Manufacturing and the recession

Tim Worstall sets us a task:

Work out the share of each OECD…economy that is a) manufacturing and b) finance.
Look at the decline in GDP and the length of time of negative growth.
Compare and contrast the four sets of data.

My chart should set him on the way. It compares the share of manufacturing in GDP in around 2007 to the fall in GDP from its peak (which varied from country to country) up to Q3, the last period for which the OECD has data.
The correlation is positive - 0.18 - but very weak. Yes, Iceland with its small manufacturing sector suffered the most, whilst manufacturing-heavy Norway and Korea suffered little: indeed, Korean GDP is back above its pre-recession peak. But generally speaking, there isn’t much link.
For example, Japan and Finland are more manufacturing-based than the UK, but suffered deeper recessions. And France, which has less manufacturing than the UK, suffered a milder recession.
If we look at the share of GDP devoted to finance - defined broadly by the OECD to include business services (lawyers, accountants etc) and real estate - the picture is similar. There is a negative but weak correlation - minus 0.11. This shouldn’t be surprising, as manufacturing-light economies tend to be finance-heavy ones.
Truth is, we shouldn’t be hugely surprised by this. Manufacturing and finance are related. Because the credit crunch caused a collapse in trade credit, it led to a slump in world trade and in inventories, and so hit some manufacturers hard. 
These figures, do not, of course, shed any light upon an alternative hypothesis - that finance-heavy economies will grow more slowly in coming years as banks recapitalize themselves and come under heavier regulation.
Frankly, I couldn’t give a damn here. The idea that our economy should be more reliant on manufacturing (or finance) seems to me an absurd notion, combining both central planning and a fetishism of national borders. If people just did what they are best at doing, a healthy economy should emerge - shouldn't it?

Comments

[Giles Wilkes]

Hear hear. Why should people obsess on products that you can pick up, trade, physically handle? it is nonsense.

Manufacturing fell far harder than services in this recession; it only failed to contribute towards the recession as much, because it's so small.

http://www.statistics.gov.uk/pdfdir/qna1209.pdf annex 1

Thank goodness we didn't have a larger manufacturing base . . .

In fact, it is even a myth that Britain for so long rested on manufacturing. In the C19, we needed invisibles and foreign income to keep the books balanced.

[Alex]

It is a fetish. It's a fetish that I find inexplicable, because if we really wanted more manufacturing, then I would've thought the market would be there for it. But it's obviously not.

(How come you only posted one of the two graphs?)

Anyway, what if you remove Iceland, Norway and Korea as anomalies, then you would get a reasonably strong negative correlation?

[Tony Woolf]

"If people just did what they are best at doing, a healthy economy should emerge - shouldn't it?"
And all would be for the best in the best of all possible worlds. Looks more like faith than reason to me.

[Econoclast]

I would like to agree with your statement at the end of your piece. But you know as well as I do, that this isn't the case because there isn't a level playing field. Manufacturing companies that trade in world markets have been allowed to fail, sometimes with devastating consequences for the regions in which they are based. Over the last few years, the financial system has been bailed out at massive cost to the taxpayer. The government has effected a transfer from manufacturing to banking, from north to south, from poor to rich (by propping up inflated asset markets). This simply encourages over-capacity in finance. I think we all know now that isn't good for the economy.

[Tim Worstall]

Thanks for that Chris. Puts that issue to rest in my mind at least.

[Alex]

Giles: causality. Manufactured goods are fundamentally the most tradable of products, therefore major manufacturing economies are usually also big traders, therefore if some fool blows up the financial system to the extent that you can't get letters of trade credit any more, they've got a problem.

[pandora charms]

Manufacturing companies that trade in world markets have been allowed to fail, sometimes with devastating consequences for the regions in which they are based.
http://www.shoptraveljackets.com/
http://www.tf-mart.com/
http://www.thomassabosales.com/

[godswmobile]

This simply encourages over-capacity in finance. I think we all know now that isn't good for the economy.

[orjin krem]

"If people just did what they are best at doing, a healthy economy should emerge - shouldn't it?"
And all would be for the best in the best of all possible worlds. Looks more like faith than reason to me.

[orjin krem]

This simply encourages over-capacity in finance. I think we all know now that isn't good for the economy.

[orjin krem]

Thank you for sharing the benefits I've seen a lot

[youthair]

Bu sadece finans kapasiteli teşvik eder. Ben tüm bu ekonomi için iyi değildir artık biliyoruz düşünüyorum

[Dermojin Polen]

This simply encourages over-capacity in finance. I think we all know now that isn't good for the economy.