Select Committee on Trade and Industry Minutes of Evidence

Examination of Witness (Questions 292-299)




  292. Good afternoon, Secretary of State, we are delighted to welcome you here. As you are aware we have been looking at matters which are of some concern to all of us, I think. We all know from our constituency experience and from the national perspective that manufacturing does not quite have the impact on the economy it used to have. The bewildering array of information and advice we have received would tend to suggest a number of conclusions which we will not in any way derive until we have heard you speak today. You may get some of them as a sniff in the wind. I realise that—I used the word advisedly because I know that in the allocation of responsibilities the Prime Minister in the machinery of Government is always somewhat opaque and less than transparent—you would probably dispute that, that he is the soul of clarity. I do not wish to put words in your mouth. We certainly find it a wee bit difficult to work out exactly what the balance is for any government, and some of us have been tracking the DTI through governments blue and red over a number of years, but on this particular issue, perhaps you can give us, firstly, your view as to where you see the responsibility of the DTI in respect of manufacturing and, secondly, how you see the prospects in manufacturing are in the short to medium term, and in the world in which we live that is probably as long as most of us are prepared to make any kind of forecast. Can you start from there?
  (Ms Hewitt) First of all, on the issue of departmental responsibilities manufacturing is primarily the responsibility of the Department of Trade and Industry. It is a responsibility that I welcome as Secretary of State and I take extremely seriously. I think everyone here knows I represent a Leicester constituency, an East Midlands constituency, for the two years before I became Secretary of State I was not only the Minister for small business and e-commerce I was also Minister for textiles. I feel extremely strongly committed to the importance and to the future of our high tech manufacturing industry. I spelt that out in the recent speech, which I hope has been made available to members of the Committee, and if not I will make sure that it is. We have that responsibility and, of course, within my excellent ministerial team Brian Wilson takes much of the day-to-day responsibility for manufacturing sectors and Douglas Alexander as Minister for e-commerce and competitiveness also has responsibility for the textile sector. There is a broader set of responsibilities which have to do with productivity, not simply productivity across the whole economy but also productivity within manufacturing. That is an issue, really, for a number of government departments, the Chancellor and the Treasury because of the macroeconomic framework and the tax regime. The Department of Transport Local Government and the Regions because of impact of the planning. Crucially the Department for Education and Skills because of the importance of getting skilled people into manufacturing. The Department of Work and Pensions because of their labour market responsibilities, and so on. The mission to drive up productivity across manufacturing and the rest of the economy is shared across government departments. I am very clear, indeed, about our lead responsibility for ensuring as far as government possibly can, that we have in place the conditions for manufacturing success. On the second part of your question, which is the short to medium term outlook, if you look at the immediate position it is extremely tough out there for manufacturing but it is tough right across the world. In our memorandum we put in a graph of the decline in industrial production in the recent period, which shows that although, of course, manufacturing output is very hard hit in Britain, it has been much harder hit in Japan or about the same in other countries. I do not say that in any way to diminish the problems facing many of our manufacturing companies. For many of them, particularly their workers, these are horrible times. The pain is not unique to Britain, it is shared right across the world of industry. The second point I would make, just looking backwards for a moment, is that we do have some very long-standing and deep seated problems. If you look back to the mid-90s, from about 1992, the end of that recession, to 1996, about the time when the exchange rate started to appreciate very severely what you will see—particularly in 1995 onwards—is a pretty sharp increase in industrial production, in America most of all but also in Germany and France and a very, very anaemic increase in industrial production in Britain. It is only in one year, in 1994, I think, when we saw anything resembling a decent increase. In that mid-90s period despite the fact there was a favourable exchange rate we had the familiar problems of under-investment, inadequate R&D, not enough innovation and not enough process improvement and in response to that perspective, problems of macroeconomic instability. There are deep-seated problems there alongside deep-seated problems in our skilled people which, of course, underlines why there is a productivity gap. The other point I was looking for is we should not pretend that it is all bad news, we should not delude ourselves into doom and gloom here. We have got some very strong sectors and some very strong companies. Aerospace, motor-manufacturing, pharmaceuticals, the new sector of biotechnology, textiles, and so on. In those sectors, even where there are enormous difficulties at the moment, the medium term prospects are very good and our industrial strategy is designed to strengthen the capacity of our companies to take advantage of those improving prospects.

