Halting the Decline of Britain's Manufacturing Industry

by Jerry Jones
Economic Committee Communist Party of Britain
First published September 2005

Contents
Preface
1. The decline of Britain's manufacturing industries
2. Why manufacturing matters
3. Why Britain's manufacturing performance is poor compared with other advanced countries
4. Why the current free-for-all relocation of manufacturing to less developed countries is unsustainable
5. What the government should be doing
6. What trade unions should be doing
7. Conclusion and Summary
8. Notes

Preface
This pamphlet is published by the Communist Party in support of the Left Wing Programme launched earlier this year, and as a contribution towards the on-going debate about an alternative economic strategy for Britain, with particular reference to restoring the fortunes of Britain’s manufacturing industry. This, it is argued, is essential for an improved rate of economic growth and a more balanced economy, in which the different sectors support one another’s development. It should not be regarded as a blueprint, or an official statement of Communist Party policy, but as a basis for a wide-ranging discussion and new thinking within the labour and trade union movement and beyond.

It is very much a critique of prevailing neo-liberal policies, which are embraced by,or have been forced on, governments worldwide. Tony Blair and Gordon Brown, in particular, and the European Commission, under the powerful influence of the European Round Table of Industrialists —a body comprising the chief executives of around 50 of the biggest European- based transnational corporations — have been at the forefront in championing such policies. It is an agenda that is intensifying the current world economic crisis. Apart from widening the gap between rich and poor, it perpetuates the problem of a majority of the world’s people being too poor to provide a market for the goods and services capable of being produced and supplied, and which they need and want. This is also the primary cause of the world’s rapidly deteriorating security situation,from which, invariably, it is ordinary people and the poor who suffer the most.

Moreover, it is an anti-democratic agenda. That is because under this neo-liberal regime, alternative policies — especially those involving various kinds of state interventions to manage a country’s economy — are declared illegal, even if a duly elected government has been mandated to carry out such policies. Thus, governments are no longer able to control the capital created by the labour of a country’s citizens — on whose behalf governments are supposed to be acting — such that it benefits the country as a whole, rather than the economically most powerful, as now. This neo liberal agenda was even written into the proposed EU constitution. A constitution, normally, confines itself to how policies are to be arrived at, since even the best policies, invariably, need to be altered as circumstances change. But not the EU’s.

Fortunately its launch has been aborted, following its resounding rejection in referendums conducted by the French and the Dutch earlier this year after successful grassroots campaigns to reveal its written-in neo-liberal content,which was carefully covered up by the propaganda coming from the EU political elite. But we need to remain vigilant. hey have not abandoned the idea.

Neo-liberal policies have largely been allowed to flourish by default, because the powers that be have managed to crowd out any discussion of an alternative set of policies. It is time to put that right. Hopefully, this pamphlet, which advocates polices that directly contradict the current neo-liberal agenda, will give a new coherence to the debate that must take place, and, in particular, set a new course for manufacturing industry to serve the needs of all people, not only in Britain, but worldwide.

I. The decline of Britain’s manufacturing industries
Britain’s manufacturing industry is in serious crisis. Currently, it is going through yet another bout of recession.’ Already, since 1997, more than a million jobs in manufacturing have been lost Only 12 per cent of Britain’s workforce of around 30 million people is now employed in manufacturing, down by about a third since the mid- 1980s. In fact, manufacturing as a share of output has been falling in all the advanced industrial countries. In France and the United States, for example, it fell from about 30 per cent in 1960 to around 16 per cent now, about the same as in Britain. In Japan and Germany, over the same period, it fell from 34 and 40 per cent, respectively, to 21 and 23 per cent now. Employment in manufacturing has fallen roughly in proportion.

Partly this reflects the fact that as economies develop, it is possible to achieve higher productivity gains in manufacturing through investment in more productive technology than in other sectors. It is logical, therefore, that fewer people need to be employed in manufacturing. In addition, there has been the trend of manufacturers contracting out many services — such as catering, cleaning, secretarial work, printing, transportation — that previously had been carried out in-house, so that many jobs previously classified as manufacturing, because that was the dominant activity of the company, are now classified as services. Furthermore, as incomes grow, people tend to spend more on services, thus creating more employment in those areas.

However, the trend also reflects the extent that manufacturing industries are being relocated to less developed countries, where wages are a fraction of what they are in the advanced countries, enabling goods to be produced more cheaply (and more profitably for company shareholders). Up to a point, from the point of view of the advanced countries, this is not a bad thing. We need underdeveloped countries to have industries and to export to us so that they become more developed, because it means that they can then provide more of a market for the products that we need to export to them for our economies to prosper. Moreover, if goods as a result of being produced in underdeveloped countries are cheaper, we have more to spend on other things, which creates new jobs to fulfill that demand. However, if this process goes too far, undermining our economies, we will not be able to provide markets for their exports, so that everybody loses out. As will be discussed, it needs to go ahead in a controlled and orderly way.

Although manufacturing output as a proportion of total output tends to decline as an economy develops, this does not mean that manufacturing output itself has to decline. It may just grow less fast than other sectors. For example, in France and Germany, since 1992, manufacturing output has grown by around 30 per cent. In Britain, however, over the same period, it grew by barely 6 per cent. In fact, up to 1997, Britain’s manufacturing output was expanding at more or less the same rate as in France and Germany. It is only after new Labour came to power under Tony Blair as prime minister that it fell back, and then went into decline. Thus, since 1997, whereas in Germany and France, manufacturing output has gone up by around 20 per cent, in Britain it has declined by 2 per cent.

But does it matter that Britain's manufacturing is declining? If a country’s strength is in services — for example, in the area of financial services, which is one of Britain’s main strengths — then surely in today’s globalised economy, that should be the focus, rather than manufacturing? Thus, it can be argued, that as long as manufacturing is being invested in and expanded somewhere in the world, which can provide the demand for services elsewhere, and the wealth needed to support them, then it does not matter if manufacturing is being run down in some countries, and being expanded in others. Indeed, in some quarters, notably in the financial centres in the City of London, it started to become fashionable to draw a line between yesterday’s old economy of manufacturing and tomorrow’s new economy of e-commerce. However, this took a bit of a knock following the collapse in 2000 of the dot.com bubble. In short, it is slowly coming to be realised — at least outside City and government circles — that manufacturing does matter, even for Britain, which is what trade unionists in the manufacturing sector have been saying for the past several years. As will now be argued, putting its decline into reverse is the key to our future economic welfare.

2. Why manufacturing matters
Turning raw materials into finished products, which is what manufacturing is about, is where the bulk of economic value in society is created. It is what provides the basis for increasing the productivity of labour, enabling more goods and services to be produced and supplied in ever-increasing diversity, utilising ever more efficient technologies. Manufacturing in a modern economy does, of course, depend to a high degree on services such as transport and distribution, wholesale and retail markets, financial and business services, and education and training. Meanwhile, demand for those services, and others, and therefore employment in those activities, as well as employment in the construction industry and utilities, depends to a high degree on manufacturing, and on those employed in manufacturing spending their wages. This is particularly obvious in a locality when a major industry employing many people closes, which often leads to the closing of shops and other facilities, as well as the general running down of the whole neighbourhood due to unemployment and the lack of tax revenue to finance local public services. In short, the prosperity of a neighbourhood, as well as that of countries, depends on having a judicious mix of manufacturing and services, so that the one can effectively support the other.

Of course, this does not mean that every neighbourhood, or every country should go out of its way to invest in a wide range of manufacturing industries. Indeed, in most neighbourhoods, as well as in most small countries, it would be utterly impractical to invest in manufacturing, except on a small scale. In general, countries and neighbourhoods should seek to invest in those productive activities — be they manufacturing or the provision of services, including leisure — for which they have a comparative advantage related to their natural resource endowment and their past history However, although these will no doubt affect the choice of productive activities, they are not the be all and end all. Comparative advantage is largely created, rather than inherited. In particular, it is a function of a country’s evolving institutions — such as government policies, structure of markets, educational and training systems, business culture, and so on — that favour or support particular productive activities over others. In other words, comparative advantage is largely a function of a country’s comparative institutional advantage. This is well illustrated by Japan, which in the last century was the most successful country in manufacturing, yet its industries are dependent almost entirely on imported raw materials and other inputs. This was related to the support given to manufacturing by the Japanese government and other institutions. Much the same can be said for Germany, and to a considerable extent most other European countries, but less so for Britain.
Although it is conceivable for small island economies or enclaves to prosper (as many do) more or less on services alone, such as tourism and financial services, in which a large number of foreigners are involved relative to the size of the economy, this is not an option for large economies. That is because many of the services upon which people depend for their livelihoods would barely exist if it were not for manufacturing. In addition, most services are not tradable internationally, so that it would be impossible to earn sufficient revenue from exports to acquire the manufactured goods that people and businesses need and want, if mostly these were no longer produced in the country.

