Sunday, July 2, 2023

Government intervention for manufacturing

 There are growing cries from manufacturers for government support. These are not new. Here I try to map out the pattern of support given in the period since WW2 and the impact that it had. 

Following the end of the war, government restricted imports and encouraged all parts of industry in an export drive. This was assisted in 1949 by a much needed reduction in the dollar exchange rate from 4.03 to 2.80.

In the fifties and early sixties under a Conservative government, the idea of tripartite working between the state, industry and trades unions was being accepted. The Conservatives had come under pressure to modernise industry, given the growing awareness that other countries were doing just that, and with tangible success. The Department of Scientific and Industrial Research, set up during the Great War, had reported, for example, that machine tools were ‘a key strategic sector for the modernisation and expansion of British industry’. Such exhortations fell on deaf and fiercely independent ears. The main interventions were those to counter restrictive practices in the form of the Restrictive Practices Court and an encouragement of investment in Research and Development.

The National Economic Development Council was formed in 1962. This followed the policy in the 1950s of encouragement by government to fragmented industries to come together in larger, hopefully more viable units. There was also encouragement for large, successful companies to set up new operations in areas scared by unemployment. Rootes made their Hillman Imp at Linwood outside Glasgow, and Dunlop was urged to keep open their India Tyres plant at Inchinnan despite damaging union militancy. Some of the many shadow factories built for war production were repurposed for peacetime production.

In the mid-sixties, in spite of the massive push for exports, British manufacturing was seen to be languishing in comparison with that of other countries. It was not doing badly, it was just that they were doing better. It needed encouragement. In 1965 the Queen’s Award for Industry was instituted. Four years later, the MacRobert Trust instituted their Award for Engineering.

The new Labour government under Harold Wilson had its response ready in the ‘white heat of technology’. It set up the Department for Economic Affairs led by George Brown which authored the National Plan supported by the National Economic Development Office (NEDO) and subsidiary bodies focusing on industries and geographical areas – the Little Neddys. Alongside the DEA, was the new Ministry of Technology and its minister Anthony Wedgewood Benn, soon to be Tony Benn, supporting technical committees including the National Engineering Laboratory, the National Physical Laboratory and the National Computer Centre. There was then the Industrial Reorganisation Corporation led by Sir Frank Kearton who came to it from his post at the head of textile giant, Courtaulds; he had previously worked at ICI including in its atomic bomb programme. It was about creating national champions. It supported the creation of ICL as the British answer to IBM and primed the explosive growth of GEC. The expansion of Courtaulds into spinning and weaving by acquisition of a great many independent mills was perhaps not an IRC intervention, but it was closely aligned given Kearton’s involvement in both. The motor industry was in desperate need of rationalisation, although the IRC was perhaps grasping at straws in supporting the creation of  British Leyland in 1968 and providing shipbuilding support between 1967 and 1972 (Harland & Wolff, Upper Clyde Shipbuilders and Cammell Laird). The Selective Employment Tax introduced in 1966 sought to discourage certain types of employment, essentially trying to make manufacturing employment more attractive.

The strains in the overall economy, all really stemming from the emptying of the national coffers to fight two world wars, led to a currency crisis for the new chancellor of the exchequer, Jim Callaghan, and hence to the 1967 devaluation of sterling from 2.80 to 2.40. 

In 1967, fourteen privatised steel producers were brought together to form the nationalised British Steel Corporation under the chairmanship, first of merchant banker, Lord Melchett, grandson of the founder of ICI, and then engineer Monty Finniston who, somewhat later and famously reported on the profession of engineering for Prime Minister Margaret Thatcher. The abrasive American industrialist, Ian MacGregor, took the helm in 1980 before moving to the Coal Board to face the miners’ strike in 1984.

