Diane Coyle: The death of industry has been greatly exaggerated

The statistics portray not only a healthy economy, but also a vigorous manufacturing base
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The Independent Online

This admission will probably not be good for my social life, but I'm so fond of statistics that I have some favourite tables, and one batch of these was published just recently by the Office for National Statistics. For anybody interested in the key questions about the British economy - what are we doing, how fast are different activities growing, which goods and services are the most successful in export markets - the annual Input-Output analyses are a treasure trove of evidence.

The headline-grabbing fact was that we now spend more on eating out than on eating at home, deemed more exciting than the other obvious trends. For example, the figures show that although manufacturing had a good year in 2004 (the latest year analysed), the sector has been in steady decline as a share of the economy, while finance and business services make up the biggest sector by far. Nothing new in that, surely? The sad decline of British manufacturing has become conventional wisdom.

As ever, though, the conventional wisdom caricatures a much richer and more interesting underlying picture, to the extent that it distorts the reality. The detailed statistics portray not only a healthy economy, but also a vigorous manufacturing base, in the parts that matter. Looking at the overall shares of manufacturing and services in the total economy (measured here by Gross Value Added, GVA, which differs from GDP by excluding taxes), the manufacturing share of the total fell below 20 per cent in 1999 and below 15 per cent in 2003. In 2004, manufacturing GVA grew for the first time since 1998 to reach 14.1 per cent. By contrast, the share of finance and business services has grown substantially, from just 24 per cent in 1992 to 33 per cent by 2004 (Figure 1). So far, so consistent with the story of manufacturing decline.

Part of that decline, however, reflects the increasing tendency by manufacturing and other businesses to outsource non-core activities, not only cleaning but also IT, property management, accountancy and a host of other services.

To give just one small example of the extent of outsourcing, until the 1980s many large British manufacturers used to employ economists in-house, but now not even a handful do so. That activity has transferred from manufacturing to business services, but it has almost certainly grown substantially. It is impossible to put an exact figure on the extent of outsourcing, but some evidence that it is significant is provided by manufacturers' purchases of services (rather than raw materials, energy or manufactured components) as an input. This share was 17 per cent in 1992 and had climbed further to more than 19 per cent in 2004.

A second reason for scepticism about industrial declinism lies in the detail about activity in different manufacturing sectors. Unsurprisingly, the level and share of activity accounted for by heavy industries such as iron and steel, and other traditional sectors such as textiles and clothing, has been falling steadily. These are sectors in which the UK simply no longer has a comparative advantage, and so global competition has shrunk them. But many manufacturing groups have seen substantial growth during the past decade or so. The fastest-growing include wood products, concrete, structural metals, printing and publishing, pharmaceuticals and motor vehicles, but these are not the only expanding sectors.

Of course it's true that many components of financial and business services have grown even faster. However, the detail there too undermines the easy assumption that we are no longer a proud industrial nation but a country of rentiers instead. There is some truth in that: the share of banking and finance in the economy has increased greatly (to 6.1 per cent in 2004). So, in part because of outsourcing, have the shares of property management and dealing (3.3 per cent), residential letting (8.3 per cent) and leasing (1.1 per cent).

Yet other rapidly growing service sectors include computer services, research and development, legal activities, accountancy, advertising, management consultancy and a host of other business services. These are not manufacturing industries, but we are much better off with an economy consisting of such skilled activities in place of steel mills and weaving sheds (Figure 2). Apart from anything else, pay in those industries is higher and has increased faster.

One common counter-argument to any such optimism is that services need to service something, so ultimately depend on the manufacturing base. I find this simply illogical. Services can service other services. All of human life depends ultimately on basic material needs, food, clothes and shelter, for sure, but also on basic immaterial needs such as administration, or singing and dancing. Why thriving creative industries, as we call them now, should depend on manufacturing machine tools or processing food is beyond me.

Another, more interesting, pessimistic response is that manufactures are traded and most services are not, so a service-heavy economy is doomed to a trade deficit. The UK figures seem to support the argument that a long-term decline in manufacturing's share has resulted in a structural deficit. The share of imports in total demand for goods and services has been broadly stable during the past decade, but the ratio of total UK exports to our total production of goods and services has declined.

However, UK export performance has improved across the board. The proportion of manufacturing output exported has climbed from 18.4 per cent in 1992 to 19.5 per cent in 2003, and the proportion of service sector output exported has risen from 5.8 per cent to 6.9 per cent.

The biggest gains in export shares were recorded by insurance and pension funds, and research and development. Other significant exporters include computer services, architectural services, market research, management consultancy, advertising and legal activities.

It's correct to say that manufactures are more likely than services to be exported, so the changing composition of the economy has helped to reduce the overall export share (as has the growth in the public sector, which doesn't export at all). But, as services globalise, it's clear that the UK has some thriving service sectors which are already good at exporting and getting better.

None of this is an excuse for complacency about the economy. Any business has to stay on its toes to succeed in increasingly competitive global markets. But the conventional wisdom, that industry is in decline while parasitic services doom Britain to long-term impoverishment, does nobody any favours. I suspect it will take more than a few statistical anoraks poring over the data to derail the narrative of decline, however.

Instead, I propose that the ONS simply abolishes the categories of "manufacturing" and "services" as no longer meaningful. If we abandoned this division of activity, which dates back to the 19th century, we would get a much truer picture of the underlying strengths and weaknesses of the economy in the 21st century.

*All the ONS data and analysis is available at www.statistics.gov.uk/inputoutput

Diane Coyle is the managing director of Enlightenment Economics