In the 1980 recession, the UK dropped a significant 25% of national value added in two years. Japan on the other hand, saw a continued increase of an overall 238%. In the 1990 recession both countries faced a major decline, Japan 50% and the UK 30%. During the 1980s and 1990s recessions Britain�s overseas competitors tolerated declining profitability that helped to ensure maintenance of capacity. It may be argued that Britain�s economy declined due to its internal structure while her competitors revived because of theirs. This explains why during the economic booms all except British manufacturing experienced value added growth that exceeded previous peeks.
Historically the United Kingdom shifted from an agrarian based economy to one of manufacturing. The late twentieth century brought further changes to Britain�s sectoral favoritism with encouragement from the newly elected government. Between 1958 and 1979 value added in Britain grew steadily with an overall 50% increase. Although there were a few decreases they may be attributed to regular cycles. In 1979 the Thatcher government won a fierce election. Unlike their predecessors they held relatively radical economic policies. The Thatcher government downsized industrial policy, restraint the growth of public expenditure, encouraged foreign investment and accepted the de-industrialization of the manufacturing sector, (Crafts).
The British economic structure had long been self-financed; this structure was in favour of shareholders and large investors. Management�s primary objectives was concern about increasing shareholder value rather then invest in technology. Surplus operating profits were mainly used to pay equity liabilities and to increase financial assets. Mayer shows that between 1970 and 1984 thirty per cent of the total finance of the corporate sector went into acquiring financial assets. In 1989 a three billion pound deficit appears due to the incurring financial changes in the ownership of said assets, (williams). In eastern Asian countries, by contrast, the function of the financial sector was to serve for the investment of new production. Excess profit was re-injected into the firm to provide a strong stable corporation as well as invest in production technology. Japan is a perfect example. They were able to reduce their production costs to provide a higher recovery cost. This resulted in Japan�s tolerance of declining profitability during the recessions and resulted in it�s increase in value added growth in manufacturing. A stable and predictable exchange rate and a stable corporate financial structure enabled this growth.
The �crowding-out� effect was the restriction of opportunity for the profit-making sectors by the growth of other parts of the economy, (Bacon). The expansion of the government and service sectors drew resources away from the manufacturing industry. Private sectors generally grow faster than public ones and the government had expanded into traditionally private sectors, such as social welfare and education. Overall government�s expenditure amounted to thirty per cent of the total GDP. Business opportunities were limited in the manufacturing industry and a cash surplus was difficult to sustain, (Bacon). The crowding-out led British firms to shift from manufacturing to the service industry. Changes in the sectoral composition suggest that some sectors are more cash generative than others and have growth rates which increase their contribution to value added. Manufacturers are transferring into the services industry because it promotes a higher return on capital, higher contribution to overheads, and larger profits. The growth in the service sector now amounts to two-thirds of the national income. Britain�s economy went through a stage of deindustrialization which led to a reduction of the contribution of manufacturing value added. (Haslam).
Manufacturing also has a higher labour cost share in value added than that of services. This can be shown in graph (insert graph number). UK employment dropped by almost 50% in a 20 year period. However, value added per employee increased by 150%. This could allude to the idea that Britain was changing into a service industry where labour costs were low and value added per employee was high due to the return rates. The UK�s competitors however, were able to employ a larger number of workers while expanding their manufacturing industry. Japan, increased its employment by 70% and its real value added by 369%. This suggests that although Japan remained in the manufacturing industry it was able to combine low wages, high production techniques, and a competitive price advantage.
When Britain began its shift into the service industry, it lost its share of world manufacturing output. While many large British firms were expanding and building their overseas productions, the manufacturing businesses which remained in Britain, were low tech and had high costs. The UK�s trade position weakened and lost its competitive edge. In thirty years, since 1950, the UK�s manufacturing output had halved. UK�s competitors were developing their industries faster and their domestic output was increasing. Competitors witnessed a growth in their manufacturing share of GDP, which was common to newly industrialized countries. Both Germany and Japan increased their share of world output through an expansion in manufacturing; Germany specialized in machines, tools, and engineering while Japan in electronics, motorbikes, and cars. Their international competitive positions strengthened and their share of manufacturing increased. Due to an investment in production they were able to produce units at a much lesser cost than that of the UK, and sold their outputs at an attractive higher western price. This allowed for a higher cost recovery for Britain�s competitors. Korea for example, was able to invert the usual 30-70 ratio where most countries realized 30 cents as cash or value added to the dollar, Korea realized 70. This was partially due to their lower labour costs per unit, which was dramatically lower, resulting in a strong cash recovery.
Eastern Asian countries combined a growing domestic market, low wages, and an efficient investment in production technology to catch-up to the British manufacturing sector and surpass the GDP growth. Britain�s failure to invest in production technology caused it to lag behind its competitors in the international market. Its inadequacy to improve its economic structure fell to political economic pressures. Between management�s concern with increasing shareholder value and movement of the sectoral composition, it can be argued that Britain decline in manufacturing was inevitable.
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