Wednesday, May 16, 2012

The case for investment in high-tech industries

As an economic recovery strategy austerity is not working. Defenders of the "orthodox neoliberal" response to the ongoing economic crisis often demand to know what the alternatives are to their favoured "cut-now, think later" strategies.
In this series I'm going to explore what some of these alternative economic strategies could be.

The UK post-industrial experiment has created a large trade deficit, whilst
 the German high-tech economy has developed a large trade surplus.
After the financial sector bust the UK post-industrial experiment is as good as over. Neglecting the UK industrial sector in order to turn London into a hub for deregulated financial sector gamblers was always going to be a risky strategy, but few would have predicted such a catastrophic failure. The government and the Bank of England have been forced into a position of pouring hundreds of billions of pounds into the black holes of debt created by reckless and idiotic speculative gambling on transparently unsustainable house price inflation and complex derivatives that even the traders betting on them didn't understand. The financial sector has not replaced the industrial economy, it has become a huge and unsustainable drain on what remains of it.

Since the financial sector meltdown the UK economy has been running the biggest trade deficit (the difference between imports and exports) in its history. At more than £4 billion a month since 2011 it is even worse than the peak of £3.5 billion a month at the height of the UK financial sector meltdown in 2007-08. The financial sector has not adequately replaced the industrial sector, the only way that the trick even seemed to be working was through the inflation of a vast unsustainable "easy credit" bubble.

Once the financial sector had been exposed as a giant ponzi scheme of bad debts dressed up as reliable assets stamped with AAA ratings from the Credit Rating oligopoly, it became absolutely clear that the UK must return to the core productive economic activities of industry and manufacturing. There are two conceivable approaches, the establishment can either drive down the wages and working conditions of the UK labour force in order to parse costs down to compete with the Chinese or they can attempt to invest in the development of leading edge high-tech industries.

The chosen path of the three establishment parties is obvious, the economically destructive austerity measures of the Coalition and Neo-Labour's bland "austerity-lite" posturing show that they have no faith in direct investment in the UK industrial sector as a viable option. The nay-sayers and doom mongers would have us believe that UK manufacturing has been left way behind by the high-tech economies of Germany and Japan and couldn't hope to compete with Chinese productivity, however, despite three decades of deliberate government neglect in compliance with the utterly discredited "state intervention is evil" fallacy British manufacturing is not yet completely dead in the water.

The rapid decline of the British train building sector
coincided with the botched privatisation of British Rail.
Lack of investment, mismanagement, botched privatisations, lack of protection and sheer malice have all contributed to a three decade long era of unprecedented decline in the UK industrial sector. To take one of many, many examples; the hopelessly botched Tory railway privatisation led to the ruination of the once world leading UK train building sector. In 1994 when rail privatisation plans were drawn up, the entire UK rail network ran at a cost of £1.6 billion (£2.2 billion adjusted for inflation) and the British train building industry was still near the cutting edge, having recently built one of the world's fastest trains (the InterCity 225) and done pioneering work on the bogey technology necessary for high speed tilting trains. By 2009 the annual cost of the rail network had risen to £5billion in government subsidies. In this period in which government spending on the rail network had actually more than doubled, the UK train building industry was left to ruin. Most of the train builders were wiped out by a 1,063 day delay in ordering any new trains as the private sector operators maximised profits by rinsing as much value as they could out of former British Rail stock. As of 2012 the only remaining commercial train building operation on UK soil is the struggling Canadian owned Bombardier group and the only entirely British train to have been built in recent years was the heritage project A1 peppercorn class Tornado, built at Darlington Locomotive Works.

Swathes of the UK industrial sector have been deliberately run down or left to ruin by successive Tory and Labour administrations and Britain has rapidly slumped towards the bottom of table of nations ranked by industrial output as a percentage of GDP, with an industrial sector accounting for only a paltry 21.6% of GDP (when the global average is 31.1%). In 2011 only 5 of the 27 European Union nations experienced worse industrial sector growth than the UK (Greece, Portugal, Italy, The Netherlands and Norway).

Rolls Royce, an example of a world leading UK based industry.
Despite the rapid industrial decline as a percentage of GDP, there are some grounds for optimism about UK manufacturing. Despite the disgraceful mismanagement of the UK industrial sector over the last three decades, the UK is still the sixth-largest manufacturer of goods in the world according to the value of its outputs. If the UK is to reposition itself as a high-tech economy, there are a few remaining industries that demonstrate that British workers can still do cutting edge technology. The prime example is Rolls Royce Aero-engines, which is the World's second largest jet engine manufacturer, producing both the most powerful and the most fuel efficient jet engines on the global market. Another example is Formula 1 where several of the most successful teams in a highly competitive high-tech business are based in the UK. Although these racing teams are tiny cottage industries in comparison to Rolls Royce, the fact that these extremely high-tech racing teams base themselves in the UK demonstrates that Britain is still a potentially viable home for high-tech cutting edge industry.

If the UK is to reposition itself as a high-tech economy several key reforms will be needed:

Firstly: A complete reversal of Coalition austerity cuts in funding to research and development budgets and the engineering and technology departments of universities. Without well funded research and a Strong education sector, hopes of becoming a leading high-tech economy are nothing more than idle pipe dreams.

Secondly: Direct state investment in the industrial sector, preferably through a government backed National Investment Bank. The practice of pouring of hundreds of billions into the debt riddled financial sector in the hope that they will lend it on to the "real economy", instead of using it to pay down their astronomical gambling debts (deleveraging) or gambling it on the derivatives markets must be stopped. Either the state invests in the productive industries directly or it doesn't intervene at all, propping up the financial sector gamblers that caused the crisis in the first place should never have even been considered as an option.

Thirdly: State investment in infrastructure projects. Without significant infrastructure improvements the UK is going to struggle to compete with other high-tech economies. Priorities should include, a high speed broadband network and massive improvements to transport infrastructure. High-Tech businesses considering the UK as a base would surely be put off without improvements to the neglected infrastructure, congested roads and especially the massively overpriced and severely overcrowded public transport network. Not only would improvements in UK infrastructure make the country seem like a better base for high-tech industries, it would also create a short term economic boost by creating tens of thousands of much needed jobs.

Fourthly: A co-operative economic strategy. The divisive politics of the Thatcher era really have to be abandoned. Economic strategy should not be considered as a series of pitched battles between the state sector and the private sector, or between businesses and the trade unions. The state sector and the private sector need to co-operate in order to develop a coherent economic growth strategy, the state providing an educated and adaptable workforce, direct intervention to assist key industries and offer tax incentives to companies that are prepared to contribute to the national economic growth plan whilst the private sector must begin to reinvest in the "real economy" and to pay their fair share of taxes. The anti-trade union antagonism also has to be stopped, the German economy is a good example, through their co-operative approach between businesses and trade unions they have built a strong, highly productive high-tech economy. After all the workers are still the engines of economic productivity, treating them as if they are "the enemy within" is never going to get the best out of them.
Unfortunately, the three establishment parties in England seem absolutely determined to plough on with their ideologically driven "austerity agenda" no matter how badly it effects the UK industrial sector or the UK trade deficit. As much as they tell us that austerity first is the only option, I would like to think that I have outlined a reasonable case for an alternative strategy of intelligent, targeted investment.

See also

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