Why the Government shouldn’t step in to save steel
Government intervention to support the steel industry won't improve the long term fortunes of Redcar and Port Talbot.
Government intervention to support the steel industry won't improve the long term fortunes of Redcar and Port Talbot.
The uncertain future surrounding Tata Steel’s Port Talbot site has intensified calls for the Government to step in and save the British steel making industry. But while such calls are understandable, they’ll do little to help the areas most affected by the industry’s demise.
Two main prongs in the argument to save the Port Talbot plant are firstly that steel is part of a wider national identity, and secondly that given the bailout of the banking industry in the midst of the banking crisis, the same should apply to the steel industry as well.
It’s worth looking at these arguments in turn. In terms of identity, steel making has been playing an ever smaller role in the identity within the local authorities of Swansea and Neath Port Talbot, never mind the nation as a whole, for the last 100 years. In 1911, metal making accounted for over 15,000 jobs – or 15 per cent of the total jobs in the area. In 1981, this had fallen to 9,000 (7.3 per cent). And in 2014 it was down further to 7,000 (4.6 per cent).
This decline has mainly come about because of changes in the global economy. The UK can’t compete with other, cheaper locations when it comes to industries such as mining and coal. Instead, it has become a world leader in high skilled, knowledge-based type activities where it can compete on quality. And our research shows that it has been those cities that have best been able to adapt to changes in the global economy, and attract investment from knowledge based businesses, that are our strongest performers today.
Unlike its near neighbour Cardiff, Swansea (which we define as the local authorities of Swansea and Neath Port Talbot) has struggled to do this. This has meant that in our most recent Cities Outlook the city ranked 49th out of 63 cities for the number of knowledge services jobs in its economy, had the 10th lowest workplace wages in 2015, the third lowest productivity and the fourth highest welfare bill per capita.
The Government could step in to bail out a plant that is losing close to £1 million per day. But if it did, it’s not clear how it would help turn around the plant’s fortunes. And given the city’s struggles even with the plant open, it’s not clear how such an intervention would help to address the wage, welfare and productivity problems it faces.
The second line of argument is based on fairness – if the bankers, the very architects of the financial crisis, got help then why shouldn’t the steel workers? But the roles that the two industries play in the wider economy aren’t comparable. The collapse of the banking industry wouldn’t have just affected bankers – it would have affected the whole economy, with fragile sectors such as the steel industry likely to have been most impacted. And whether this sits comfortably or not in this case is almost irrelevant – using it as justification for intervention in steel will do little to support the people that those arguing for intervention are trying to help.
The Government should react to the closure. But using taxpayers’ money to delay the pain doesn’t seem like a very good idea. Instead it should be looking to improve Swansea’s attractiveness to investment from knowledge based businesses, principally through improving the skills of the city’s residents – at 11.8 per cent, Swansea has the 14th highest share of residents with no formal qualifications of all cities – as well as giving direct help to those who stand to lose their jobs as a result of the closure.
Our most successful cities have shifted from places of low cost production to knowledge production. And the ones that are struggling need to shift their identities away from being the producers of goods to the producers of knowledge. Not doing so leaves them vulnerable to further closures in other low cost industries in the future.
This blog is cross-posted from Click on Wales here.
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John Charlesworth
Try telling that to those living in Redcar and Port Talbot.
Dr Alex Strickland
Surely, the main issue is whether or not the state has any sort of legitimate role to play in the development of the national economy and if so what that role should be. Steel is a cyclical product and markets will rise and fall. The idea that adopting a non interventionist laissez faire approach will resolve the problem is clearly wrong. Perhaps the UK should learn from developmental economic models in Japan, Europe and elsewhere and be mindful of the strategic importance of the economic sector in relation to building a long term sustainable manufacturing base for the British economy. Even putting to one side the social cost to communities throughout Wales that are directly impacted upon, there is a strong argument that the government should not allow such a strategic economic sector to simply fail on account of market movements that could look very different in five or ten years time. Closing down steel capacity is not the same as closing down an ice cream van – simply because the books dont balance over the short to medium term. Of course the banks needed to be saved during the financial crisis of 2008/9 but the whole argument shows just how political the economy has become – winners share the spoils and the losers pay the price. The fact that the winners are in London and the losers are in Wales just underlines the point even more. Any price paid for the failure of the steel industry will be political as well as economic – and one wonders how we will explain to future generations just why it seemed to make sense to allow such a strategic sector to fail on account of short term view coupled with a misplaced and blinkered adherence to ideological free market dogma that itself has been seriously undermined by the financial crisis of the last decade.
Paul Swinney
Hi Alex,
If there is a market failure then there is a clear need for a government to step in. I’m just not clear what the market failure is in this instance. What do you think?
I don’t think the struggles are all down to Chinese dumping either. Clearly this will have an impact, but steel output has stagnated and employment has fallen for the last 40 years in the UK.
A lot of people have also pointed to steel being a key or strategic industry. Again, I’m not convinced by this, nor do I really know what it means. I’m sure many voices said the same thing when industries such as mining (where will we get our power from?) and textiles (where will we get our clothes from?) came under threat.
Alex Strickland
Hi Paul,
I suppose the issue in part is how we cope with the consequences of globalisation. The chinese dumping issue shows market forces at their worst – with an ability to inflict huge social damage, whilst all the time being beyond political control. The fact that the future of Welsh industry can be decided in large part by a boardroom in India somehow shows the lack of local or domestic control that exists over the economy in the modern age. As I understand it, steel is strategic because it acts as a vital input into the production chain of manufacturing economies. If the UK decides it wishes to abandon manufacturing then that is a choice it makes – but again the consequences will be both political and economic not only in Westminster but in communities abandoned to their fate by the invisible hand of short term market forces. In addition to the fact that such communities take decades to recover, the social costs are great and there is little sign of any kind of an industrial policy to guide development of the British economy. I fear that without strategic intervention in terms of setting an industrial strategy, the gains from the devolution agenda in terms of transport improvement, skills development and business support may be too little too late ?