Furthermore, any sizeable country without much manufacturing lends itself open to being exploited by others — the more so, of course, at the moment, when the main economic agents, the global transnational corporations, are free to move their profits and capital around the world at will, about which more later. The failure to develop a wide range of manufacturing industries in underdeveloped countries is precisely one of the major reasons why they remain underdeveloped, and are subject to such a high level of exploitation by the already developed countries. Meanwhile, the world economy is not static. People in Britain now, and in other advanced countries, up to a point, are benefiting from the lower prices of many consumer goods — and all components that go into their manufacture — as a result of relocation of their production to countries where labour costs are a fraction of ours. However, in time, workers in those countries will become better organised to campaign for a larger share of the resulting profits in the form of higher wages, so that goods from those countries will no longer be so cheap. And as these countries become more developed, they will be in a position to have their own financial services sector, and be less dependent on financial centres such as the City of London to raise finance and insurance. Countries such as Britain, formerly strong in manufacturing, that allow their manufacturing sector to be run down, would then become extremely vulnerable. It would also be difficult and costly to re-establish many of the industries because the skills needed would have disappeared — which, as will be discussed, is already a problem in Britain for what is left of our manufacturing industry

There is a lesson here from the killing off of our coal mining industry, which no other country not even the United States, would have allowed. It was linked, of course, with the vindictive short-term desire of the Tory government under Prime Minister Margaret Thatcher to break the backbone of Britain’s trade union movement. As a result, we now import 70 per cent of our coal needs— mainly from Australia, Colombia, Poland, South Africa and the United States — whereas before we were more or less self-sufficient. Even seven years ago, Britain produced 70 per cent of its coal needs. One of the arguments produced as an excuse for the running down of our coal industry was that it was cheaper to import coal than to produce it in Britain. But this was related first to the use of cheap labour (even child labour in Colombia), which, as just argued, will not apply once workers in those countries become better organised to push up wages, and second, to our overvalued exchange rate (see below). Further, ii was related to restrictions placed on Britain’s publicly owned coal mining industry to diversify — for example, in the manufacture of its own equipment — and the extent that it was deprived of investment by various governments using it to subsidise other industries and to control inflation. Meanwhile, the use of coal to generate electricity has been run down. Coal now accounts for barely a third, having been overtaken b natural gas, which now accounts for 40 per cent. But as the reserves of gas under the North Sea become depleted, again this will depend more and more on imports. An advantage of gas is that it is less polluting, but that is also to do with the lack of investment in the development of clean coal technologies. In short, the running down of our coal industry will probably prove a costly mistake. And if present trends continue, our manufacturing sector will face a similar fate.

To sum up, in order to be reasonably self-reliant, and to minimise being held to ransom, a country needs a diverse range of productive activities, such that a crisis in one or two areas due to some event at any particular time can be offset by income generated in other productive areas. In other words, it makes sense for all countries as far as possible to have a reasonable range of manufacturing industries, commensurate with their size.

It is analogous to agriculture. Most countries recognise the importance of preserving their agricultural industries so that they are reasonably self-reliant in food. Note that this is not the same as being self-sufficient, which can make a country more vulnerable and less self-reliant, for instance, due to drought or some other catastrophe Self-reliance in food means having a diverse range of productive activities and sources of income, so that a country can deal with any contingency one element of which, in the area of food, is maintaining a buoyant agricultural sector. That is why every country has policies in place to ensure that agriculture thrives and is not undermined by cheap imports. This, of course, is the reason for the existence of the European Unions Common Agricultural Policy — though Britain no doubt would be better served by its own similar policy tailored to its specific needs. Even these policies have been under attack by the neo-liberal ideologues acting on behalf of the transnational agribusiness corporations, and many of the more vulnerable, underdeveloped countries have been forced to abandon such policies in exchange for debt relief. But the main point here is that just as agriculture is generally recognised as being of strategic importance, so must manufacturing, and we need to apply similar policies in order to protect it.

3. Why Britain’s manufacturing performance is poor compared with other advanced Countries
B Britain, as the world’s fourth largest economy, and because it was the country that pioneered the development of industrial technologies that form the basis of modern manufacturing industries, should be at the forefront of manufacturing among the advanced countries. Why is this not so? The obvious answer is because there has been insufficient investment in manufacturing. The capitalist institutions that dominate our economy and which are responsible for making investment decisions, find it more profitable to invest capital abroad or to recycle it speculatively within the financial sector. Inevitably, this is at the expense of investment in manufacturing. And successive governments over the years have done little to change that situation — which they have every right to do, as representatives supposedly of everybody, not just the capitalist elite.

After all, that capital is created not by capitalists, but by the labour of all the people — or more precisely, by the surplus labour that they perform over and above that for which they are paid. It should therefore be the responsibility of governments to ensure that this capital that people create is invested for the benefit of the whole of society rather than allow the capitalists appropriating it to make money out of it at the expense of everybody else. Meanwhile, because of the failure of domestic capitalist institutions to invest adequately in manufacturing in Britain, governments have been increasingly relying on foreign investors to plug the gap, such that by the turn of the century foreign-owned firms accounted for 25 per cent of manufacturing turnover in Britain. The trouble is, as will be discussed, foreign investors tend to be fickle, and cannot be regarded as a reliable basis for stabilising and expanding our manufacturing sector, which is what is needed. Moreover, the extent to which they have benefited the British economy has been wildly exaggerated.
Furthermore, the economic and political dominance of the financial sector in Britain has other consequences that militate against investment in manufacturing.

These include the tendency for interest rates, and also the exchange rate of the pound, to be higher than they otherwise would be, and for there to be insufficient investment in education and training in the skills needed for a successful manufacturing sector. These and other reasons for Britain’s poor manufacturing performance compared with other advanced countries will now be explored in more detail.
The dominance of the financial sector and its consequences

The dominance of the financial sector in Britain at the expense of investment in manufacturing has a long history going back to the eighteenth century, which is related to our imperialist past.’° Thus, even when Britain was the world leader in manufacturing, its profitability was overshadowed by the even greater profitability of financial institutions based in the City of London. Money was made out of the export of capital without it ever having to leave England, because it was spent on investment goods produced in England, after which new capital came flowing into the country in the form of interest and the repayment of principal on the capital advanced. On top of that there were the profits from insurance and shipping.

London’s financial institutions received a new boost from the 1950s on when London became one of the world’s leading offshore tax havens (second only to Switzerland), as foreign companies sought ways of avoiding tax and other regulations in their own countries. (British companies achieved the same object by making use of other offshore tax havens.) Thus, London went on to become the world’s leading centre for foreign exchange transactions and the raising of finance for companies, an indeed, governments, all over the world. This helps to explain why the financial sector in Britain, more than any other country is so dominant, both in terms of attracting investment and of its effect on economic policy, which has been at the expense of manufacturing.

In contrast, historically, the major priority in other capitalist countries was to gel manufacturing established so that they would no longer be exploited by British capitalists. And this focus on investment in manufacturing has to a greater or lesser extent remained a part of their culture ever since. Thus, institutional structures have evolved specifically to support their manufacturing industries, such as networks and associations of industries in particular product areas to serve their common interests, and mutually beneficial links with banks, as in Germany, or more state involvement in coordinating the interests of different industries, as in France.” In particular, manufacturing industries in most other western European countries are less susceptible to the vagaries of their stock markets, because they are far less dependent on the stock market for raising investment capital. Firms therefore are in a stronger position to invest for the long term, which is what is needed for modern manufacturing, because of the amount of capital often required upfront to undertake the research and investment necessary to develop new technologies and new products, and then to invest in their production, before there can be a return on the capital invested. This ha5 been helped by the fact that many of the shareholders have a longer-term vested interest in the productive activities of the firms in which they hold shares.

All this is in sharp contrast to Britain where firms have to give priority to the short- term interests of fickle shareholders acting as ‘absentee landlords reaping the benefits from a company while taking no interest in its management There is a conflict between the need to keep short-term share values high to please the stock market, and the need for longer-term investment to maintain competitiveness of the company. Ir order to keep share values high, companies have to continue paying out high dividends, which, of course, is at the expense of investment, not only in more productive technologies and improved products, but also in wages. This acts as i disincentive for attracting workers with higher levels of skill, and for acquiring those skills in the first place, upon which a successful manufacturing sector crucial!) depends. In the 10-year period up to 1997, dividend growth outstripped investment growth by a ratio of 3: 1.’ However, during the 1990s’ stock market bubble that partially collapsed in 2000, share value was more important because of the capital gains to be had from the buying and selling of shares at inflated prices, but since then, dividench have once again become more important The contrasting fortunes of the car industries in Britain, on the one hand, and in Germany and Japan, on the other, well illustrate the differing attitudes toward investment. In the 1950s, Britain had a well-established British-owned car industry but because its managers had to give priority to paying dividends to shareholders, ii was starved of investment, until eventually, it was run into the ground, no longer able to compete. Today, Britain’s car industry is entirely foreign-owned. Meanwhile, the German car industry in the 1950s, as a result of the Second World War, was totally run down, with one of its most famous brands today, BMW, insignificant and bankrupt. But as a result of the steady ploughing back of profits over the years into investment, Germany today heads the league of world class cars, and its industry is entirely German owned. A similar story can be written about the Japanese car industry A study in 1977 found that the capital intensity of the Japanese car firms, Toyota and Nissan was $29,200 and $22,400 per worker, respectively. This compared with $15,500 per worker for Volkswagen in Germany, $15,100 and $11,400 for Ford and General Motors, respectively, in the US, and just $4,100 for British Leyland.

