Balance of payments
An alternative definition of deindustrialization is offered by Singh, based on the traditional role of manufacturing in UK trade flows. Historically the UK was a net exporter of manufactures, so that surplus foreign exchange was earned which enabled the country to run a deficit on its trade in food and raw materials.
Singh (1977) defines an ‘efficient’ manufacturing sector as one which ‘not only satisfies the demands of consumers at home but is also able to sell enough of its products abroad to pay for the nation’s import requirements’. Singh also states that this is subject to the restriction that ‘an efficient manufacturing sector must be able to achieve these objectives at socially acceptable levels of output, employment and exchange rate’. A country such as the UK would then be ‘deindustrialized’ if its manufacturing sector did not meet these criteria, leaving an economic structure inappropriate to the needs of the country. It can be argued that this is indeed the position in the UK. The current account can only be kept in balance by surpluses in the oil and service sectors and by earnings from overseas assets. Any reflation of aggregate demand stimulates an even faster growth in imports of manufactured goods which pushes the current account towards deficit. By the end of the 1980s boom the UK again had a worryingly large current account deficit, as indeed it still has in 2010. The decline of UK manufacturing has recreated the balance of payments constraint on macroeconomic policy which many had hoped North Sea oil would remove. This suggests that the UK could be regarded as ‘deindustrialized’ on Singh’s definition.It might be argued that the service sector can take over the traditional role of manufacturing in the balance of payments accounts. A difficulty here is that unlike manufactures many services cannot, by their nature, be traded internationally (e.g.
public sector services), with the result that trade in manufactures is on a vastly bigger scale than trade in services (see Chapter 25). The House of Commons Trade and Industry Committee has pointed out that a 2.5% rise in service exports is required merely to offset a 1%fall in manufacturing exports. In some services which can be traded, the UK is already highly successful (e.g. financial services), and if even bigger surpluses are to be earned then the UK would have to move towards a monopoly position in those services. In fact, international competition is increasing in traded services and the UK may find it difficult to hold its current share of the market.
Other economists have pointed out that Singh’s definition would leave most of the non-oil-producing industrial countries categorized as ‘deindustrialized’ because, despite growing industrial output, their macroeconomic policies were constrained by their balance of payments positions after the 1973 and 1979 oil price rises. This observation does not invalidate the conclusion that deindustrialization in the UK has had serious balance of payments consequences.