High-tech isn't enough: Britain needs to stop pricing its low-tech goods out of the world

The new book Progressive Capitalism in Britain encourages a narrow focus on high-tech exports. Instead, Britain must allow its medium and low tech exports flourish too.

John Mills
25 March 2015

© Copyright Hugh Venables and licensed for reuse under this Creative Commons Licence.

Progressive Capitalism in Britain summarises much of the progressive thinking which is currently taking place in the UK on how we should try to shape our economy over the coming years. How should we get it to perform both better and more fairly? How is an economy which suffers particularly from both static productivity and a large structural balance of payments deficit to be galvanised into delivering higher living standards not just for those who are already well off but across the board?

The answers provided are familiar. We need to reform our financial and governmental institutions to make them better at supporting high tech industry. There needs to be much more of a focus on our vocational educational system. Companies need to take a longer term view. Financial services need to be better geared to supporting industry rather than the housing market. The crucial issue, however, is whether changes along these lines, however desirable they may be in themselves, will make any real difference to our economic prospects.

First, does it really make sense to see the future in high rather than medium and low tech manufacturing? It is true that a lot of our industry which sells abroad is high tech but this is largely because its output is both not generally very price sensitive and – partly for this reason – difficult but not impossible to attack from much lower cost base economies. This is why it has survived while industries which are more vulnerable have all gone under as the proportion of our GDP coming from manufacturing has gone down from about a third as late as 1970 to barely 10% now. The problem with relying on high tech is then twofold. First there will never be enough of it even in the best of circumstances and second, just because it is more difficult to attack, it does not mean that it is not vulnerable to lower cost competition. Relying on high tech thus poses both a short and a longer term problem of vulnerability.

If this is true, however, it leads to a very awkward conclusion. We are never going to be able to pay our way in the world unless we can also compete - at least on import substitution if not always on exports – with enough low and medium tech manufacturing, so that we can get the proportion of GDP coming from manufacturing as a whole up to about 15% of GDP. Without this, we will never stop the balance of payments being a heavy disinflationary burden. For this rebalancing to be achieved, we will, however, need to be competitive across a much wider range of manufacturing output than we have at the moment. For this to happen, we need a far lower exchange rate – a factor not mentioned anywhere in Progressive Capitalism in Britain.

The fact that the cost base in the UK – all the components of cost in sterling that are charged out to the rest of the world via the exchange rate – is so high also bears very heavily on another of the issues raised in the booklet. The main reason why we have so many people on low wages is that, via our over-valued currency, we try to charge out our labour costs at a higher price than the rest of the world is prepared to pay. This and the extreme difficulty of making any money out of manufacturing for export means that investment in the potentially most productive part of our economy is exceptionally low, making it impossible to price ourselves back into the market by increasing output per head.  This is why we are currently locked into a vicious spiral of pitifully low levels of investment, static productivity and low wages.

The solution advanced in Progressive Capitalism in Britain is to concentrate resources on increasing the education and skill levels in the UK labour force. Other things being equal, of course the higher the qualifications that the workforce has, the better, but many jobs which are well worth doing – especially outside high tech industries - do not require either high levels of education or training. More important are workforces which are punctual and reliable - qualities available across all socio-economic groups. Higher productivity can then come from investment in labour saving machinery rather than enhanced brainpower.  The danger in concentrating on higher and higher skill levels, which are actually only appropriate for quite a narrow range of jobs especially outside high tech industries, is that far too many people get left out because there are too few employment opportunities in the sorts of activities where very high skill levels count.

This analysis suggests that – leaving aside whatever else is done on the supply side to improve the competitiveness of the UK economy - concentrating resources on high tech and better education and training is going to be much less effective at getting the UK to pay its way in the world than making the whole economy more competitive by going for a much lower exchange rate. This is not a perception which is widely shared, but as long as all the available intellectual horse-power is deployed into advocating plying resources into too narrow and vulnerable a sector of our economy, we will go on losing ground in world markets, the balance of payments will be a constraint on expanding the economy and living standards and job opportunities will stagnate. This is surely not what the authors of Progressive Capitalism in Britain want to see happening.

John Mills is a funder of openDemocracy.

John Mills is a donor to openDemocracy.

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