However, it must be said, that the pressures of the neo-liberal agenda being pushed by the giant transnational corporations, including those based in Europe, is narrowing these institutional differences, so that the above account is beginning to get out of date. But it still serves to explain why manufacturing in other western European countries is in a stronger position than in Britain.

The extent to which Britain lags behind other industrialised countries in investment is indicated by its low rate of fixed capital formation — that is the growth of physical assets such as plant, machinery schools, universities, hospitals, dwellings and other buildings, railways, roads and vehicles, and so on. Britain has been bottom of the league for years, averaging around 17 per cent of GDP. For most other countres, it has been above 20 per cent, reaching 30 per cent in Japan and Portugal in some years. And in China, over the last decade and a half, it has averaged 35 per cent.’ This has a cumulative effect. If less is invested in one year, there will tend to be less to invest in the next year, and so on. Therefore, as long as Britain lags behind in this respect, we will find ourselves being overtaken by one country after another. These figures also help to explain why growth in productivity in Britain is below that of other advanced countries, which, of course, makes our manufacturers less competitive. Thus, labour productivity in Britain is 60 per cent lower than in the United States, 40 per cent lower than in France, and 20 per cent lower than in Germany,’ which, of course, is related to the much lower capital stock per worker in Britain, as well as lower skill levels, and lower expenditure on research and development. Expenditure on research and development in Britain between 1985 and 1996 grew at an annual rate of barely 2 percent, compared with 17 per cent in France and Germany (17)

The export of capital
Britain is the world’s biggest net exporter of capital for direct investment — the United States exports more, but, on average, receives as much back from foreigners investing in the US, and, in fact, currently is a net importer of capital for direct investment.’ The amounts of capital exported vary considerably from year to year according to opportunities, but whatever the amount, it is obviously at the expense of investment in Britain. Over the last decade, it amounted to £570 billion. However, this was offset by £320 billion of foreign direct investment coming into Britain, giving a net outflow of £250 billion.’ On top of that, during the same period, nearly £2,000 billion of capital disappeared abroad in portfolio and other investment — spent mainly on the purchase of foreign shares and bonds, and deposits by British banks. This was offset by £2,500 billion coming into Britain from abroad. In other words, overall, Britain was a net importer of capital. But since most of this is portfolio capital or bank deposits, it is mainly speculative, or used by foreigners for the purposes of money laundering and tax avoidance, taking advantage of the City of London s status as an offshore tax haven. Therefore, mostly, it is not invested in manufacturing, or other physical assets that produce real goods and services. Even direct investment into Britain is often simply acquiring already established businesses, so that it is not investment in any economic sense, unless, in addition, it results in new plant or buildings, or higher employment. Some foreign takeovers have actually been vehicles for disinvestment, the purpose being to reduce competition or steal firms’ order books before shutting them down (see below).
The primary driving force for direct investment abroad is, of course, that it is more profitable than investing at home — or at least it is perceived to be, because, as man companies have found out, it does not always work out that way. For example, Stagecoach, the Perth-based bus company, which also owns South West Trains and 49 per cent of Virgin Trains, last year had to write off nearly £600 million on its ill- advised acquisition of Coach USA. Similarly, Scottish Power, in May 2005, ended up selling a major acquisition in the United States, Pacifcorp, at a £1 billion loss. There are many other examples.

The most obvious way of making extra profit, indeed, super profits, is to relocate production to less developed countries where wages are a fraction of what they are in the advanced countries. But before that can happen, those less developed countries do need to have a reasonable infrastructure in place, and a well-trained workforce The former centrally planned economies in Eastern and Central were a gift to transnational corporations in that respect. And China has made huge strides since th early 1980s, and because of its huge supply of cheap labour it can undercut almost everywhere. During the first six months of this year, over 21,000 new foreign-owned enterprises were approved by the Chinese government, which is about average at th moment. This trend is enhanced all the more by the fact that the cheap import undermine manufacturers that originally had chosen not to relocate, so that they am compelled to relocate themselves in order to be able to compete. However, about three quarters of direct investment abroad from the advanced countries goes to other advanced countries. This is still motivated, of course, by the extra profits to be had, bu’ these will arise, if indeed they do arise, for reasons other than cheap labour.

Where the investments are made relates very much to the product, and to its markets The cheap labour areas are most attractive for mass produced consumer goods, such a textiles, clothes, shoes, toys, small domestic appliances and other electrical goods, or mass produced intermediate products such as standardised components for industrial equipment, motor vehicles, aircraft, electronic goods, and so on. Even companies making high-tech or specialist products, often tailored to the specific needs of users worldwide, are increasingly subcontracting the manufacture of key components, if no the whole of their production, to companies or subsidiaries in Eastern Europe or Asia - especially China. However, for more specialised productive activities, for example bespoke parts for various industries, or bulky low value products, the motive is to hi located near their markets, in the hope of undercutting local producers by investing in more productive technologies, or to have control over a natural resource upon which the industry depends. These are among the motives for the large-scale presence a Britain’s two biggest corporations, BP and Shell, in the United States. BP took over th US corporation Amoco in 1998, and shortly after Atlantic Richmond, and has had major production assets in Alaska since 1969. For both companies, some 30 per cent of their capital expenditure is in the United States.

Another reason for companies to invest in other advanced countries is to get round potential or existing import restrictions. For example, the huge investment b Japanese car companies in the United States and in Britain (to serve the European market) was motivated by the need to get round import restrictions applied to can manufactured in Japan. For similar reasons, currently, BAE Systems, the British arm manufacturer is busily seeking acquisitions in the United States in the hope o clinching lucrative contracts from the hugely expanding United States imperialist war machine. The company is already making sizeable profits from the necessarily more modest imperialist ambitions of the Blair government.

One other motive for investing in subsidiaries abroad is that it opens up opportunities to avoid tax and various regulations by setting up ‘letterbox holding companies in offshore tax havens, through which invoices (and bribes) can be channeled — using the device of transfer pricing and the like — to move capital arourn to where it is most profitable, and least likely to attract tax, to the benefit of th corporation as a whole.
For all countries, direct investment in manufacturing abroad is, of course, at the expense of investment in manufacturing at home, and the extent to which this goes to the cheap labour countries affects all the advanced countries, as well as Britain. But as shown by the figures given earlier, manufacturing in Britain is suffering more than in other advanced countries. This is related to the continuing dominance of financial institutions based in the City and their branches in other offshore tax havens, which attracts funds away from investment in manufacturing.

The export of jobs
When capital is exported and invested in productive activities abroad rather than in Britain, this obviously is equivalent to the export of jobs. Since, as has just been said, about three-quarters of outward foreign direct investment from the advanced countries, including that from Britain, goes to other advanced countries, that part of direct foreign investment is more or less jobs neutral — jobs exported are compensated by jobs created by inward foreign investment from other advanced countries. Britain, however, loses out because, as just discussed, it is the biggest net exporter of capital for direct investment among the advanced countries. Furthermore, direct investment covers both the establishment of new productive activities and the takeover of existing enterprises, when foreign firms acquire or merge with firms already existing in the country. Only the former leads to more jobs, unless the foreign firm acquiring or merging with the local firm initiates a new round of investment. Alternatively, if the motive of the merger or acquisition is to capture the markets of the firm already in the country, or to ‘rationalise’ production because the market for the particular product is relatively saturated or declining, the foreign investment can lead to major job losses. How a country is affected is strongly related to its labour laws, and how easy it is to sack workers. Again Britain loses out because of its pro big business, anti-union labour laws, which make it easier, and less costly for companies to close down businesses here and expand them elsewhere (see below).

The quality of jobs might also be affected over time by the interchange of direct investment among the advanced capitalist countries. The big transnational corporations are in a position to set up their various operations worldwide according to where it is most advantageous to them. For example, a country with a highly skilled workforce in a particular productive area will be favoured with the production of its higher value products providing higher paid employment, whereas others with a lower level of skill might be lumbered with its lower value products, with workers being paid less. And this will tend to perpetuate itself, because the opportunities are less for workers in the latter case to acquire the higher level of skills. Again, because of its poor quality of training, Britain loses out, which is why many of the foreign-owned plants have tended to be more in the way of assembly plants, with much of the value in the manufacturing of the components created elsewhere. Furthermore, if a country’s labour laws are weak, as in Britain, this is likely to attract that part of a t operations that are more susceptible to varying demand, so that the company is in a stronger position to hire and fire workers, or reduce them to part-time, as and when required, according to demand for the product.

