UK's Future Depends on Services: Stop Chasing a Lost Manufacturing Dream

Once again the UK's gallant service sector became the beleagured British economy's white knight.

Services galloped in and saved our damsels in distress - construction and manufacturing.

It rescued Britain - and what's left of Chancellor George Osborne's tattered reputation - from the grip of a triple-dip recession, by beating expectations in the first quarter.

Yet, some still call for a return to the industrial glory days where, steeped in British history, thundering pistons and grinding cogs powered and supplied the world over.

Most of the machinery has fallen silent, replaced by the sounds of the service sector - from clinking glasses to rattling computer keyboards.

This is Britain's future.

Rather than chase the lost manufacturing dream, we should invest in becoming the world's leading service sector.

The truth is, much has already gone to other parts of the world and cannot be retrieved.

It isn't just emerging economies, such as superpower-in-waiting China, who can produce much more for far less, but fellow western states, such as Germany who pump ahead of us in this area.

Once manufacturing represented around a third of GDP and employed 40% of the British working population. It now represents just 11% of GDP as the long-term decline of manufacturing rumbles on.

Service sector firms account for three quarters of GDP.

Britain is a services economy and it must become a better one.

Research by lobbyist TheCityUK found that in 2011, Britain's world-renowned legal services industry contributed £20.9bn - 1.6% - to GDP. There is room for growth here and it is expanding each year.

"The quality of our judicial system brings more international litigants to the UK every year," said Lord Green, the government's trade minister.

"The UK's legal expertise is also an extremely valuable export in its own right as well as underpinning our strong commercial offer across a range of sectors."

Britain's legal services account for 7% of the world's trade in this field. As manufacturing's slow decline is managed, it is in areas such as legal services that the government can steadily build up to fill some of the gaps left behind.

Lessons from the past

While we should not yearn for a British manufacturing industry better suited to the history books, there are some lessons we can draw from the past.

Such was the prestige of Victorian Britain's engineering and the talent behind it, demand grew across the globe for the country's skills in this area.

The first ever permanent bridge to connect both Buda and Pest across the Danube in Hungary was built by a British civil engineer.

William Tierney Clark was hired by Hungarian Count István Széchenyi to design the Chain Bridge because of Britain's solid reputation in this field. It is now one of the focal points of Budapest and a triumph of Victorian engineering.

As some of the poorer countries of the past watch their economies grow, they will need the infrastructure to maintain and support this expansion.

Once again, Britain could help to develop the world's infrastructure and recapture some of the Victorian civil engineering glory by exporting our firms' skills, if not the physical infrastructure, to the many nations wanting to modernise.

There is another example in the past from which we should learn.

In the 1980s, Margaret Thatcher unleashed the banking beast when she deregulated the country's financial sector. It created a boom in the City of London and, with the help of subsequent governments, led the economy to prosperity.

Prosperity, then crisis.

A crisis we are still struggling through. Is this a doomful warning that staking your economic fortunes on services is fated to fail?

Not quite, though there is a broad lesson.

It is a lesson on regulation and unwatched, unbridled markets. The trick is to learn from your mistakes.

Do not create poorly regulated systems that can bring your economy to its knees and must drain the public purse to prop up its failed institutions.

Education and skills

The biggest problem Britain faces in improving its service sector is education and training. Many employers lament the skills gaps in the UK economy, as masses of children are chewed up by the education system and spewed out again.

They leave school with, if they are lucky, a handful of GCSEs. Some are barely literate or numerate. Many lack the skills service employers are crying out for.

If we don't invest in educating children fully with the skills they need to survive and thrive in the modern world, such as in IT, we cannot expect our economy to keep up. We will have to keep importing the labour business needs, rather than rely on our own workforce.

According to a recent survey by consultancy giant PricewaterhouseCooper's, three quarters of Britain's chief executives are demanding that the government act within the next year to start plugging the country's gaping talent hole by offering more support for training and learning.

"UK businesses are struggling with a widening mismatch between the skills of their workforce and the skills they need to achieve strong growth," said Laura Hinton, HR consulting partner at PwC.

"There needs to be a joint approach to addressing the problem, with business and government working together to plug the skills gap.

"Apprenticeship programmes are a great example of where business and the government are already working together to tackle this issue."

The world's service sector

When the Chinese need lawyers, they should find them in the creaking chambers of Gray's Inn. When the Indians want to gain knowledge and skills through education, they should choose British universities' mortar boards.

When the upwardly-building Arab world needs a new skyscraper, it is the architectural creativity of British firms they should seek. When the Americans need to speak the unspoken languages of computer programming, they should search the grotty corners of London's Old Street.

Manufacturing's decay is sad but inevitable. We cannot rebuild the sector to the same globally adored status it had in the past.

Instead, let's make Britain's service sector the world's leading service sector.
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