Since at least 2016, the question of how to go about achieving stronger economic growth has been a feature of the UK domestic policy scene. Within this broader debate, two themes have commanded significant attention: the scale and depth of regional inequality in Britain, and the UK’s ‘productivity puzzle’. Living standards in the UK have barely improved in real terms since the financial crisis of 2008; most measures convey a picture of worsening regional inequalities, and the economy has been plagued by anaemic productivity growth. Both major political parties now recognise the importance of these challenges, economically as well as politically. From Theresa May’s Modern Industrial Strategy of 2017 to Boris Johnson’s 2019 levelling up agenda to Liz Truss’s ill-fated Plan for Growth, a revival of the fortunes of UK manufacturing has been envisaged as a part of the strategy to build a stronger economy, free from the shackles of geographic inequities and lagging productivity. Given that it is often cited as a potential cure, it is worth examining whether a return to manufacturing - reindustrialisation - is a feasible or desirable solution to the UK’s biggest economic problems.

The UK is one of the most regionally unequal economies in the developed world, with its economic geography reminiscent of a much poorer economy. Though most industrialised economies experienced an increase in regional and income inequalities from the 1970s, the UK stands out for how far this trend has developed. Since the 1980s, the increase in regional inequalities has coincided with a decline in manufacturing employment and manufacturing output as a share of UK GDP. With deindustrialisation and a shift to a services-based economy, higher productivity jobs have become concentrated in professional and financial services that tend to cluster in city centre locations. This pattern is true of all major developed service-based economies, with capital cities around the world growing faster than rest of the country. In the UK, the shift to services caused the richest region of London to forge ahead, whereas deindustrialisation meant that previously higher-productivity areas that were reliant on manufacturing, such as the North-East and Midlands, fell behind.

A revival of manufacturing could, to some extent, reverse this trend. Manufacturing tends to be space-intensive, and industries are more likely to locate economic activity in towns and rural areas. Manufacturing jobs pay well: on average, annual wages in manufacturing are 12 per cent higher than the average salary in the wider UK economy, owing to the more productive and skilled nature of the jobs. This means that reindustrialisation could support income growth in places outside of cities that have not benefitted from greater creation of office-based jobs.

The slowdown in productivity growth in several developed economies can be partially explained by the shift away from high-productivity manufacturing to lower-productivity service roles that have less capacity for productivity increases. The logic behind this argument is simple. Cafés or bars today are not likely to be very different in terms of productivity from those that existed fifty years ago. However, modern factory methods help manufacture goods with efficiency levels that are orders of magnitude higher than what was previously possible. According to OECD estimates, labour productivity tends to be 40 per cent lower in services on average when compared to manufacturing. Productivity rates between the two sectors have diverged, with labour productivity in services growing 1.7 per cent slower than manufacturing in the recent decades. Though the UK boasted a highly productive financial services sector in the past, the financial crisis of 2008 led to a severe productivity slowdown in the sector from which it is yet to recover. And given the precarity of the sector to global shocks, basing an entire productivity growth strategy around it carries high risks.

Analysing the UK economy, it is clear that the decline in per capita productivity growth closely reflects the shift towards a more services-based economy. Of course, it's possible that a portion of the UK's productivity slowdown is caused by the plateauing of productivity growth rates in the manufacturing sector. Technological innovation of the kind that can significantly increase manufacturing productivity might occur in fits and spurts rather than consistently. But it is obvious from the data that the slowdown has generally been much more pronounced in the service sector than in manufacturing. So a call for the revival of British manufacturing as a solution to the UK’s productivity puzzle as well as its regional inequality problem seems well-placed.

But could reindustrialisation be a feasible strategy? It is important to recognize that reindustrialisation is not a simple reversal of the process of deindustrialisation. Whereas the latter is a result of structural economic changes, the former requires careful policy interventions and efforts to materialise. Building up lost production capacity is not easy: the skills, knowledge, networks and market share built up in manufacturing over decades cannot simply be brought back at the drop of a hat. Years of deindustrialisation have destroyed UK’s ‘industrial commons’ – a term coined by economists Gary Pisano and Willy Shih to collectively refer to the skilled workers, suppliers, capital investment as well as the know-how that comes with investing into production at scale.

And where the international market structure has shifted drastically since deindustrialisation—for example, due to the growing dominance of low-cost producers in labour-abundant economies such as China and Vietnam—it can be very difficult to re-enter or even to maintain a market position while continuing production. Lastly, the transition to net-zero poses certain challenges to a manufacturing revival. Ever since the First Industrial Revolution, manufacturing has mostly relied on fossil-fuel energy. Switching to low-carbon sources while remaining cost-competitive might prove to be both technically and economically difficult, especially as far as energy-intensive heavy-industrial sectors are concerned.

Overcoming these challenges requires determined policy action, but the potential benefits to productivity and regional inequality are huge. To realise these benefits, the UK government should dedicate resources to ensure that the sector has a strong skill base and access to finance and essential infrastructure such as local transport and digital connectivity. A more devolved form of governance is also important to direct resources in a way that can spur local economic growth. The first major report in CPP’s ‘Open for Business’ series will explore some of these issues in greater detail.