The export of jobs is not just due to the export of capital from the advanced countries. More often than not, the big transnational corporations already have a store of funds derived from the profits of their worldwide operations, and access to lines of credit, through their holding companies and subsidiaries based in offshore tax havens. For example, the second biggest source of foreign investment in China during the first six months of this year was the British Virgin Islands, a notorious unregulated tax haven. This was just behind the leader, Hong Kong, which is also in part a tax haven, and ranking seventh, eighth and ninth, after Japan, South Korea and Taiwan, were the Cayman Islands, Singapore and Samoa, again all well known tax havens.The fickleness of foreign investment in Britain Because of the reluctance of home-grown big business to invest in manufacturing industry the previous Tory government and, since 1997, the new Labour government, have gone out of their way to attract foreign investors, often awarding them large cash payments as a way of encouragement, courtesy of taxpayers. The trouble is that the world’s transnational corporations have become adept at playing governments and workers in different countries off against one another when deciding where to locate their various operations. BMW, for example, in 1993, after assessing 250 locations in 10 countries, finally decided to establish its new plant in South Carolina in the United States after the state government had offered $130 million worth of incentives and subsidies over a thirty-year period.

The US car company, Ford, has been particularly skillful in its bargaining with governments in Britain going back a long way. For instance, taking more recent examples, in 1994, Ford persuaded the British government to grant it the equivalent of £64,000 per worker to expand its Jaguar plant, which it had acquired five years earlier. Only two years later, the government gave it another £80 million as an incentive to manufacture a new Jaguar sports car saloon in Britain rather than the United States. And two years after that, after threatening to move its production line for Jaguar cars elsewhere, citing lower costs, Ford extracted another £43 million from the British government — amounting to £15,000 per worker — to keep the plant in Britain. Then, after all that, Ford announced in September2004 that it was to close two of its three plants in Britain anyway, including the historical site at Browns Lane, Coventry Meanwhile, in December 2004, it got another £4.5 million out of the government — equivalent to £10,000 per job created — as a ‘sweetener’ to set up a new diesel engine plant at Dagenham. Ford not only gets money from the British government In 1999, for example, it got the equivalent of £450 million for setting up a plant in Brazil. This was after the progressive government of Guiba, in the Brazilian State of Rio Grande do Sul, after coming to power, rejected a similar scheme on the basis that the subsidies and tax-breaks that would have gone to Ford would have outweighed the benefits of the new employment generated. It had decided that the money would be better spent in other ways. Perhaps Britain should learn from that.

Transnational corporations even play regional or local governments off against one another. For example, the Korean transnational, LG, decided in 1996 to set up two plants in Britain, one manufacturing computer chips, and the other television parts. After first investigating what was on offer in Scotland and North East England, LG finally opted for South Wales after managing to negotiate a subsidy of £248 million - equivalent to £40,600 per job —from the Welsh Office. was supposed to have been for the creation of 6,100 new jobs. In the event, LG never opened the state-of-the-an chip plant — built, incidentally, in opposition to local planning rules. (This plant ha since been sold on to another Korean transnational, Hyundai, which has mothballed it.) Fewer than 2,000 people were ever employed, and by 2003, this number had dwindled to just 300. In addition, LG closed its plant in Southport Merseyside, which made chemicals for its television tube production because they became available more cheaply from Chinese sources.

Another major recipient of state aid in 1996 was the German transnational Siemens for setting up a semiconductor plant in Wallsend Tyneside, employing 1,567 workers Only two years later, following a downturn in the semiconductor market, the plant closed down. Siemens was originally meant to have received £50 million, but, in the event, got only £18 million, which it has since paid back. A survey conducted by the Financial Times in 2003 found that half the £750 million state aid offered to 50 project over the previous decade had gone to just 16 transnationals that have since closed factories or failed to reach employment creation targets. Of the rest, only seven showed evidence of creating or safeguarding all of the jobs promised. Imagine if all this aid had gone towards helping local enterprises to set up or extend their businesses especially if they were co-operative ventures, which had a vested interest in providing employment for, and serving the local community.

Meanwhile, in June 2005, South Wales was hit by the closure of another television plant, first established in 1973, owned by Sony, the Japanese-based transnational, with the loss of over 650 jobs, already whittled down from the 4,000 it employed in 2000.” Sony had also been a recipient of state aid — £7 million in 1996, and £16 million in 2000. Sony blamed the redundancies on the downturn in sales of cathode ray tube televisions in favour of slender flat-screen types. The former will be concentrated in Sony’s factory in Slovakia, where wages are a fraction of what they are in Britain. Why doesn’t Sony transform its plant in Bridgend to make flat-screen televisions? Because that side of its business is taken care of in its plant in Barcelona, which serves the whole of Europe.

In short, under the current neo-liberal regimes which Tony Blair and Gordon Brown favour so strongly, the world’s transnational corporations — with state aid if they can persuade governments to oblige — are allowed to set up their operations, and close them down, as they see fit, according to their own best interests, never mind the effect it has on the local community. Their fickleness when it comes to their investment plans is well summed up a recent headline in the Financial limes: ‘No fixed abode for the modern manufacturer’. The article was about the criteria transnationals apply when deciding where to locate their operations, noting that ‘smart companies are splitting production into stages and carrying it out in different countries Needless to say, this is hardly a basis for a government to plan the long-term future of its manufacturing industries, upon which the welfare of working people everywhere ultimately depends.

Meanwhile, foreign companies that do set up in Britain, not only transfer the profits created by British workers abroad, so that they are not available for reinvestment here. They also contrive to pay little or no tax through complex accounting devices, such as exporting products on the cheap to subsidiaries in other countries, or borrowing large amounts from their subsidiaries and offsetting the supposed interest payments against tax.” Of course, British-based transnationals are guilty of the same tricks, which is one reason why they find it more profitable to invest abroad rather in Britain.

The effect of Britain’s anti-union labour laws
Britain’s pro big business, anti-union labour laws make it easier for workers to be sacked than in most other advanced countries, apart from the United States. It is therefore easier to close down enterprises, and relocate production elsewhere, perhaps where labour is cheaper, almost with impunity. Indeed, Britain has the worst employment protection in the EU- 15.” On top of that, Britain has longer working hours than any EU- 15 country, and the government has pledged to keep its unique opt-out from the EU Working Hours Directive. Britain also has the lowest benefits for the first year of unemployment of any advanced country — more so even than the United States.” If laws made it more costly to sack workers, as in France and Germany, companies might have more incentive to invest, making their plants more productive, or to diversify allowing the redeployment of workers displaced by more productive technologies, or shrinking markets for particular products.

Even when workers are more productive than their counterparts in Europe, this is no guarantee. For example, Corns — the Anglo-Dutch steel company formed in 1999 following a merger between formerly state-owned British Steel and Hoogovens in The Netherlands — sacked 1,300 workers in 2000, even though its British plants were more efficient, simply because it is cheaper to make workers redundant here.” Similarly, in 2002, the US company, Arco, that owns the tractor firm Massey Ferguson was able to close its Coventry factory which had been starved of investment, with the loss of 1,100 jobs, and transfer production to its plants in France and Brazil. And, in 2004, Hell Trailer International, the US-based manufacturer of tanker trailers, closed down its West Midlands plant with a loss of 100 jobs, transferring production to Thailand, Poland and Argentina”. Just before that, the biggest US food company, Kraft, unceremoniously announced the closure of its Terry’s chocolate factory which it had acquired in 1993 — and which had been making chocolate in York for nigh on two centuries —with the loss of over 300 jobs, transferring its production to elsewhere in Europe”. At the same time, the world’s biggest food company, Swiss-based Nestlé, with a worldwide turnover in 2004 topping £50 billion announced the closure of its Staverton plant making desserts, which had been a key employer in the town for 120 years, with a loss of 120 jobs, having previously closed down its Halifax factory with the loss of 270 jobs.

One of the most scandalous closures must be that of Biwater Pipeworks, in Claygate, Derbyshire, with the loss of all 700 jobs, the day after its acquisition by the French transnational, Saint-Gobain. This was in spite of a full order book for the next two years. The object of the whole operation quite clearly was to drive out the competition and take over its market. What made it all the more scandalous was the fact that the Office of Fair Trading knew about the plan, but failed to reveal it because of ‘commercial confidentiality’ — and also that Stephen Byers, the Trade and Industry Secretary at the time, failed to intervene.” At the time of writing, Saint-Gobain is trying to take over the British plasterboard manufacturer, BPB.M Workers at BPB — be warned! Another scandal that has blown up, purely the result of our anti-union laws, is the sacking of 670 workers — by loud hailer — by Gate Gourmet, for refusing to take a wage cut The company produces in-flight meals for British Airways. It was formerly owned by British Airways, but is now owned by the US Private Equity firm, Texas Pacific, which has a history of similar actions in enterprises it owns in the United States.” As the Morning Star put it at the time: ‘Too many workers in Britain have been dumped on the cobbles by hard-faced employers, while trade unions are held hostage by anti-union laws and Labour ministers wash their hands Pontius Pilate-style. Workers are dumped as so much rubbish with no thought at all that these are people with families to support, and lives to live.

