Hamish McRae: Made in Britain: a service economy

We just have to race on, accepting change and trying to develop skills other nations will find hard to match
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The Independent Online

Can the UK live by money alone? No, that is not intended to be a philosophical question, but an economic one. This week, the pages have been full of debate about the "rich list", the fact that the UK in general, and London in particular, has become the preferred base of the global rich and mega-rich.

Meanwhile yet another car plant is being closed, this time Peugeot's at Ryton. We make money from servicing the needs of the rich, but we import a lot of cars and the closure of a car plant will mean we will import yet more. Maybe they can be made more cheaply in Eastern Europe, but we have to pay for them somehow. Can we make enough out of our service economy to keep us in the style to which we seem to have become accustomed?

It is huge question, a disturbing one, and one that won't go away. The expansion of the EU has catapulted Eastern European countries directly into our markets, and with lower labour costs, lower company taxation and, thanks to a wave of investment, newer plants, that competition will grow and grow. But quite aside from the consequences of enlargement, the wider globalisation of the world economy means that we are competing against people on the other side of the world. They are just as clever as we are, increasingly as well educated, and are prepared to work for perhaps one tenth of our wages.

So the question is not just one of manufacturing or services - making things or managing money - though that is part of it. It is also one of comparative advantage - what can we do better than the competition?

Manufacturing first. The balance between the different chunks of the economy changes over time, and that is normal and natural. We think of Britain as a manufacturer because we were the first industrial nation, the workshop of the world. But even in the 19th century, when that epithet was coined, Britain ran a trade deficit almost every year. At that time there was profound concern that the country's agriculture was being run down, with half our food being imported. To be dependent on foreign cars is much less serious in strategic terms than to be dependent on foreign food, as we discovered in two world wars.

So the real issue is not so much whether it is wise to allow manufacturing to shrink, even assuming we knew how to prevent it. There are very real social and regional concerns, and they need to be tackled. But what matters overall is general wealth creation and its sustainability: whether the service industries that replace the lost manufacturing employment can offer a secure flow of foreign revenue and secure job prospects.

The classic case study has been the replacement of production-line jobs with call-centre ones. When the latter sprang up, they were seen either as a saviour for regions that were running down manufacturing or, depending on your view of the world, a new wage slavery. They were jobs, but mostly low-paid ones, which maybe would soon disappear to India. As it turned out some have done so, but many have stayed. In any case, the greater threat has come from technology: people using the internet, for example to book a flight, instead of making a phone call.

The moral surely is that nothing is really secure: we just have to race on, accepting change and trying as best we can to develop skills that other nations will find hard to match. Seen in that light, catering for the global rich is one example of a wider theme: one service where we seem to have a clear advantage, at least for the time being.

But it has to be one of many. The full balance of payments accounts for 2005 will not be available until the summer, but the pattern of recent years seems to have been repeated last year. It is that we cover an ever-smaller proportion of our imports with physical exports. In fact exports of goods account for only about 40 per cent of our total foreign earnings, with the rest coming from services and earnings from overseas investments. That is astounding. We are the most "virtual" exporters in the world. In shorthand, we have as a nation become a bank instead of being a factory.

As such we have not done badly. Sure, we have a current account deficit, but at about 2.5 per cent of GDP that seems to be acceptable. And as the Chancellor reminded us in his Budget speech, the UK is now second only to the US in terms of national income per head in the large industrial nations.

This strange position carries both strengths and dangers. The strengths are that it seems to be harder for China, India or the new EU members to compete against a bank than it is to compete against a factory. I suppose that is because the skills are harder to replicate and, insofar as the UK does not have the home-grown skills, we are prepared to import them.

And of course, the factory/ bank shorthand conceals the huge complexity of the various service industries that the UK has developed. The average salary in the City for support staff (ie not the high-flyers who earn millions) is now over £51,000. Why does the City pay so well? Because the banks are fighting a "war for talent", and it is very difficult to find the skills.

But there are dangers. Of course, the economy, an economy generating $1,900bn a year, does a vast variety of different things. But the motors of growth are quite narrow. We have specialised to an extraordinary extent, making a huge bet on the global economy continuing to become yet more global. You see that in things we lose: we lose a car plant because of globalisation. You see it most evidently in things we gain, including that batch of global billionaires who base themselves here. The fact that seven out of the top 10 on the UK rich list are foreign-born is globalisation personified.

And that is the key to understanding both our strategic strength and our strategic weakness. While the global economy continues to thrive we will, unless we do something seriously stupid, continue to do well along with it. But if it were to falter, if there were some global trade war or some collapse of international finance, we would suffer gravely. So would other countries, of course, but I fear we would be hit harder than most because we have more to lose.

And the possibility of an end to this phenomenon we call globalisation? I think you have to see what is happening in the context of history. The last great burst of globalisation, that of the 19th century, was brought to an end by the stupidity of European political leaders, who allowed the slither into the First World War, the 1930s depression and the rise of Hitler. It is not very comforting to have to depend on the wisdom of politicians to keep us in profit - but they are the people who could muck it up.

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