The 1970s began with the re-election of the Conservatives under Prime Minister Edward Heath determined to roll back the influence of the state in the economy; the market was to rule. Fate had other ideas, for not long after the election that icon of British manufacturing was in trouble with the spiralling cost of the RB211 engine being developed for Lockhead. The approach taken by the Secretary of State for Trade and Industry, former industrialist John Davies, was to bring it into state ownership saving 80,000 jobs and a vital part of the British defence industry. The experience of the Rolls-Royce rescue led to an acknowledgment that there was a place for government intervention and this found expression in the Industry Act 1972.

The Heath government saw the culmination of a project very close to Edward Heath’s heart, the joining of the Common Market. He saw that British manufacturing needed a big home market and membership offered just that. It is also opened up the British market to manufacturers from the other member states, something that led to decline of motor industry. The failure to join the Common Market earlier had handed advantage to the German and French motor industries giving them a larger market but also exposing them to the benefits of competition. The timing of Britain’s entry was simply too late for our industry to catch up. We had suffered for too long from the lack of exposure to competition. There were benefits in EEC membership with reduced price of imports and increased market for specialist manufacturing and products. The Labour government, which succeeded Heath, put the question of continuing membership of the EEC to a referendum which saw the electorate voting strongly in favour of remaining. A contemporary CBI survey was overwhelmingly in favour of remaining. 

Harold Wilson’s Chancellor, Dennis Healey, taking over the Treasury from Heath’s Anthony Barber described it as ‘like the Augean stables’. In order to balance the nation’s books, income tax was increased to a maximum of 98%; Marr quotes Healey as  blaming the nation’s poor performance on bad management, poor training and low investment. 

The bug-bear of the 1970s was inflation. The Labour government under Wilson and then James Callaghan, once again tried to tackle industrial relations and incomes policy with the Social Contract or Compact. Cash limits were set on public expenditure and attempts were made to contain wage increases to 6%. Industrial unrest spread, union membership increased spreading into the public sector. Observers are critical of James Callaghan for not standing up to union leaders. When eventually he did with an attempt to keep wage increases below 5% he was met by a wave of strikes which became known as the winter of discontent. Key was the claim by 57,000 Ford workers for  30% increase, in the event settled at 17%.. 

Many suggest that a large part of the decline in manufacturing output in the seventies should be placed at the feet of North Sea Oil. Sterling had weakened following the 1973 oil crisis, culminating in the intervention of the IMF in 1976. Then, quite quickly, the currency strengthened as home produced oil cut imports and made the UK look comparatively strong. A strong currency made exports more expensive and imports more attractive. There followed a shift away from manufacturing for export to importing manufactured goods for domestic consumption. Looking at specific examples, the motor industry was undoubtedly one, with British Leyland shrinking with consequent job losses throughout the supply chain. ICI lost 1/3 of its workforce. At GEC the discipline imposed by Arnold Weinstock resulted in many plant closures and job losses. Elsewhere there were job losses in the ship yards and in the aircraft manufacturers.

From the point of view of labour, the period 1970 to 1979 can be categorised as one of radical growth in membership and strikes for the trades union movement. In terms of membership, this rose to 13 million and covered more than half of those eligible. It strengthened in the public sector and in coal reached 100%. In terms of legislation, the Industrial Relations Act of 1971 was hotly disputed and eventually repealed by the new Labour government in 1974. The issue would not go away and Labour made further attempts between 1974 and 1979, including the creation of ACAS which has survived to this day. Strikes were particularly prevalent in the 1970s as unions struggled to maintain their members’ income in times of roaring inflation. In the winter of discontent in 1979 some 29 million days were lost through strikes, many in manufacturing. 

Government intervention in industry once again came to the fore with the creation of National Enterprise Board (NEB ) 1975, taking on the state holding in Rolls-Royce, British Leyland, Alfred Herbert and Ferranti.  British Aerospace was created in 1977 in effect nationalising aircraft production; the nationalisation of shipbuilding followed.