These a just a few ‘highlights’ among very many instances of what are coming to be everyday events for workers in manufacturing up and down the country on the way Britain’s anti-union laws are used by companies to ‘rationalise’ production among their plants around the world. Then there are the threats of transferring production abroad to downgrade pay and employment conditions, or to reduce staff so that those remaining have to work longer or more intensively. For example, in August 2005, TRW Automotive in Pontypool was trying to ditch 156 workers out of a workforce of 600, and increase working hours of those remaining ‘to improve competitiveness’ with the threat that if this was not accepted, the company would transfer assembly work to Poland.”

The mythical benefits of Britain’s ‘flexible’ labour
The reason why the government refuses to repeal much of the anti-trade union legislation introduced by the Tory government under Margaret Thatcher in the 1980s h supposedly to encourage investment, both domestic and foreign, through Britain having a ‘flexible’ labour force — a euphemism for anti-labour laws making it easier to sack workers or force them to work long hours or part-time. But as the figures giver earlier on capital formation clearly demonstrate, this has had little effect, with Britain if anything, placed at a disadvantage compared with its Western European neighbours Meanwhile, research undertaken this year by John Edmonds, former general secretary of the GMB trade union, and now research fellow at King’s College London, and Andrew Glyn, fellow in economics at Corpus Christi College, Oxford, has shown that the extra 550,000 private sector jobs created since 2000 are more or less entirely due to increased government spending going to construction companies to build new hospitals and schools, companies supplying such things as new equipment, drugs anc school books, and private service contractors involved in catering, cleaning and othei activities.” Earlier, research based on output data for 20 manufacturing sector between 1984 and 1992 carried out by the Cardiff Business School similarly showed that the supposed benefits of foreign investment in Britain have been greatly exaggerated.” Moreover, it was found that foreign investment often had a negative effect on industry because of the extra competition for local British-owned companies, with some seeing their productivity decline as their business activities dropped off. In short, Britain’s anti-labour laws have not had the effect of encouraging investment at all, domestic or foreign, as is claimed.

The problem of the pound being overvalued
A further reason for the decline of manufacturing in Britain since 1997 is that the trade-weighted exchange rate of the pound in 1997-98 jumped by nearly 25 per cent. This made our exports more expensive and therefore less competitive, and at the same time, imports cheaper. Thus, manufacturing industries both for export and for the domestic market were undermined. This problem has eased slightly more recently, especially with the recent rise in the value of the dollar, which facilitates exports to the United States, one of Britain’s major export markets. However, the value of the pound is still higher than it otherwise would be due to our interest rates being higher than in other advanced countries. This makes it more profitable for international currency dealers to hold their stocks in pounds, which increases the demand for pounds, and therefore its price in terms of other currencies. The much-publicised quarter percentage point cut in base rates to 4½ per cent in August 2005 was trivial. The eurozone base rate is 2 per cent

The negative consequences of high interest rates
Apart from this adverse impact on the exchange rate which undermines manufacturing, higher interest rates also make it more costly for manufacturers to invest or borrow to buy inputs from other manufacturers — especially as they often have to pay much higher rates than the Bank of England’s base rate. Ostensibly, the reason for higher interest rates is to control inflation. But one of the factors that makes Britain’s economy more prone to inflation is insufficient investment — which in part is due to the higher interest rates. So it is a vicious circle.

Many people on the Left blame the higher interest rates on the decision of the Chancellor, Gordon Brown, to give independence to the Bank of England for the setting of interest rates. However, even if monetary policy had remained with the Treasury, it is doubtful if it would have made any difference, because interest rate decisions would still be determined by the same criteria. In fact, other things being equal, the setting of interest rates to control inflation is largely a technical decision — or more precisely, a professional judgement among experts attempting to take into account the various uncertainties involved. In any case, the Bank of England, in the last analysis, still has to do what the government says, though, to be sure, it could be made more accountable by Parliament being given the power to vet nominations for the Monetary Policy Committee, the body responsible for setting interest rates, including their past professional history and publications.

The trouble with over-focusing on Brown’s decision to grant the Bank independence is that it actually detracts from the main issue. That is the government’s decision — in line with the neo-liberal ideology that dominates its thinking — not to use other available methods for controlling inflation, such as credit controls to limit consumer demand when necessary, or subsidies financed from revenues from other economic sectors to stimulate investment in productive activities that open up supply bottlenecks - which, ultimately, is the primary cause of inflation. In a way, the government has been lucky, because the main reason for the relatively low rate of inflation at the moment is due to the chronic overcapacity worldwide for the manufacture of a large range of consumer goods (or more precisely, due to underdemand, because most of the world’s people are too poor to afford them). However, the underlying problem of insufficient investment as a cause of inflation has revealed itself very clearly in the huge escalation of house prices.

The myth of Britain remaining outside the euro as a problem
There are some in the trade union movement, and especially at the TUC head office, who somehow believe that Britain would benefit from closer ties with the European Union by joining the eurozone. One Supposed advantage is the current low interest rates in the eurozone. First, there is no guarantee that that will always be sc Interest rates are low at the moment because of the need for European Central Bank ti stimulate investment in the depressed economies of Germany, France and Ital (Italy in particular, needing even lower rates). In fact, other countries in the eurozone such as Ireland, Spain and Greece, need interest rates to be higher, because that is th only tool that the EU allows for the control of inflation — under EU rules, these countries are not permitted to use other methods, just mentioned. They have to accept the ‘one-size-fits-all’ decision of the European Central Bank. Moreover, nation governments are not allowed any influence on European Central Bank decisions. least, ultimately, the Bank of England is answerable to Britain’s Parliament Th European Central bank is answerable to nobody but itself.

Even the most pro euro advocates, if they go into the issues in any depth, have t admit that there is no economic advantage to Britain joining the euro, and most small and medium businesses, as well as the powerful financial sector see it as a distinct disadvantage. Only the large transnational corporations based in Britain stand to gain giving them even greater flexibility than they have already to set up or close down operations within Europe as they see fit, using their huge financial resources to pus. out smaller competing businesses. Practically the only plank that supporters of th euro within the labour movement have to stand on is the so-called Social Charter. But they should take note of what Keith Richards, Secretary-General of the European Round Table of Industrialists — comprising the chief executives of around 50 of th biggest European-based transnational corporations — had to say about it. (The ER was largely responsible for drafting the Single European Market agenda and th Maastricht Treaty) ‘The Social Chapter he said, ‘would not affect the functioning c the single market’ and would be ‘a large waste of time’. ‘But if politicians feel it i important to get the chapter referring to the desirability of full employment and the think it will help public opinion we don’t really object It won’t help jobs, but it won’t d much damage providing of course that it remains related to aspirations’. It could not be put much better! But even that was too much for the Tory government to accept and it opted out of the Social Chapter. The new Labour government, under Blair has, of course, since signed up to it, but has still retained an opt-out on the Working Hours Directive.

The problem of skill shortages
In spite of the inadequacies of government economic policies, some manufacturing has managed to prosper, mainly in high technology areas, such as highly tailored products that need to be produced close to where their British customers are, c products based on locally supplied inputs. The industries that have suffered the mo are those which can easily be relocated to less developed countries where wages are low. As mentioned already, if controlled, this need not be a bad thing, because if the economies develop as a result, they will provide bigger markets for our exports. Win should be happening, and is happening to a greater extent in other advance countries, is that as some manufacturing activities are relocated, others producing more specialised products at a higher technological level should be taking their place In other words, it need not involve workers in manufacturing losing their jobs at a] Workers could simply be retrained and redeployed in new productive activities preferably within the same enterprise. But a major inhibiting factor in Britain compared with other advanced countries is the shortage of skills at various levels. La year, for example, according to the Department of Work and Pensions, there were 58,000 vacancies in manufacturing largely due to difficulties in attracting staff with th right qualifications.

61 Partly this reflects the general crisis of education in Britain, which has suffered from chronic underinvestment. In contrast to Britain, other advanced countries have long-established and well developed systems of comprehensive education, which do not hive off children from the upper classes to elite schools. Therefore, everybody, especially those with political clout, has a vested interest in ensuring a decent level of investment in the state education system. In Britain, too many people leave school without the basic education needed to learn the technical skills required for working in high technology industries and in research and development. In particular, it is relatively easy for school students in Britain to opt out of scientific and technical subjects, which are perceived as more difficult because of the jargon that has to be learned, and generally because studying such subjects demands more rigour.

A further disincentive to the studying of the natural sciences and technical subjects is the perception, not without grounds, that one can earn more in ‘business’, ‘management’, or ‘accountancy’. This reflects also the bias in Britain towards the financial sector at the expense of manufacturing. In fact, there is something of a Catch- 22 situation here. If the manufacturing sector is perceived to be declining, which it is right now, this is not going to provide much incentive for young people to invest their time in acquiring education and skills that might in the end be worthless, or when the risk of loss of employment opportunities that require those specific skills is high. And the shortage of people coming through with the skills needed for a healthy manufacturing sector puts a further nail in the coffin of manufacturing.

