economies has been on the order of 0.2, but much higher for manufactured goods and especially for services. With low-income elasticity and high productivity growth, the share of US employment devoted to agriculture has declined sharply (from 72% in 1820 to 2.5% in 1999). Eventually, productivity growth outraced the income elasticity effect for manufactures, whereas in services, relatively high- income elasticities exhibited no sign of compensating for low productivity growth. In preparing this chapter, I was astonished to find Singh’s correct analysis of the countervailing forces, since I struggled to work them out on my own (Scherer 1999: 20-21, 131) and believed, erroneously, that my derivation was original.
Why should policy makers worry about a declining share of manufactures in national employment and a deteriorating balance of trade in manufactured goods? In a frictionless, static Walras-Heckscher-Ohlin world, there might be scant cause for concern. But the real world is not frictionless, Singh argues: exchange rates and wages are sticky and governments may struggle to maintain something approximating full employment. He warns (Singh 1977: 133) that the balance-of-payments difficulties stemming from a weak competitive position can force governments to restrain aggregate demand, which leads dynamically to lower investment and hence lower growth of productivity and continuing balance-of-payments difficulties. In that seminal paper (ibid.: 128), Singh generalizes:
Given the normal levels of the other components of the balance of payments, we may define an efficient manufacturing sector as one which...not only satisfies the demands of consumers at home, but is also able to sell enough of its products abroad to pay for the nation’s import requirements. This is, however, subject to the important restriction that an ‘efficient’ manufacturing sector must be able to achieve these objectives at socially acceptable levels of output, employment, and the exchange rate.
He also worries appropriately about the dynamics. Quoting Nicholas Kaldor’s characterization of the manufacturing sector as an ‘engine of economic growth’, he observes that manufacturing generates technological innovations which advance productivity in other sectors and enhance the quality of exported goods, allowing exporters to capture significant market shares at favourable prices and hence permitting the payment of higher real domestic wages, all else being equal. This too, I believe, is an important truth. During the 1970s, the manufacturing sector conducted roughly 95% of company-financed research and development in the USA, generating a rich flow of products conferring externalities on other sectors of the economy (see Scherer 1984). That share has fallen to roughly 70% more recently with the growth of software and biotech industries,[1] but manufacturing remains the predominant engine of growth in the USA. Contrary to the glib assertion to the contrary by Michael Boskin, at the time chairman of President Ronald Reagan’s Council of Economic Advisers, it matters considerably whether companies are producing ‘semiconductor chips or potato chips’.
Challenging the view of some economists that the debate over whether UK and USA firms are losing their ‘competitiveness’ as a ‘dangerous obsession’, Singh laments the inferior quality, design, and performance of British manufacturers’ products relative to those of international rivals. Moreover, on the other side of the pond, he argues (Howes and Singh 2000: 17) that, ‘both from the short-term and long-term perspectives of the United States as well as the world economy, the United States needs to improve its national competitiveness in order to achieve sustained faster growth of output and productivity’.
To improve their competitiveness in this context, Singh warns (1977: 134) that the UK and in a later work (Singh 2000) the USA might for a considerable period of time have to abandon the regime of free trade and free convertibility of currency. I agree that a problem exists and that solutions are needed. I am sceptical, however, whether protectionist tariffs necessarily improve matters. In a statistical analysis of cross-border technological rivalry (Scherer 1992: 152-170), I found that 308 US companies’ R&D/sales ratios grew more slowly between 1971 and 1978, the greater was the fraction of their sales protected by import barriers, taking into account variables proxying inter alia for the richness of technological opportunities. Year-to-year changes in company R&D/sales ratios were also negatively related to the strength of import barriers, ceteris paribus. The relationships are weak and fall short of the 95% statistical significance point, but the results are at least cautionary. A regression analysis of aggregate investment by the import-plagued US steel industry (Scherer 1996: 193-195) showed, again weakly, that steelmakers reduced their investment in plant and equipment, on average by a half billion dollars per year, when import barriers were in place, taking into account also steelmakers’ output, cash flow, and interest rates. For infant industries in emerging nations protectionism may well support technological dynamism, but in mature economies like the USA and the UK, barriers may act more as a narcotic than a stimulant. Industrial policies emphasizing wider and better education for engineers and scientists, vigorous support of basic science, and R&D tax credits would seem a more promising route.
In his 2000 book with Howes on international competitiveness, Singh returns to his early research, suggesting that the myopic time horizons companies adopt to keep current profits high and thereby discourage take-over attempts concurrently impede incentives for innovative investment and the cultivation of firm-specific human capital. The authors suggest (ibid.: 19) that ‘throwing sand in the gears of the market for corporate control’ might help encourage longer-term investment perspectives.
- [1] This is in part a statistical illusion, because biotech start-up firms with no products to sell are assignedby the US Census Bureau to the service sector, but when they begin selling products, they are reassignedto manufacturing.
