Comment artwork showing a contract being awarded to a Korean company

Manufacturing success can't be left to the free market

Simply getting the best deals for taxpayers won't help rebalance the UK economy, says Kaveh Pourvand

The 2008 financial crisis revealed the extent to which the UK had been over-reliant on banking and finance. Prior to that, manufacturing and engineering seemed rather old-fashioned; now they are widely accepted as critical to the UK's economic future. So what is the role of government in cultivating a strong manufacturing sector?

One answer is 'very little': the government should not privilege any specific sectors but create a generically strong business environment, with low taxes, low regulation and a stable economic landscape; the market will decide which sectors would be best for the economy. That was the thinking before the financial crisis, and it is still with us, although it doesn't take much analysis to find problems with it.

Take the Ministry of Defence decision last year to award the contract to build four 'MARS' logistics vessels to South Korean firm Daewoo Shipbuilding and Marine Engineering (DSME). The government could have boosted British manufacturing by offering the contract to a domestic consortium; it even had a rival offer from Italian firm Fincantieri offering to build one of the ships in the UK. Yet it chose DSME on the basis that it was the best deal for taxpayers.

What the government seems oblivious to is the huge public investment that South Korea has made in its ship-building industry, from offering cheap loans through state-owned banks to government investment in complementary infrastructure to discounted steel prices through a state-owned steel company.

The British shipping sector faced a Catch-22: it could not get government contracts without being competitive, yet it could not become competitive without government support. And one way to support an industry is to give it government contracts. This case highlights the importance of public investment and public action in creating what economists call a comparative advantage in manufacturing.

We need look no further than aerospace to see proof of this. It is one of the UK's rare manufacturing success stories, and a substantial one at that. With 17 per cent of global market share, the industry is second only to the USA. It provides 100,000 well-paid, high-skilled jobs and in 2011 generated £24.2bn worth of revenue, 75 per cent of which was exported. This was all the more impressive for taking place in an economy which otherwise had a goods trade deficit of £100bn. It's not hard to show how government action has been crucial in the sector's success.

After the Second World War, Britain didn't even have civilian airline capacity. Subsequently, it was the Ministry of Aviation that designed and built several new civilian planes in the 1950s and 1960s, including the Vickers Viscount, the most successful European civil aircraft before Airbus.

It is well known that Rolls-Royce's phenomenal success in recent years has been due to its innovative RB211 engine model, which has made it the world's third-largest maker of aircraft engines. Yet the initial development of the engine in the late 1960s bankrupted the company. Nationalisation in 1971 and subsequent public funding gave the company breathing space to keep developing the engine.

Today Airbus employs 10,000 people at sites in Bristol and north Wales, where the wings for its signature A320 plane are made. These sites would not exist had Margaret Thatcher's government not offered British Aerospace (now BAE Systems) a £250m loan in 1984 to help with the initial set-up costs. The supposedly laissez-faire Thatcher also granted a $14.8m loan to Rolls-Royce that year to help it design the IAE V2500 engine which today powers the A320 family.

It's true that we can't return to some manufacturing golden age of the 1950s. But the aerospace sector shows that, with enlightened, long-term support from government, we can still succeed in manufacturing.

Kaveh Pourvand is a research fellow with Civitas: The Institute for the Study of Civil Society (www.civitas.org.uk)

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