A 2013 paper produced by two LSE academics, Professor Stephen Broadberry and Dr Tim Leunig, The impact of Government policies on UK manufacturing since 1945 , offers a perspective with both the benefit of hindsight but also a political steer given that it was produced for the Government Office for Science. It suggests that government intervention had very little positive impact. I infer from their paper that the decline in manufacturing was inevitable. Britain had set out its stall after the war as a manufacturing nation, although in the staple industries comparative advantage was being lost to low wage economies. The move was inextricably towards capital intensive industries where the technical content was high, so pharmaceuticals and electronics. These did nothing for unemployment but did add to GDP. One exception to the ineffectiveness of government intervention was perhaps the encouragement of inward investment where the evidence does point to the creation of jobs. In terms of other action, 'Buy British' campaigns were thought ineffective, but government procurement was vital not least to the Defence and Pharmaceutical sectors.

Mrs Thatcher was elected on 4 May 1979 oddly not with an overt mandate to challenge the power of the unions and to allow market forces relatively free reign. She wanted a return to Victorian values, the economics of the prudent family. In time and with the experience of government she began to see the obstacles to this vision. 

She saw strike action as a key factor in the British decline and she was determined to challenge it. This she did through successive pieces of legislation: seven different Acts between 1980 and 1993. Union membership fell to 7 million in 1995. Inflation was still running high with wage demands to match.

She saw the need to roll back the role of the state. After a decade of nationalisation and ineffective government intervention, she wanted the market to play a key role: state ownership was consigned to the past. Each of the various privatisations had different implications for manufacturing. For British Leyland, it was really just the end of the line for this, some might say, unlucky company. As with many bonfires there were Phoenix to rise from the ashes. Jaguar and Land Rover both re-discovered themselves, but both eventually fell into foreign ownership.  The privatisation of British Shipbuilders 1983 –1986 was another bonfire from which little would rise except in the area of defence. The same was true with aircraft manufacturers, with the notable exceptions of Rolls-Royce whose time had nearly come with the highly successful Trent engine, and British Aerospace and the British part of Airbus.

The privatisation of electricity generation and distribution robbed the traditional suppliers such as GEC and NEI of their safeguard in the ‘Buy British’ policy. The same went for telecoms.  Manufacture was being replaced by imports, continuing but on a much larger scale that which had begun the seventies. The Thatcher government steered away from intervention preferring the market to rule the day. The Westland affair and the efforts of Michael Heseltine to save the British helicopter industry stood out as an exception. Nevertheless, the welcome given to inward investment was evident, for example in the motor industry where Nissan set up in Sunderland, Toyota south of Derby and Honda in Swindon. 

Privatisation continued with the railways. Here work had been done to prepare the manufacturing and repair sides of British Railways, nevertheless the removal of any serious encouragement to Buy British had a major impact.  For example, the German Siemens were preferred over the Derby based but Canadian Bombardier, which had bought British Rail Engineering, for new trains for Thameslink and South West Trains. Bombardier was subsequently bought by the largely French Alstom. The third major manufacturer of trains for the British rail companies is Hitachi.

The tone set by the Thatcher government was continued by her successor, John Major. With minor exceptions this was the case also with the Labour governments under Blair and Brown. For example Trade and Industry Secretary Peter Mandelson became involved in attempts to save the former ICI chemical plant at Wilton which later fell into foreign ownership. 

The economy would be fed by the High Street itself fuelled by large increases in personal borrowing. Financial Services would become the powerhouse, with the fruits of its success ‘trickling down’ to benefit everyone. The bursting of the dotcom bubble would see the end of GEC. German and American car companies would buy the jewels in the crown of British motor manufacturing; Jaguar Land Rover later becoming owned by the Indian Tata alongside their chemical and steel interests.

 The first two decades of the twenty first century have witnessed the loss to foreign ownership of key British companies including much of Britain’s building products sector, with only occasional and specific interventions, Sheffield Forgemasters being one and this for national security purposes.

Recent interventions have been fiscal with Freeports and enhanced capital allowances. There is also some evidence of inducements to foreign companies at least to remain in the UK.

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