MN101: Business Analysis and Decision Making

Lecture 2 handout: How can a Value Added Framework explain the reduction in the UK Manufacturing Sector?

1. Aims: • To introduce the use of the value added framework. • To understand the process of wealth creation. • Appreciate the importance of sales and value added. • Present a basis for discussion in the workshops.
2. Context/scope: • Lecture presents a method of analysis which all will become familiar by the end of the course. • Understand and appreciate the foundations of economic growth and decline. • International comparisons (mainly UK centred). • Set the corporate performance within a macro context.
3. Lecture structure- fairly straightforward: • First, we consider the economic background till 1980 and detail some of the economic failures/concerns. • Secondly we discuss the features of the two dominant explanations of economic decline (I) the “crowding-out” theory, (ii) trading failure. • Thirdly, we discuss the merits of the explanations using a range of statistical data. • Fourthly we discuss the implications on industry of the post 1979 change in economic policy. • Use a Value Added Framework to explain economic decline.

The Concerns

1. Declining share of international trade.
2. Declining share of world manufacturing output.
3. Reduction in manufacturing share of GDP.
4. Weak Balance of Payments profile. = UK’s declining international role.

The Explanations

Two competing explanations of economic decline:
1. The “crowding-out” explanation by Bacon & Eltis in the book Britain’s Economic Problem: too few producers. • The central explanation was expansion of the government and service sectors which had drawn resources away from manufacturing.
2. The failure in International trade explanation by Ajit Singh’s in his article UK Industry and the World Economy: a case of de-industrialisation. • The central explanation was the UK’s relatively weak international trading position.

The Evidence
1 Bacon & Eltis thesis: does the evidence support it? • Government’s role had expanded with government’s share of GDP (inc transfer payments) at 42%. • Government expanded into health, a social welfare provision traditionally within the private sector. • Government had expanded into traditional private sector industries. • Private sector services grew faster them manufacturing.
Overall the government’s share after excluding transfer payments reached 30%.

Conflict with the thesis. Employment migration:

Service sector grew from 12 million in 1974 to 15 million by 1985 -71% of the working population.
But growth all female employment, which was largely absorbed by services. Male employment had fallen by 3 million or 27% during the same period.
So where was the “crowding-out”? Wages in services were lower with an increasing working population forced into service sector employment not manufacturing employment.

Rejection of the Bacon & Eltis thesis:

• Manufacturing did not suffer a labour shortage. • Growth in services aided manufacturing growth as the workers bought manufactured goods.
Does an international comparison support the thesis?
- The UK’s competitors all experienced service sector growth but manufacturing employment also grew.
- Like the UK, the competitor-manufacturing sector’s paid higher wages than the service sector.
Again we must reject the thesis.

2 The Singh thesis. Does the evidence support it?

• The UK’s trading position progressively weakened. • The UK’s share of international trade had halved in the 30 years since 1950. • Manufacturing’s trade surplus had declined • Balance of Payment’s weakness resulted in ‘stop-start’ economic policies.
This appears to be a strong thesis.

International comparisons support the thesis - evidence contrasted sharply with the UK. • Both Germany and