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Thatcher’s legacy offers lessons of labour pain, and gain Add to ...

The death of former British prime minister Margaret Thatcher last April set off a fierce debate about her economic legacy, and reopened some of the battle lines on issues such as the importance of manufacturing versus services, and the undermining of the trade union movement.

Britain has been struggling to get back on a growth course since the global financial crisis struck in late 2008, and narrowly avoided a triple-dip recession when first-quarter gross domestic product figures were published in late April. GDP is still an estimated 2.6 per cent lower than it was in the first quarter of 2008, according to the country’s Office for National Statistics.

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But one of the legacies of Thatcherism can be seen in an unusual aspect of the British economy during the past five years, which is how unemployment has remained relatively moderate (currently at 7.8 per cent) during a period of severe recession followed by weak recovery.

“Over the past five years there have been wage cuts in real terms, which was not the case in the late 1970s and early 1980s, and part of the reason for this is that the trade unions are weaker today,” says John Van Reenen, director of the Centre for Economic Performance at the London School of Economics. Whereas in 1979 two-thirds of British workers had their wages set by trade unions, today the figure is less than a quarter, and heavily concentrated in the public sector.

“Wages failing to keep pace with inflation is clearly painful for workers, but lower real wages are better than not having a job at all, and better for society as a whole,” Dr. Van Reenen says. Studies show that long-term unemployment has a scarring effect, particularly among young people who often lose motivation and find it hard to get back into the labour market, and Britain has done better than other European Union countries, such as Spain, in avoiding very large-scale youth unemployment.

Britain ranks eighth overall in the World Economic Forum’s (WEF) latest global competitiveness index.

Labour market efficiency, which includes factors such as flexibility of wage determination and hiring and firing practices, is often cited by business executives as a strength of the British economy, in sharp contrast to the rigidity of many other European countries.

“The U.K. ranks fifth for the efficiency of its labour market, and, while this flexibility makes it relatively easy to fire people, it also encourages firms to hire additional staff faster if business picks up,” says Jennifer Blanke, chief economist at the World Economic Forum in Geneva, Switzerland. “In contrast, in other EU [European Union] countries, such as France and Spain, companies struggle with whether to hire more full-time staff, and young job seekers suffer the most.

“The global competitiveness index aims to help countries understand what the important economic growth drivers are going to be, and where they should focus their efforts,” Dr. Blanke explains. “For example, the U.K. has a high ranking for the sophistication of its businesses [eighth] and capacity for innovation [10th], and these are likely to be important factors for the future development of the U.K. economy, which has now settled firmly back into the top 10.”

Alternate financing

According to the chief executive officers interviewed for the qualitative aspect of the survey, used alongside hard data to produce the rankings, the most problematic factor for doing business is access to financing, with tax rates ranked second.

Access to financing has been a particular problem for Britain because its banking system, with its sizable investment banking activities, was hit extremely hard by the financial crisis. Banks have been boosting capital and shrinking the overall size of their balance sheets, which has meant less lending, including to small and medium-sized enterprises (SMEs).

SMEs have struggled to get the necessary funding to grow, though many have also been extremely cautious about making new investments in staff or machinery, worried about a slide back into recession.

One entity filling the gap is Michelin Development, which was set up in 2002 to provide funding and expertise to small businesses around the areas in which Michelin operates: Ballymena in Northern Ireland, Dundee in Scotland and Stoke-on-Trent in England.

SMEs in these areas can apply for unsecured loans at the Bank of England base rate, with a repayment period of up to five years. In addition to funding, companies also get free advice from Michelin. About 190 companies have had loans to date, totalling more than $8-million (all figures in Canadian dollars unless noted).

“A loan might be £25,000 [about $40,500] on average, but don’t think that just because a loan is only £10,000 that it isn’t valuable,” comments Mike Cole, director of Michelin Development. “For a company that wants to grow but has no money to take the next step, it can be a lot, and when you combine this with the leverage it might bring, and the confidence it gives the entrepreneur to know that Michelin has scrutinized their plans and wants to support them, it can be a great boost to their business.”

Hope for manufacturing

In a recent survey of CEOs specifically on competitiveness in manufacturing conducted by the World Economic Forum in conjunction with consultants Deloitte, Britain ranks just 15th, and the perceived lack of support for the manufacturing sector is another one of Ms. Thatcher’s legacies, and is still being hotly debated more than 20 years after she left office.

Britain does, however, still have some highly sophisticated and successful manufacturing companies. A prime example is Rolls Royce’s aircraft engine operations, which make the Trent 900 models that power many of the Airbus A380s currently in service.

Airbus Industrie has a Centre of Excellence for Wing and Pylon at Broughton in north Wales. The site is responsible for the wing final assembly and wing equipping for the entire range of Airbus aircraft. Wings for the new A350 XWB model, which performed a flypast at the Paris Air Show last June, are being manufactured in the newly constructed North Factory at the site.

And Jaguar Land Rover, which was acquired by Tata Group of India from Ford Motor Co. in March of 2008, has staged a comeback and last May unveiled record sales, revenue and profit. The latest luxury Jaguars, many built at the Castle Bromwich production line near Birmingham, have been a notable export success. Additional workers have been hired for the new F-Type model.

“The U.K. government has swung more behind manufacturing, because during 2011 and 2012 it was one of the better performing sectors, in contrast for example to the weak recovery in financial services, which has been such a drag on the economy,” says Mark Stephenson, a partner at Deloitte in Britain whose specialties include manufacturing.

“However, the [business lobbying organization Confederation of British Industry] has said that there is still not enough being done, especially to address skill-based shortages, and the low number of engineering graduates coming through is a serious problem to be faced over the next five to 10 years,” he adds.

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