In a recent article, Ha-Joon Chang highlights the decline of
manufacturing as a source of stagnating living standards in the UK. I would agree that Britain's manufacturing
decline is a cause for concern, but what interested me in the article was the discussion
of the role of productivity growth.
The basic argument here is: 1) there is greater scope for productivity
growth in manufacturing than in services; 2) greater concentration of economic
production in activities with high productivity growth means higher aggregate
productivity growth; 3) the higher a country's overall productivity growth, the
higher its per capita real income growth. In
fact, for a small open economy like the UK, I think the latter point is a bit
more complicated than that.
To help see why, imagine that you were about to choose your
future career and had the choice between going to work on a production line
making TVs - an area with scope for high future productivity growth - or becoming a hairdresser
- an area with little scope for productivity growth. Now, obviously, there are lots of
considerations here. However, the
argument that you could expect to see much higher personal income growth as a production
line worker than as a hairdresser because of the productivity issue should
sound a little suspect.
What in fact is likely to happen is that, over time, TVs
become cheaper relative to haircuts. The
productivity growth in TV production benefits both the production line worker
and the hairdresser. Exactly how much
each benefits depends on how the terms of trade develop between the two which
depends on various demand and supply elasticities.
In a world with significant global trade, the same point
applies to whole economies. Productivity
gains in one country are to the benefit of all countries, even those which are
themselves seeing no productivity growth.
Exactly which countries benefit depends on their trading positions - the
elasticities in the goods they export and import.
Now, this does not mean that the UK's decline in
manufacturing does not matter. It does
matter, but the point is that it matters as much because of the role of
manufacturing in providing exports and import substitutes as it does in
providing productivity growth. To
benefit from global productivity growth, a country has to be well positioned in
traded markets. Cutting hair is a useful
activity, but has limited export potential.
Of course some services can act as exports and, in principle, it is
possible for a country which exports the right services to see substantial
growth in living standards without any material domestic productivity
growth. But this is probably not an
option for the UK.