  293. That is helpful. I note the use of the words "anaemic increase" in that period before the Labour Government came to office. I am conscious about the post 1995 increases in industrial productivity across the world, they were not very good. We had evidence yesterday from Dr O'Mahoney about trends over time and we had within that all kinds of arguments about how the Americans perhaps had shifted quickly in certain areas and done better. I do not really want to get into the arm wrestling that this implies and that might be something that we might do by correspondence with your officials, if I can put it that way, because I think it is a rather arid debate but we have had from you, I think, a reasonably fair view, some of my colleagues with other political persuasions than my own might have a slightly different view but reasonably fair and I think we would accept the view you have taken but let us go a little further than that and say "That is where we have arrived at", how do you see the prospects for recovery? When you come back here 12 months from now, as 12 months from now you probably will, where will you be disappointed if we have not done better? What are your views about the immediate circumstances? Where do you think we are going to go from here?
  (Ms Hewitt) If we look at where we are likely to be in terms of the global economic context in 12 months' time, and certainly I am not an economic forecaster, but despite the very serious fall in our industrial production that has just been confirmed in the latest figures from the ONS, there are signs in the most recent forward-looking indicators, if you like, from particularly the CBI and the CIPS, as well as from America, of a recovery, just very early indications of a recovery. I am cautiously optimistic, therefore. What that suggests to me if that is right is that in 12 months' time we should be seeing significant recovery in our export markets. I think we know from the IMF and the OECD view that at the macro economic level of course we are much better placed than the rest of the world to withstand this general downturn. Just focussing on manufacturing, I think we should see, within the next 12 months, renewed demand for our industrial goods particularly in our key export markets. Where I want us to be by then is to have in place, for instance, in the area of innovation and knowledge transfer, the partnerships and the programmes that will already be enabling more companies to raise the quality of the way they manage their people and the way they manage their processes so that they are ready to deliver better products, higher quality products, using better processes. We can talk in more detail if the Committee would like about the regional centres for manufacturing excellence, the innovation centres, the partnerships, the various supply side programmes that we have to help companies drive up productivity. There is a great deal of that activity going on and that is a central part of the strategy for ensuring that we have got more manufacturing companies that are competitive and can stay competitive and, therefore, continue to employ people and indeed we hope by then to increase their numbers of employment rather than, as so many are having to do at the moment, shedding labour.

  Chairman: Thank you very much. We are going to move on in a moment to factors affecting productivity but my colleagues, Andrew Lansley and Ashok Kumar, would like to come in and then we will go on to Roger Berry.

Mr Lansley

  294. Before we move on to the individual factors, I want to take your view if we might on the overall picture. It is now some years, probably about three years at least, since the Government said that its long term economic ambition for the coming decade—2000-2010—would be for Britain to have a faster rise in productivity than its main competitors, therefore to close the productivity gap. Now your memorandum to us sets out some of the analysis of the components of those productivity differences, and we took evidence on that yesterday, but your memorandum does not point to any evidence thus far that Britain has indeed closed any of those productivity gaps or that our productivity in any sense is rising faster than our competitors, indeed the opposite in the latter stage of the 1990s was certainly the case.
  (Ms Hewitt) Let me respond to that because I think it is a very important point. The first thing we had to do was create a climate of economic stability. I am not going to go through the usual stuff about boom and bust but Britain has suffered for a very large part of the post war period from a climate of economic instability that has been hugely damaging to long term business investment, particularly in manufacturing industry. It is not the only thing that has to be done but without economic stability we will never get the investment we need. That was the first absolute requirement that had to be put in place before we would have any hope at all of getting the investment that is a key determinant of productivity. One can argue about the numbers but the gap between ourselves and Germany, France and America in terms of plant, tools and technology is a key component of the productivity gap. The second thing that we needed to do post 1997 was to increase employment and get the long term unemployment down. Now we have done that, more than 1.3 million people are in work than there were in 1997, very substantial falls in unemployment particularly in long term unemployment. We have done, therefore, in a sense what happened some years ago in the United States which is very significantly to increase the number of people in work. Almost by definition the people we were bringing in to employment through those labour market policies, welfare reform policies, were less productive than the average of those already employed.