But the shortage of skills is also to a considerable extent a problem of British capitalist owners of industries’ own making — namely their reluctance to invest in training workers in transferable skills who might then go on to sell their newly acquired skills to ‘free rider’ competitors. In contrast to Britain, Germany has an elaborate network of industry-wide employer associations and trade unions to supervise a publicly subsidised training system. This helps to ensure that firms investing in training will not have their workers once trained poached by companies that do not make equivalent investments in training. Conversely, a worker undergoing training is assured that it will result in lucrative employment. In short, by pressurising major firms to take on apprentices and monitoring their participation in such schemes, these associations limit free-riding on the training efforts of others. Meanwhile, by negotiating industry-wide skill categories and training protocols with the firms in each sector, it is ensured both that the training fits the frims’ needs and that there will be an external demand for any graduates not employed by the firms at which they apprenticed.
4. Why the current free-for-all relocation of manufacturing to less developed countries is unsustainable
Before considering what the government should be doing to halt the decline of British manufacturing, it will be useful to examine some of the contradictions of the current free-for-all to relocate industries to less developed countries where wages and therefore labour costs are low. As implied already, up to a point, Britain and other advanced capitalist countries benefit from this trend because it means that we have access to high quality goods at cheaper prices, giving us more to spend on other things, especially services. And the extent to which high quality jobs in services replace more mundane jobs lost in manufacturing, we benefit from that too. Furthermore, investment in manufacturing in underdeveloped countries needs to be encouraged because it is precisely the deficiency of such investment that causes these countries to remain poor and underdeveloped. Again, we also would benefit because the more that is invested in manufacturing in these countries, and therefore, the more economically developed they become, the more they will be able to provide a market for the goods and services that Britain and other advanced countries need to export to the underdeveloped countries for our economies to prosper.

However, this assumes that the huge profits arising horn investing in manufacturing in underdeveloped countries due to the low wages at least remained in th underdeveloped countries so that they were available for re-investment in the development of their economies. As the former Secretary for Trade and Industry Patricia Hewitt, was fond of pointing out, that is indeed how South Korea turned itsel from one of the world’s poorest countries to a major industrial country. But what he propaganda omits, either through ignorance or to deliberately distort, is that in South Korea virtually all its industries are owned by Korean companies, which, alor capital ntrols, ensured that the profits largely stayed in the country; arid wer theiëTore av for reinvestment in other productive activities. In contrast, in mos other underdeveloped countries, the industries being established are largely foreign owned, or are joint ventures, so that most of the profits disappear abroad, facilitated b’ various accounting tricks — especially transfer pricing, through the overinvoicing of imported inputs and the underinvoicing of exports. Thus, even when involved with joint ventures, transnational corporations are able to transfer profits abroad, which means, in addition, that they get away with paying little or no tax. That is why, in spit of the new industries, the economies of less developed countries remain relatively underdeveloped.

Meanwhile, because of the underdeveloped state of their economies, an consequently the high levels of unemployment and underemployment, workers ii most underdeveloped countries are in severely weak bargaining positions. Not on! are wages forced down to rock bottom, but also workers’ rights are practically non existent, and Victorian-like sweatshop conditions prevail, with workers in some case forced to work a 10-hour day or more. Furthermore, almost invariably, trade union are banned, or are mere arms of governments wanting to keep down wages. Apart from this obvious abuse of human rights, it perpetuates the underdeveloped state of their economies because the low growth of economic demand locally provides little incentive to invest in the domestic market, so that there are fewer new employment opportunities, which means that economic demand continues to remain at a lo level. When manufacturing industries are transferred to underdeveloped countries under these conditions, therefore, our manufacturing base is undermined not on! because we lose the industries that get relocated, but also because, as long as th economies of the underdeveloped countries remain relatively underdeveloped, the cannot provide much of a market for the products of the manufacturing industries that we do manage to retain.

The logic of current trends is for all manufacturing to migrate to China, because this is where labour costs are lowest, and therefore is where manufacturing is more profitable, and also because, unlike some other underdeveloped countries where wages are even lower, it now has a well developed infrastructure to support manufacturing industries. And, as noted already, even now, the shift of manufacturing to China is by no means confined to low-tech products, and its industries are becoming ever more sophisticated by the day. That is why China is fast becoming th ‘workshop of the world’ — once Britain’s epithet On that basis, our wages will have to b pushed down to the same level as China’s for our manufacturing industries to become profitable again! However, in time, this might be moderated to some extent, hopefully by Chinese trade unions pushing up wages in China so that its workers get a bigger share of the fruits of their labour. But even before that, and presuming that trade unionists in the advanced countries were unable to prevent wages from falling, which would require forcing upon governments a change of policy, we would be faced wit an intensification of the current crisis — that is low wages globally and insufficient economic demand to provide markets for the goods and services capable of being produced and supplied. Thus, if there were a slump in wages in the advanced countries too, which would cause economic demand to decline, and markets to contract even more, it would lead to more and more businesses closing down, more unemployment, and a further slump in economic demand, and so on. In other words, it would lead to a prolonged and self-perpetuating economic depression, with all its negative repercussions — indeed, a situation not too much different from what prevails in most of the world, even now, which is causing so much suffering. All these trends, of course, are a consequence of businesses only being able to act in their own interests. In fact, they cannot act in any other way. It is not their role to deal with the combined effects of their actions on whole economies. That is the job of governments. But as long as governments cannot be weaned from acting in the interests of the shareholders of big financial institutions at the expense of the rest of society then these contradictions will intensify.

In short, the extent to which the higher profits from investment in manufacturing in underdeveloped countries are not retained in those countries and therefore not re invested in their economies, is a major .cause of the world’s current economic problems, as well as the social, political and security problems that are getting ever more serious. This will only be resolved by governments everywhere taking it on themselves to regain control over the economies that they are charged with, and to act in the interests of everybody rather than privileged groups, such as the shareholders of transnational corporations, which currently are being given a free rein.

5. What the government should be doing
Halting the decline of Britain’s manufacturing industry — which is what is needed for a more balanced and more prosperous economy— will require a wide-ranging package of measures, and a multi-pronged strategy. In particular, the government needs to go out of its way to support British manufacturing enterprises — the opposite of what it appears to be doing right now. Most of the measures needed as proposed here fly in the face of the prevailing neo-liberal ideology that currently dominates economic policy, and therefore could be considered controversial. However, many would have been regarded as perfectly orthodox in the 1950s and 1960s (and in some countries, into the 1980s), and were part and parcel of government policies everywhere. And this was when economic growth was at an all-time record, peaking in 1973 when world output rose by 6.7 per cent in a single year. Today’s neo liberal policies have never achieved anything like those growth rates.

It is beyond the scope of this pamphlet to analyse fully the causes of the demise of those policies in the 1950s and 1960s, which were loosely based on the economic theories pioneered by the British economist John Maynard Keynes (1883-1946). Suffice to note that they did not address the underlying contradictions of capitalism, which are of a class nature. At first, relatively full employment in the advanced countries as a result of those policies enabled organised labour to push up wages. And it allowed primary commodity producers in less developed countries, especially members of the Organisation of Petroleum Exporting Countries, to raise prices. Rather than increase investment in response to the growth in economic demand that resulted, many businesses — in some countries, such as Britain, more than others — in order to sustain short-term profits, cut back on investment. This initiated a spiral of inflation, which increased profits in the short run, but which had a massive destabilising effect in the long run. Meanwhile, other businesses sought more profitable investment opportunities abroad, bypassing the capital controls that were then in force, by making increasing use of offshore financial centres or tax havens, which mushroomed as a result This, in turn, undermined the capacity of governments to control investment and capital flows, exchange rates and interest rates, which had a further destabilising effect. Furthermore, it led to a huge growth in the speculative financial sector, which attracted funds away from investment, thus further fueling inflation. This was added to by irresponsible governments (notably that of the Unite States to finance its war against Vietnam) attempting to manage their growing deficit by printing money or otherwise increasing money supply, and by unregulated banks ii offshore tax havens (actually branches of banks based in the advanced countries advancing credit to an increasing extent, until it was unsustainable. All these factor gave rise to intensifying political struggles during the course of the 1970s, and a new generation of right wing monetarist governments came to power, first in the Unite States, and then in Britain and elsewhere. These introduced sharply deflationary policies, freed capital movements and sought to run their economies with mud higher levels of unemployment, thus powerfully reducing workers bargaining positions. The result was a sharp increase in inequality in all countries, a massive increase in the development gap between the more advanced and less developed countries, and a huge slowdown in growth of economic demand — and an absolute decline, in many countries.

Prevailing neo-liberal policies have extended all those trends with a vengeance, and as noted earlier, are leading to a deepening of the world economic crisis. It should also be noted that in essence these policies are a resurrection of those which prevailed ii the early part of the last century and which resulted in the worldwide depression of th 1930s — and to which Keynes’s economic theories were largely a response. We should therefore have no qualms about challenging current orthodoxy.

Some of the measures proposed here demand concerted action by governments most obviously the reining in of offshore tax havens and the negotiation of a new international trade policy. But as the failings of the neo-liberal agenda become more obvious, it is likely that more and more governments can be won round, provide there is a large enough campaign, led by the organised labour movement and it supporters, with a coherent alternative agenda that can counteract the powerful lobbying forces of the world’s transnational corporations that currently influence government policy-making.

