Friday, December 04, 2009

The London disease: how finance kills manufacturing

This is an old story about finance crowding out and killing manufacturing: indeed we blogged about it recently.

The FT has recently published some new research on this, showing the problem in stark detail, and how Britain's "New Labour" the problem must carry a huge share of the blame:

"The rate of decline in the manufacturing share of the economy under Labour has been 2.7 times faster than under Mrs Thatcher’s government."

As an accompanying editorial notes this startling record since New Labour came to power in 1997:

"industry, which accounted for 20.3 per cent of UK value-added in 1997, crumbled to 12.4 per cent by 2007."

And, the FT reports:

"Between 1997, when Gordon Brown took office in the Treasury, and 2007, when the economic crisis began, finance, construction and real estate services made up 50.5 per cent of UK growth. . . manufacturing was left behind."

And, as we have explained on several occasions, much of the problem lies with the financial equivalent of the Dutch Disease that afflicts mineral-dependent states - we like to call it the London Disease. The FT continues:

"The main culprit for this weak performance is sterling, which – supercharged by financial sector exuberance – climbed from a weak low in 1995 to reach an over-valued plateau in 2000."

And what a fine mess the finance industry has now got us into. We would agree thoroughly with the editorial's conclusion:

"It is a consequence of Britain’s previous failed strategy: being an exporter of finance and a consumer of imports. A new model should emerge: a subdued financial sector combined with fiscal austerity should weigh on the pound, allowing manufacturing the space, in time, to grow."

We couldn't have said it better ourselves.


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