Chapter 6The UK Economy.docx
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Chapter6TheUKEconomy
Chapter6:
TheUKEconomy
ThisunitisabouttheeconomyintheUK,includingabriefhistoryofitseconomicdevelopmentanditspresentsituation.
FocalPoints
●AbsolutedeclineandrelativedeclineofBritisheconomy
●Theprivatisationinthe1980s
●ThemainsectorsoftheUKeconomy
●Primaryindustries
●Secondaryindustries
●Tertiaryindustries/serviceindustries
●Agriculture
●Energyproduction
●Theoffshoreoilindustry
●Themanufacturingindustry
●TheCityofLondon
●TheLondonStockExchange
●Theaerospaceindustry
●FrankWhittle
●Concorde
Text
AbsoluteDeclineandRelativeDecline
Bythe1880stheBritisheconomywasdominantintheworld,producingonethirdoftheworld'smanufacturedgoods,halfitscoalandiron,halfitscotton.TheamountofBritishshippingwasgreaterthanthatintherestoftheworldputtogether.Butevenby1900thiswasnolongerthecase,theUKhavingbeenovertakenbyboththeUnitedStatesandGermany;andcertainlyfrom1945untilthepresent,thestoryoftheUKeconomyisusuallythoughtofasoneofdecline.Thisisunderstandablebutrathermisleading,asithasinfactbeenaperiodofsteadyeconomicgrowthandrapidlyincreasinglivingstandards.BritainremainsoneoftheGroupofSevenlargeindustrialeconomies.Buttherearereasonsfordescribingthisperiodasoneofdecline.Britainenteredthepost-warworldasoneofthesuccessfulalliesoftheSecondWorldWar,withsomeofitschiefcompetitornationssuchasGermanyandJapan,economicallydestroyed.AlsoBritainwasthecentreofastillvastempire.Accordingtothefigures,theUKwassecondonlytotheUnitedStatesintheinternationaleconomy.ThusBritainwastheninanapparentlystrongeconomicposition,apositionitclearlynolongeroccupies,whichindicatessomesortofdecline.
Butthebasicpositive-seemingfactsdescribingthesizeoftheeconomy,thehighproportionofworldtradethatwasBritish,andsoon,in1945,didnotrevealimportantnegativefactsabouttheUK'spositioneventhen.Firstlythecountryhadgoneheavilyintodebtinordertofinancethewar,sellingmanyofitsaccumulatedoverseasassets,andborrowinglargeamountsfromtheUnitedStatesandCanada.ThesedebtsmeantthattheUKenteredthepost-warerawithamajoreconomicproblem.
AMapofIndia
Secondly,theeraofempirewasover.India,popularlyknownas"TheJewelintheCrown"oftheBritishEmpire,gaineditsindependencein1947,only2yearsaftertheendofthewar.Thiswasthelargestelementintheempire,providingrawmaterialsandabigmarketforBritishgoods.ThisrelationshipwithIndiawasnolongeravailable,andtherestoftheempirequicklyfollowedIndiatoindependence,leavingBritainasjustamedium-sizeEuropeancountry,withapopulationonlyonefifththesizeoftheU.S.
UNSecurityCouncil
Thirdly,despitetherelativelyrapidandtrouble-freeprocessofdecolonisation,Britainwasstillforcedtomaintainasubstantialandexpensivemilitarypresenceinmanyoverseaslocationsuntiltheprocesswascompleted(mostlybytheendofthe1960s).Alsoitspositionasoneoftheshapersofthepost-warworldrequiredsubstantialmilitarycontributions—bothasoneofNATO'smajorpartners,andasamemberoftheUNSecurityCouncil.AllthishadtheresultthatBritainspentahigherproportionofitsnationalwealth(andespeciallyofitsresearchanddevelopmentbudget)onthemilitarythanmostofitscompetitors.Militaryexpendituretendsnottogenerateaneconomicreturninquitethesamewayasotherindustrialinvestment.
Fourthly,althoughBritainwasquitebadlydamagedbyGermanbombingduringthewar,itsindustrysurvivedcomparativelyunaffected.Thiscontrastedgreatlywithsomeofitscompetitors—especiallythemainlosersintheconflict,GermanyandJapan,whoalmosthadtostartagainfromnothing.Thisapparentdisadvantageforthemmayhaveworkedintheirfavourinthatastheyhadtoinvest,theycouldinvestinthemostmodernequipmentandnewproducts.Britishindustryhowevercouldcontinuewithitsolderfactoriesandpre-warproducts,andgivenitsothereconomicproblems,didso—aprobleminthelong-term.Italsomeantthatoutputwasinitiallyverylowinthesetwopotentiallylargeeconomies:
sowhileBritainlookedsecurelywealthierthanthemin1945,acatching-upwiththeUKwasinevitableastheyrecovered.
