Diane Coyle: Relative decline of manufacturing does not spell economic doom

For starters, given the value they add and their positive contribution to the balance of payments, it is sectors such as finance (32 per cent of value added) and transport and wholesaling and retailing (16 per cent) which deserve the attention lavished on the smallest development affecting industry. Computer services alone are a fifth as important in their contribution as all of manufacturing, as are hotels, catering and pubs. Yet investment banking and programming software clearly lack the romance of industry.

The tale of manufacturing's relative decline (for its output has in fact continued to expand, with ups and downs) is encapsulated in the textiles and clothing industry. This sector has seen perhaps the steepest contraction amongst manufacturing industries. When my parents and aunts and uncles worked in Lancashire cotton mills in the early 1970s it was long past its peak but still a substantial industry. During the past decade, however, employment in clothing and textiles has fallen from 368,000 to 182,000 while the deficit on trade in clothing soared from £1.8bn in 1992 to £7bn in 2003. There has been a decisive shift towards lower-cost production of clothing elsewhere in the world, and this pattern is repeated throughout the advanced economies.

That trade deficit is likely to surge again once the European Commission figures out it cannot keep cheap Chinese clothing piling up in warehouses or even stuck on container ships indefinitely. The ending of the Multi-Fibre Agreement at the start of this year will in time remove all the protectionist barriers which limited cheap imports in the past. The comparative advantage in making many types of clothing lies with developing countries. And, just as the theory of international trade predicts, that has been a great benefit to consumers. The price of clothing and footwear has declined by more than a third during the past 10 years. As clothes are a necessity on which low-income families spend a higher proportion of their cash, this has been good news for all British workers, even though so many fewer of them work in the clothing industry.

However, it would be wrong to paint a completely bleak picture of the UK clothing industry. Its contribution to value added rose until 2000 and has declined by far less than employment since then, according to the ONS's 2005 Input-Output Analyses. There have been substantial productivity improvements in the indus-try, and also a move upmarket. An ONS analysis of "the creative industries" includes clothing and footwear, to capture the contribution of British fashion (although the statistics incorporate the whole of the clothing sector). The creative industries as a whole are another area of the economy which tend to be derided, especially since the Government tried to hijack them in its Cool Britannia phase. It seems to be hard for the grumpier kind of commentator to take seriously the idea that something as frivolous as fashion can be of economic importance. Yet the creative industries contribute more than 9 per cent of the value added in the economy. This includes some manufacturing as well as services. The fastest-growing creative industry by far in recent years has been software. However, until 2002, clothing made the biggest contribution to output of all the industries included in this glamorous sector, overtaken by software only in 2003. (Architecture and publishing are the other big industries in the grouping, while advertising, the arts, television and radio, and film are relatively small).

As these figures demonstrate, the unravelling of the traditional British textile industry can be told as a more upbeat story rather than the usual tale of manufacturing decline. Certainly most of the jobs have gone, although my experience suggests this was no bad thing: it is still an industry often characterised by low pay and poor conditions. Productivity has risen; output has declined by less than might have been feared, and is now focused on higher value activities than in the past. Clothing is an important part of a set of activities we do very well in the UK, whether you like the "creative" label or not. Even the dire trade balance in textiles and apparel contains good news, in the much lower prices people pay to clothe themselves. If we bought fewer of our clothes from abroad, we would pay much more for them.

Shifts in comparative advantage in the textiles industry, such as the one that has occurred with the emergence of China as the world's dominant producer, are not new. The trends over the decades are tracked in a fascinating new book, The Travels of a T-shirt in the Global Economy, by the economist Pietra Rivoli (John Wiley £19.99). Britain was the China of the late 19th century, followed by the US before the Great Depression, giving way to Japan, Taiwan and Hong Kong, and latterly with successful clothing industries emerging in very poor countries such as Bangladesh and Mauritius. That these latter countries will be steamrollered by the new Chinese competition is a real possibility now.

Does it matter that the UK is no longer a powerhouse in this particular industry? Not at all. We have large trade deficits in many sectors where we lack comparative advantage, including automobiles, alcohol (importing so much wine), pulp and paper, and computers. But there are large surpluses in insurance, banking, other financial intermediation, architectural and other technical consultancy, computer services, business services, legal services. Although the net effect is a large balance of payments deficit at present, this is the result of various other influences such as the exchange rate and slow growth in out main continental European markets.

The lesson of the input-output statistics is that the structure of the economy is extremely fluid even over as short a period as 10 years. There is nothing automatically bad about the share of manufacturing in the economy dropping from more than 20 per cent to less than 15 per cent in that time. After all, once upon a time the manufacturing share was 25 per cent, and before that 30. Meanwhile, the economy has continued to grow, as have incomes, while employment is near an all-time peak. And if you had to choose a pattern of economic strengths and weaknesses to create value and make Britain prosperous in future, the sectors which have been growing in importance during the past decade, all those high-value services such as finance, computer services, advertising and management consultancy, would be exactly the right ones to choose.

Diane Coyle is the founder of Enlightenment Economics