Although the following measures are primarily geared to rescuing Britain manufacturing industry, many have a wider application. Meanwhile, if they led to healthier manufacturing sector, this would pave the way for a more health economy as a whole, because it will lead to a more sensible balance between different economic sectors that can support one another. There is a certain logic t the order in which the measures are presented in that to a greater or lesser extent those discussed later depend for their effectiveness on the measures considered earlier being implemented. But, in any case, all of them should be regarded as package. Each on its own is not enough. The combined effect of these measure would no doubt reduce markedly the profitability of so-called investment in th financial sector (actually not investment in any economic sense, but the speculative shifting of capital assets from one form to another). This should mean th investment in manufacturing, as well as in other productive activities that produce and supply things that people and businesses need and want, will become more attractive, the more so as the economy grows as a result. The financial sector will n longer be the tail wagging the dog.

Finally, it should be pointed out that the following measures do not particularly address the underlying contradictions of capitalism just mentioned, merely the won excesses of neo-liberalism. But they do pave the way for the other political struggle necessary to bring about a more equitable, socialist economic system based o common ownership embracing co-operatives and publicly owned industries an services, because it would become clearer what else needs to be done. Moreover, these measures would not be irrelevant to such a system. On the contrary they would need I be part and parcel of it. So, from a progressive point of view, campaigning for the$ measures serves three purposes.

The case for import controls, and a new international trade policy
All governments need to control imports. Indeed, it is their democratic right. No country including Britain, has established a manufacturing industry or reached an advanced state of development without import controls. Mostly, this has been driven by private companies seeking to prevent their investments being undermined by foreign companies with a competitive advantage — for instance, because they had been in the business longer, had more experience, or better technology or because of the availability of cheap labour. Private companies and governments acting on their behalf only champion free trade from a position of strength. What is needed is for import controls to be subject to internationally agreed rules or guidelines, so that they can be applied in an orderly way to the advantage of all concerned.

The first point to stress is that controlling imports does not mean a ban on competing imports, which is what opponents of such controls almost invariably make them out to be, and which, unfortunately, governments have sometimes practised. In fact, it is self- defeating. First, countries need to allow in imports so that other countries have the means to import from them. In other words, it is a question of keeping the balance right so that all countries benefit. Secondly, allowing in competing imports, up to a point, tends to enhance quality and efficiency of production, so that consumers benefit in terms of both quality and lower prices. The different devices for controlling imports have advantages and disadvantages (see Boil).
A major problem with all types of controls on imports is their tendency to remain in place long after their original purpose has abated because they entrench vested interests, which become a powerful lobbying force on governments to prevent their removal. An internationally agreed rules-based system would help to avert this.

One such agreement was the Multi-Fibre Arrangement first put in place in 1974, which allowed all countries to import and export textiles and clothes subject to complex set of quotas. In spite of flaws, it enabled many underdeveloped countries to establish a manufacturing base in these activities, without it undermining too much the established industries in other countries, which were encouraged to switch to higher value products. It is only now, since January 2005, when it was abolished (a sop to the neo-liberal agenda) that its relative success is beginning to be appreciated. Thus, many poorer underdeveloped countries, as well as advanced countries, are discovering that their textile and clothing industries are being undermined by the new free-for-all that overwhelmingly favours China, which has the capacity to produce such products more cheaply than anywhere else. Indeed, almost immediately after the MFA was abolished, the EU has re-imposed emergency quota because of the pressures from European manufacturers, but it has caused chaos. Retailers and wholesalers, in anticipation of the end of the MFA, had long before placed orders for this year’s winter stocks. By August 2005, most categories had already exceeded the quotas that had been agreed between the EU and China in June, and at the time of writing, amongst other things, there were 59 million sweaters and 17 million pairs of men’s trousers piled up in warehouses in Europe unable to be released because the quotas had been exceeded. (64)

Out of this mess, perhaps, there is a chance for trade unionists in different countries to push for concerted action to the get the Multi-Fibre Arrangement renegotiated and re-introduced, and to extend such a system to other goods. This would enable all countries to develop to a greater or lesser extent and preserve broad manufacturing base, and at the same time gain from the benefits of international trade. It would allow the beneficial, stimulating effects of competition, but prevent the extremes of cutthroat, dog-eats-dog competition, which is what the neo-liberal regime encourages to the disadvantage of everybody apart from the big transnational corporations.

When tariffs are deemed more appropriate and more efficient to administer, again these should not be set at prohibitive levels, which, as in the case of highly restrictive quotas, would be self-defeating. For instance, tariffs on manufactured products from less developed countries when exported to the advanced countries could be designed to offset partially the lower labour costs, but only up to a point. This would allow domestic industries in the advanced countries, as well as imports from less developed countries, to flourish, thus giving the latter a chance to diversify their exports. And countries with low incomes per capita, or other disadvantages — such as resource poverty: or being land-locked or a small island economy — could be allowed dispensations to charge higher than average tariffs.

In short, it would be beneficial to all concerned if tariffs, and other controls on imports, were applied according to an internationally agreed set of rules that promotes trade, rather than the opposite, and which strike a balance between removing all restrictions on international trade as far as possible in the long run, and preventing trade from undermining countries’ manufacturing industries, and therefore the process of economic development, in the short run — especially in underdeveloped countries, upon which the future expansion of world trade depends. Thus, it needs to be accepted that all countries, whether rich or poor, at different times, do need, and should have the right, to protect their economies from certain imports if they are having an adverse impact on their economies, and that poorer countries need that kind of protection more than richer countries. Furthermore, it needs to be accepted that governments are bound to have differing priorities, hopefully arrived at democratically, and that therefore a reasonable degree of flexibility needs to be built into international trade rules.

The easiest and most transparent way of achieving those aims would be to allow every country an average tariff or equivalent in some sort of proportion to its GDP per capita, leaving it up to each country to decide how the tariffs were distributed. Less developed countries would have the higher levels of protection that they need, and they would be able to impose high tariffs on imports, such as luxury goods, or products being produced locally for the first time, offset by very low tariffs, or perhaps even subsidies, on imported technology needed to develop their economies. More developed countries, meanwhile, could use their much lower ‘allowances’ to limit imports of products tending to undermine employment in certain sectors, giving enterprises a chance to adjust, cut costs, or diversify. Obviously, much detailed work is needed before such a scheme could be put into practice — but that surely is what we pay economists at the World Trade Organisation and in governments to do.

BOX 1: Pros and cons of different measures to control imports
Import tariffs. These are a tax on imports, which may be ad valorem (a certain percentage of value), or on a specific basis (as an amount per-unit).Tariffs have the advantage that they are easy to administer and alter as circumstances change, and are transparent — that is, the degree of protection can readily be calculated and therefore the economic effects assessed. Tariffs can also generate revenue for governments, a part of which, if derived from imports from underdeveloped countries, could be channeled back to those countries in the form of aid to help diversify their economies.

Import quotas. These limit the amounts of a particular product allowed to be imported, normally through a system of import licences. Quotas have the advantage that protection is more certain. In contrast, the effectiveness of tariffs depends on how people choose to spend their income. Also, the prices of imported goods tend to be lower than if tariffs are employed. On the other hand, import quotas require a substantial bureaucracy to implement, and lend themselves to various kinds of abuse, ranging from the bribery of officials in order to obtain licences, to importers overstating their requirements in order to profit from the sale of licences or the sale of resulting excess imports on the black market. It is also more difficult to judge their overall economic impact, especially as an economy becomes more complex, and government bureaucracies, even with the best will in the world, are not necessarily the most reliable judges of the amounts that should be imported.

Countervailing duties. Also known as anti-dumping measures, these are a tax on imports designed to offset export subsidies or products being exported at prices lower than those prevailing domestically.
Non-tariff barriers. These are rules and regulations that make it more difficult or expensive for a country to export to another Such regulations may be quite genuine — for instance, if a country has democratically decided that it does not want genetically modified foods in the country for safety reasons. Others may more cynically be measures to protect domestic industries, ranging from deliberate delays or obstructionism at customs facilities, and complicated paperwork, to requiring imports to conform to particular standards which favour domestically produced products, perhaps banning some imports altogether on spurious health or safety grounds.

Maintaining an undervalued currency. This is not specifically a measure to control imports, but it makes imports more expensive, thus favouring domestic producers, as well as making exports more competitive. In other words, if taken to extremes, it undermines other countries’ exports,and can lead to retaliation,and a trend of successive competitive devaluations among countries, as happened in the 1930s, with no country in the end becoming any better off.

Public subsidies for domestic producers. Again, this is not strictly an import control measure, but it has the same effect of enhancing the competitive position of domestically produced products over imports, and, also, if the resulting products are exported, they undermine other countries’ exports. At the moment, one of the major grievances of underdeveloped countries, which cannot afford subsidies, is the extent that their agricultural exports are being undermined by the huge subsidies given to farmers in the rich countries.
(end of BOX 1)

A new Bill of Rights for employees
The government should abandon its focus on making Britain an attractive place for companies to do business through so-called ‘flexible labour and anti-union labour laws. This not only downgrades pay and working conditions, but also allows companies, at little cost to themselves, to close down businesses here and relocate them elsewhere, mostly where wages, and therefore labour costs, are much lower. And it allows foreign companies to buy up British competitors in order to capture their markets, and then run them down, before transferring production elsewhere. In any case, from the research cited earlier, the evidence is that these pro big business, anti- union laws have contributed little towards encouraging investment in manufacturing industry, either domestic or foreign, which supposedly are their aim.