Thisfailuretoinvestsufficientlyinindustryalsoreflectsalong-standingandcontinuingproblemintheUKeconomy.Evenwithouttheparticularcircumstancesofthepost-warworld,relativelylowratesofinvestment(theamountofmoneybusinessesputasidefromprofitstoreinvestinthebusinessinnewproductsandproductionmethods)werecharacteristicoftheBritisheconomyinrelationtootherdevelopedeconomies.EconomistshavepointedtothelackofacloserelationshipbetweenindustryandbanksintheUK—againacontrast,particularlywiththetwomostsuccessfulpost-wareconomies,JapanandGermany,wherebanksandindustrialfirmshaveverycloselinks.EconomichistorianshavesuggestedthatthismaybeduetothefactthattheUKwasthefirsteconomy
Industrialisation
toindustrialise,andindustrialfirms,withoutforeigncompetition,grewusedtofinancingtheirowndevelopment,withoutneedtoborrowfrombanks.Bankstherefore,notabletofindgoodinvestmentopportunitiesintheUK,lookedoverseasforinvestmentopportunities.AlowrateofdomesticindustrialinvestmentcoupledwithaveryhighrateofoverseasinvestmentisstillacharacteristicoftheUKeconomy.So,amongstEuropeannations,BritainisthelargestinvestorinChina,butsellsfewerofitsownmanufacturedgoodsherethandoGermanyorFrance.
ThepointtonoteisthatthecomparativelystrongeconomicpositionBritainfounditselfin1945wasinmanywaysdeceptive.SothedeclinefromBritain'sapparentlygoodfortunesatthatpointuntilnowisthusnotasextraordinaryasitmightseem,beingtheresultofalreadyexistingbasicproblems.Anditshouldalsoberememberedthatthiswasnotanabsolutedecline:
Britainisnotpoorer,orproducinglessthanitwasin1945,infact(likemostcountries)itisalotwealthierandmoreproductivethanitwasthen.Theproblemisthatthoughithasimproved,othercountrieshaveimprovedmorerapidly,hencetheslidefrombeingthe2ndlargesteconomy(aftertheUnitedStates)tobeingthesixth,asitisatpresent.AndevenmanysmallereconomieshaveovertakentheUKintermsofoutputperheadofpopulation.SotheUKhasexperiencedeconomicdecline,butthisdeclineisrelativetosomeothereconomiesratherthanabsolute.Nevertheless,thisrelativefailureisaseriouscauseofconcerntotheUKgovernments.
RecentHistory
OPECMeeting
TheBritisheconomywentthroughaparticularlybadperiodinthe1970s.Theoilpricerisesatthattimeledtoveryhighratesofinflation(upto25%).Thiscausedmanyworkerstostrikeformorepay.ThefallinthevalueoftheUKcurrency(ThePound)evenforcedtheLabour(socialist)governmenttoborrowfromtheInternationalMonetaryFund.
Britishindustry,notablythecarindustry,appearedtobedoingbadly,withincreasingimportsrelativetoexports.Allthesenegativeeconomicfactsledtoachangeofgovernmentatthenextgeneralelection,in1979,whentheBritishpeoplevotedintheConservativepartyunderMargaretThatcher,withthepromiseofaradicalprogrammeofreform.Bureaucracywasreduced(foreignexchangecontrolswerelifted,rulesgoverningbanksloosened,forexample).Andthroughoutthe1980sanextensiveprogrammeofprivatisationwascarriedout,withmanystate-ownedbusinesses(suchassteel,telecom,gas,aerospace)joiningtheprivatesector.Itseemedinsomewaystobesuccessfulinthatinflationcameundercontrol,andbusinesses,especiallythenewlyprivatisedbusinesses,madeprofits.Thenegativeaspectwasarapidincreaseinunemployment,risingtoalmost12%atitsworst.Sowhilecompaniesweremoreefficient,producingthesameamountwithlessworkers,andthereforebeingabletopayhigherwagesandmakehigherprofits,thecostwaspaidbytheunemployedwhohadtoliveonlowincomesfromstatesupport.Thenationaleconomyasawholecontinuedtogrowatlowerratesthanitscompetitors.Intherecession1990—1992,theeconomyevenshrunkby2.3%.
Sincethenhowever,thepicturehasbeenbrighter,withfouryearsofsteadygrowth,atrateshigherthanthatintherestoftheEuropeanUnion.Unemploymenthasnowfallento7.7%,whichisamongthelowestintheEuropeanUnion.Inflationhasremainedundercontrolatverylowlevels.Investmenthasincreased,encouragedbylowinterestrates.Britain'smembershipoftheEUhasalsomadeitanattractivelocationforinwardinvestmentbycompaniesfromoutsidetheEU(especiallytheU.S.andJapan),ofwhichithasreceivedalargersharethananyotherEUcountry.OverallitissecondonlytotheU.S.asadestinationforinternationaldirectinvestment.Itisalsoitselfamajorsourceofinternationalinvestment—infactitisthesecondbiggestinternationalinvestorintheworld(1995).
TheCurrentUKEconomy
Nationaleconomiescanbebrokendownintothreemainareas:
"primary"industries,suchasagriculture,fishing,andmining;"secondary"industries,whichmanufacturecomplexgoodsfromthoseprimaryproducts;andtertiaryindustries,oftendescribedasservices,suchasbanking,insurance,tourism,andthesellingofgoods.
Britain'sagriculturalsectorissmall(producing1.4%ofthenationalwealth)butefficient,producing58%oftheUK'sfoodneedswithonly2%ofitsworkforce.Three