  295. Sorry to interrupt, what you have said was contradicted by Dr O'Mahoney yesterday of NIESR who said there was no evidence that the Treasury's contention some years ago in the Budget Red Book that our lack of productivity gains was the product of additional employment, less productive workers in initial stages, there was no evidence of that unwinding and that productivity growth has resulted in subsequent years.
  (Ms Hewitt) I have not had a chance, obviously, to see that evidence from yesterday, and I will look at it with great interest. However, not having seen that—


  296. What base line would you take? Dr O'Mahoney's arguments were based on figures that finished in 1999, do you have them for any later years than that? Do you have anything which has any specificity?
  (Ms Hewitt) The latest figures we have we have put in the memorandum to you. I am making a slightly more general point that if you look at America, which has had very, very substantial productivity growth through its long period of economic growth, until the most recent fall, what happened first was an increase in employment without productivity growth and then what happened was the increase in productivity as the fruit of the capital investment came through and as they raised their skills of the new and the existing workforce. I believe that is what will happen in Britain if we can get other things right. The third point I would make is that not only do we have this big gap in capital investment which has to be closed for the right mix of economic stability and specific incentives, but we have, also, a very, very big gap in skills and it takes time to sort that out. We are sorting it out and Estelle Morris has just announced considerably more but there is a lot more to do on that. If I can just come back, Chairman, to the question about figures.

  297. If you wish to make a fourth point.
  (Ms Hewitt) No, you gave me a supplementary question on the numbers.

  298. Your figures go up to 1999, we appreciate that.
  (Ms Hewitt) We do have figures, particularly for GDP per worker, we do not have them for all countries per hour worked for the year 2000 as well. If those are not around I will make sure they are given to you. Our assessment is basically that our gap has remained broadly unchanged and we need to see investment increasing, because that is a particular problem during this downturn in manufacturing, and we need to sustain effort on the skill base coming through in productivity.

Mr Lansley

  299. Before we move on to the detail about this, it has been put to us, I think not least in some of the written evidence from the CBI, that one of the reasons why we have not focussed particularly on manufacturing, although I suppose one could say internationally traded goods and services is the key, is because of the difficulty in managing long term current account deficits on balance of payments. Would you share that view? We all generally understood that short-term deficits may not be a problem and deficits that are occasioned by relatively high output growth problems but deficits that are not accompanied by higher domestic growth can be a problem in the long-term. Do you share that view? In these terms when does that problem necessitate any action by the government that is directed specifically as reducing that trade deficit?
  (Ms Hewitt) I do share that view. In the speech I gave recently on manufacturing I argued that amongst the reasons why manufacturing is important if we are to succeed in our ambition to have a knowledge-driven economy that is delivering high wage jobs and a high level of prosperity amongst the reasons are, first of all, the fact that you are mostly likely to get high productivity improvements in manufacturing and, secondly, the fact that the majority of our exports, still over 60 per cent, come from the manufacturing sector. Just today we are publishing the latest set of United Kingdom competitiveness indicators which show that if you look at our exports we have a higher proportion of exports coming from knowledge-based manufacturing even than America, Canada and Italy, and we are round the same level as France and Japan. We are doing well, despite the depressed conditions in the rest of the world, in the quality of our export market. That is very important, not in the short-term but in the long-term to be able to continue to pay our way in the world.

  Chairman: Can I just say, Secretary of State, I made reference to discussions that some of us had yesterday with some academics and I realised afterwards that it was a closed session. We are very happy to send you a note, you can see it, I do not want to put you at a disadvantage any more than you have to be, if I can put it like that. I am sorry that I took you on in that way: we did have a briefing yesterday but it was an off-the-record briefing, not that the academics wanted it to be off-the-record, but we thought it would be helpful. We are lobbing-in grenades from afar which I do not think are necessarily anything to fear. We will let you see them and if your officials wish to comment on them it will be recorded on the record of our proceedings.

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