Instead, new employment laws making it hard for companies to sack workers need to be introduced. An introductory measure would be to make it illegal for a profitable company to sack workers — unless, of course, trade unions negotiate sizeable compensation packages agreeable to the workers involved. But, for the long term, following, say, a three-year probationary period, during which time workers would receive training and their progress monitored, workers should expect to be offered permanent contracts until retirement age. Of course, workers’ performance could be subject to periodic peer reviews, and if, after several warnings, workers were found fl( to be pulling their weight, they could be forced to resign, or downgraded to le demanding duties. But the emphasis should be on helping workers to overcome an problems so that they can perform to the best of their ability: Such security employment would also enhance innovation. The most likely source of new ideas in company — new product ideas, improvements in the production system that would raise quality or enable more efficient use of resources, and so on — is the workers themselves. It is they who are at the front line of production and sales. However workers are unlikely to advance new ideas if they believed that it could lead to them, some of their colleagues, being made redundant. Finally, such laws would also force companies to invest in diversification to enable workers displaced by advances in technology: or products becoming obsolescent, to be redeployed in other productive activities within the company. All of these points were well illustrated during th heyday of the manufacturing boom in Japan, whose major companies operated a jobs for-life policy.
Note that with import controls in place, all the arguments about such laws increasing costs and reducing competitiveness with foreign imports would disappear Furthermore, import controls would make it easier to raise substantially the minimum wage. Of course, this would still bring howls of protest from employers — backed b spurious arguments (as when the minimum wage was first launched) — who can only see it from their own narrow perspective. But if all firms pay higher wages, there i greater economic demand, and therefore a bigger market for their products. Without import controls, of course, higher wages would tend to suck in more imports at th expense of local firms, but once in place, there is no such excuse.

New measures to deal with insolvency
These new employment rights would need to be backed up by new laws on insolvency in order to deal with the problem of company owners simply deciding to opt out of th new labour laws by closing the business down and setting up elsewhere, as well as th of firms genuinely becoming insolvent. First and foremost, a new state insolvency agency should be established at central government and local government level (to deal with businesses on multiple sites and single sites, respectively) to act a receivers in place of the major accountancy firms, which currently perform th function, and which invariably top-slice high fees at the expense of creditors.

Secondly, a new state insolvency bank should be established with a revolving furn whose function would be to advance low cost loans to help re-establish failed businesses where possible, perhaps, in a new productive activity, aimed maintaining employment, making use of the skills of the workers involved. In man cases, the best option would be to convert such enterprises into worker-owned co-operatives, which would have the advantage that they would only have to cove workers’ wages and the costs of inputs, equipment, maintenance, and marketing, an would not have to generate the high returns demanded by outside shareholders c private capitalists.

Thirdly, new laws need to be introduced to require companies to make their accounts more transparent and available to workers and their advisors, and giving workers the powers to prevent asset stripping, and companies being deliberately run down, thus making insolvency less likely. This, together with other measures t improve investment decisions, would be greatly assisted by requiring all companies, large and small, to establish a management board and a workers council. The function of the management board — comprising representatives from shareholders, manager trade unions, frontline workers, and, if a major employer in a particular localit’ representatives from the local community— would, among other things, be to initiat and approve investment decisions. To preserve commercial confidentiality, these need not be made public. The function of the workers’ council — which for small firms could be the whole workforce, and for large firms comprising elected representatives from different sections — would be to act as a forum for workers to discuss issues of concern and make proposals for workers’ representatives to put before the management board.

An expanded role for the National Audit Office
At present, the National Audit Office has powers only to investigate the accounts of central government departments and agencies (with the Audit Commission performing a similar role at local government level). Its role needs to be extended to the auditing of the consolidated accounts of transnational corporations, and major domestic businesses with multiple subsidiaries. At present, this is performed mainly by the big four accountancy firms. The trouble is these accountancy firms have major conflicts of interest in that at the same time as they act as auditors, they collect large consultancy fees from the same companies whose accounts they are auditing (the fees charged for auditing often acting as a ‘loss leader’ to secure the more lucrative consultancy business). Moreover, a large part of their consultancy business is helping transnational corporations to manipulate their accounts among their large number of subsidiaries, including affiliates and holding companies in offshore tax havens, in order to avoid tax. The more successful they are in this regard, of course, the more this is at the expense of other taxpayers, including competing businesses that do not have the facility to avoid tax in these ways. Bringing the auditing of accounts of the transnationals under the auspices of the National Audit Office — in effect, nationalising the auditing side of the big accountancy firms — would not only make it more difficult for them to avoid tax, thus boosting government revenues, but also would become an important source of income for the National Audit Office, so that it would be better able to perform this important new role. The auditing of accounts of the large number of smaller, domestic companies could continue to be carried out by the smaller accountancy firms, as now.
A new campaign to abolish offshore tax havens

The existence of offshore tax havens arguably is the single most important factor distorting the world economy, and the way in which the capital created by the world’s workers is utilised. First, of course, they deprive governments of tax revenue, and therefore place a greater burden of tax on ordinary people and businesses that cannot avoid tax. Secondly, the large-scale tax avoidance that offshore tax havens encourage means that governments have reduced resources to invest in public services, including education and training, transport infrastructure and utilities, upon which the health of an economy, and manufacturing industry in particular, depend.

Thirdly, by allowing transnational corporations to store a large part of their worldwide profits offshore gives them the power to invest those profits in the form of accumulated capital according to their own vested interests rather than in the interests of the workers who created that capital in the first place. Moreover, more often than not, it means that investment is skewed away from where it is most needed for developing a balanced economy and optimising economic growth, which may require investment in areas that are not at all profitable, and therefore unattractive to transnational corporations.

In other words, allowing transnational corporations to make use of tax havens in these ways deprives a government of its democratic right, acting on behalf of its constituents, to control the way in which the capital created by the country’s citizens is utilised. Indeed, as noted earlier, it was precisely the mushrooming of offshore tax havens that was a major factor that undermined the capacity of governments to control capital flows in the 1950s and 1960s, and therefore their ability to control
exchange rates and interest rates. This Ultimately led to the demise of the economic policies that up to then had been performing remarkably successfully.

To be sure, the City of London, which is the world’s second biggest offshore ti haven, would lose out if dealings with institutions based in such centres were mad illegal, and this could have an adverse impact on Britain’s economy But if other measures as proposed here were implemented, this would be offset easily by stronger manufacturing sector, and an all-round, more healthy economy, because capital would be invested in the production and supply of real goods and services th people and businesses need and want, instead of much of it being gambled away in the City's financial institutions, as now. Small island economies that had carved out niche in offshore finance, which would lose out, could be compensated by ft international community helping them to diversify.

The case for re-Introducing capital controls
First and foremost, it should be the democratic right for any country to be able I control what happens to the capital created by the labour of its workers, which is ft source of all capital. More particularly, if large amounts of capital are disappearing abroad, it is at the expense of investment in the country where it was created, thus tending to slow economic development and undermine the establishment an expansion of manufacturing. As noted earlier, Britain, currently, is the world’s large:
net exporter of capital, which is a major reason for the decline of our manufacturing industry compared with other advanced countries. But, in proportion to the size their economies, it is underdeveloped countries that suffer most from the loss capital abroad, including that disguised through transfer pricing (underinvoicing exports and over invoicing imports), which is largely why they remain underdeveloped. And this, in turn, affects the economies of the advanced countries because, as noted already, countries remaining underdeveloped means smaller markets for our exports.

Note that capital controls are not the same as exchange controls. Capital control apply only to a country’s capital account, which deals with future claims through th transfer of cash stocks or credit, and other financial assets, and the creation liabilities. Exchange controls apply to both a country’s capital account, and ii current account, which deals with payments and receipts for more or less immediate transactions, mainly the export or import of goods or services, or currency ft foreign travel.

As with import controls, capital controls do not necessarily mean a total ban on international capital transfers, but merely that they are kept under control. Capital controls may be restricted to particular kinds of assets, and can be applied either to outflows or inflows (especially to curb speculative inflows), or both at ft same time. And they may be in the form of quantitative restrictions, including outright bans of particular kinds of assets, or price-based controls, which seek 1 impose costs on capital flows, perhaps in order to discriminate against one class assets in favour of another. Or they may be a combination of both. There are, i course, pros and cons of these variations according to different circumstances, b these are essentially a technical matter, and will not be discussed here. The main point is to establish the principle of a government’s right to make use of capital controls as it sees fit.

Finally, it should be re-emphasised that a prerequisite for introducing capital controls is the abolition of offshore tax havens, and the opening up of the consolidated accounts of transnational corporations. Without those two things, it would be ea to get round capital controls, aided and abetted by the big accountancy firm which have their bases in tax havens, including the City o