Tuesday, November 25, 2008

Manufacturing is the key to long term stability

One of the things I have been saying for a long long time on this blog is that a nation that makes nothing is worth nothing.

There has been a feeling in this country for a long time that we can base our economy on "services" - and financial services in particular - but this, in my opinion, is a misguided belief. Our trade balance has been in decline for decades - ever since we joined the EU funnily enough - but much of the decline has been hidden by the boost that services has given to our trade.

That was never sustainable, though. First of all, what on earth makes anyone think that any other nation can not provide a service any better than we can - and for less money? It's been obvious over the last ten years that more and more of our service provision is moving out of the country - call centres were once a growth area in the UK, but now these are being moved to other nations which can provide them just as well for a lot less money. This was bound to happen and is certain to happen with other services too - including finance now that our banking system has all but collapsed.

Britain is predicted to be harder hit by this recession - why is that? Countries like Germany, France and Italy have economies that are, on the face of it, in a far worse shape than ours, but they stand to come out of it sooner and less damaged than we do. Why?

Because they still make things that people want to buy. Manufacturing has always been the key to economic success and always will be. Services can be a good supplement to manufacturing, but should never be the main driver of an economy in any developed nation - it was foolhardy to believe otherwise. While we allowed our manufacturing segment to decline disastrously - and Thatcher was as guilty as anyone of that even if she didn't start it - other countries in Europe took steps to ensure that their industries were protected.

That is why they will survive this better than we will. My only hope is that, once we start to recover we learn from the mistakes of the past and start to rebuild our manufacturing industry. We must do it and the government should take the lead by creating the conditions that enable people to start manufacturing industries.

That alone is not enough, however. What is needed in the long term are major manufacturing industries and this is where the government can and should take direct action. The simplest way of doing that is by building a defence industry worthy of the name.

We need tanks, armour, guns and ammo for our army. We need ships for our navy. We need aeroplanes for our air force - but we don't have a defence industry that can provide for those needs. Many of our latest equipment is made by foreign companies because we simply do not have the industry at home to produce what we need. Now is the time to start building that industry.

Nor should that industry be one huge lump of a company. The mistakes of the past must be understood and avoided too. Taking our once great and diverse aircraft industry and rolling them into one big lump sounded the death knell for British aircraft development. Defence thrives on competition and that is why we need a number of companies competing for contracts.

Our armed forces don't necessarily need state of the art equipment either. Our army in Afghanistan suffers from a lack of air support. Much of what there is is provided by the USA. The conventional thinking is that helicopters are the things we most need - but helicopters are hugely expensive and surprisingly vulnerable. At a time when the RAF is spending billions buying the new Eurofighter Typhoon there is a certain irony that the aircraft they could most do with in Helmand province is the old WW2 Hawker Typhoon fighter bomber!

The US Grumman A10 - although massively out of date - is one of the most effective aircraft in the theatre. It is (relatively) cheap, rugged, can loiter in battle areas for a long time and can take damage that would have your average helicopter gunship costing 10 times as much scuttling for base. We don't even need anything that sophisticated - and the A10 is far from sophisticated! - but we have nothing like it.

One of the major lessons we learned from WW2 was the importance of close air support (CAS). In recent years it has been thought that this should be provided by helicopters, but these are expensive, mechanically complex and require a huge amount of maintenance. The lack of CAS in the theatre is the principal reason why we struggle to get a grip on the region. We take a village then lose it a day later because we don't have CAS to provide support for troops. A cheap fixed wing aircraft that can operate from improvised forward air bases would be a major asset in the conflict - if only we had one!

Anyway - I've gone off the topic. The point is that our government should be setting up the companies to make these things - ships, aircraft, tanks, guns and so on. Ships, planes and tanks need steel. Steel needs coal and so on. As long as you ensure that the source of supply is British you'll soon have burgeoning industry - British ships made of British steel made from British coal etc.

Although these industries will be state owned initially, there is no need for them to remain so. As soon as the government can they should sell them off to private ownership - with provisions that they remain in British ownership of course. There should be diverse companies all operating in competition with one another.

There are more benefits besides that. As the defence industry is a major source of technological advancement it is inevitable that we will need highly trained and skilled people. Engineers, designers, fabricators and so on. Rather than training our young in media studies we would be training them in aeronautics, electronic engineering, mechanical engineering and so on - the valuable skills which any developed economy needs to progress.

There is also the possibility that these companies could (should?) diversify into making things for the average consumer. Why shouldn't a new "Land Rover" produce cars? Why shouldn't a new "BSA" make motorcycles? Or a new avionics company make computers and televisions?

This is why I believe, if it is necessary for us to spend our way out of recession, we should spend the money in areas which will provide long term benefits - and that means making things.


Nick von Mises said...

Agreed, except we don't even need the government to set up these businesses. We just need them to publish their requirements, invite a tender process, and commit to buy. A newly set up private company would secure funding while the ink was still drying on the contract. That has the extra advantage that if the company messes up, they don't get paid. Like in that thing we used to have - the free market

Stan said...

Oh, private ventures would be better no doubt about it, but would anyone do this? My view is that, in the absence of any players in the market the government should set up the companies required - but yes, private would be better. The government could offer other incentives too for people to do this - but the essential thing is that they must be British and commited to remaining so. That's not xenophobic - just plain old pragmatism.

Nick von Mises said...

The only incentive the government needs to offer is a guarantee to pay the contract price upon delivery of the contracted product.

Stan said...

That's fine for the contract winner, but what about those private vrentures that don't get selected? For example, suppose the government want a new infantry rifle. They publish the specs - weight, calibre, mag capacity etc. - and say, for example, three new private ventures tender for it. What happens to the two that fail? That's why I believe the government should start the companies themselves. For example, the govt set up 3 small arms amnufacturers - one in SW England, another in N Wales and a third in NE England. The contract winner may turn out to be the company in NE England, but the government - because they own all three - can insist that all three companies manufacture the weapons (each one making complete units - not bits). I know it's not the most cost effective way, but it ensures a competitive market and diversity. The next time the government has a requirement - for a LMG say - they put it out to tender and so on....

You can do the same for aero engines, aircraft and so on - with ships it's a little harder, but still possible. The important thing is that you are creating proper jobs, boosting manufacturing and fulfillng a genuine need. Once those companies have achieved viability in the competitive market then you sell them off.

Sorry - long reply to a short comment, but it's an area where I believe governments should intervene. After all, the governments primary purpose - above everything else - is national defence.