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Talking Manufacturing podcast: Our founder, John Mills, discusses the exchange rate’s role in the success of manufacturing

In the second episode of Talking Manufacturing, John Mills, founder of the Institute for Prosperity, discusses the role that the high exchange rate has played in the shrinking manufacturing industry, and how we can tackle these impacts through economic policy. It is now available on all major podcast platforms.

Based around the third pledge of the JMI Manifesto released in 2021, Mills and host Brendan Chilton talk about how we can attract and reward more investment in UK manufacturing. At the heart of this issue is the UK’s high exchange rate, which Mills argues needs to be rectified in order to make our manufacturing sector competitive again. 

They touch on what has changed since abolishing the fixed exchange rate, the benefits of a lower exchange rate for the manufacturing sector, and how this can be achieved. Mills also responds to criticisms that lower exchange rates drive higher inflation and why intentionally lowering the exchange rate is a different scenario than the mismanagement that caused the exchange rate to plummet under Liz Truss.

You can listen to the second episode below. Episodes will be released monthly, so be sure to follow the podcast to be notified.


Brendan Chilton: Hello and welcome to the JMI Podcast. My name is Brendan Chilton and I'm the Director of the John Mills Institute for Prosperity. And in this series, we are going to be discussing the issues at the heart of the Institute, working through each of our manifesto pledges and inviting guests to bring their unique perspective on the place manufacturing takes in the UK economy and in our society as a whole.

In this episode, we'll be talking about the lack of investment in manufacturing. The UK has seen a huge shift from prioritising manufacturing to prioritising services over the past 50 years. We've all become accustomed to the made in China labels and the novelty of British made products. But how did we get to this point? And crucially, how do we prioritise manufacturing once again?

Now, today we have got the pleasure being joined by John Mills, the founder of the John Mills Institute for Prosperity. John has had a distinguished career in manufacturing as the founder of a household name, JML, and has been an outspoken economist, political campaigner, and author for decades. Welcome, John!

John Mills: Morning to you.

BC: So, to start us off, John, how would you assess the state of manufacturing in the UK in 2023?

JM: Manufacturing in the UK is not in good shape. It's gone down as a percentage of GDP from nearly a third, as late as 1970, to under 10% now, and it's still drifting down. This is a really serious issue for two major reasons. One is that it's much easier to get productivity up in manufacturing than it is in services. So, if you have an economy with loads of services and not much manufacturing, you get a very slow rate of economic growth.

The second is that it's much more difficult to sell services abroad than it is manufacture. So, if you have a preponderance service economy, you finish up with a big balance of payments problems, and we've got both of these difficulties in spades.

BC: It's amazing to think that, just about 90 to 100 years ago the UK was — you know that phrase that we all know — the workshop of the world. Everything was made in England or made in Britain. And now, we're down to a tiny share of world manufacturing output compared to where we were.

JM: That's right, if we take steel and iron as an example. A hundred years ago, about half the steel and iron in the world was made in the UK. Now it's down to way under 1% — absolutely tiny.

BC: So, the government has chosen to prioritise services over manufacturing for decades now. What do you think the impact of this has had on the country, particularly outside of London and the Southeast?

JM: I'm not sure the government has prioritised services, I think it's just happened as a result of the way the economy's been run. The problem is that manufacturing is very price sensitive. And so, what the costs are for producing in the UK is very critical for our balance of trade on manufacturers, whereas services are really not terribly price sensitive by and large. So, you can run an economy with a high exchange rate on services, but you can't do it on manufacturing.

BC: Do you think, John, if the government haven't prioritised — you know, it's not, as you said, it's just the way it's happened. But do you think governments, successive governments, have given enough attention to manufacturing as a sector in the country?

JM: No, I don't think they have, I think they've been unaware of the damage that would be done by letting our manufacturing go down, and down, and down. The result has been that our growth rate has slumped down to really very low levels. We've got lots of problems on borrowing as an economy. We've got a balance of payments deficit, which is really frighteningly large. And the economy's very unbalanced and this has all happened because we've concentrated too much on services at the expense of manufacturing.

BC: You used that phrase there, balance of payments. Now, the balance of payments measure used to be the barometer of how well we were doing as a country in terms of our economy, and nowadays it's barely even mentioned. Why do you think that is?

JM: Well, I think in the old days we used to have a fixed exchange rate, and if we had a big balance of payments deficit, this put pressure on the exchange rate and the government reacted.

For the last 40-odd years or so, we've had a floating exchange rate, which means on a day-to-day basis, the exact exchange rate doesn't make very much difference. And, because we just don't have a policy at all for what the exchange rate should be, it just drips through the market. So, as a result of this, we don't have a balance of payment crisis, day-by-day, we just have an overall bad situation which is actually a bit out of focus from policymakers.

BC: And, John, that leads us very nicely onto the next area I want to discuss. Now, you are well known as a campaigner for a lower exchange rate. Could you just explain to our listeners what the benefits of a lower exchange rate would be?

JM: I can indeed. The real problem with the UK, from a manufacturing point of view, is that most investment, particularly investment involving international trade, involves spending money in the UK, rather than somewhere else. If you're going to have the investment taking place on our shores and not in some foreign country elsewhere.

And the trouble is, if we have too high a cost base in the UK — that is all the expenditure or manufacturing, which is incurred in sterling and with the domestic currency, you finish up with prices for our manufacturers which are too high. And as a result, investment doesn't take place because it's unprofitable.

So, the result of all this is that, if you have too high an exchange rate, which I think we have, you finish up with investment taking place in other places rather than the UK. And that's been our experience. We spend a smaller proportion of our GDP on manufacturing, than more or less anywhere else in the world. About 17% compared to 25% which is the world average — way over 40% in China. And this is why we've got such a slow growth rate, why we've got such balance of payments problems, and why we've got so many economic difficulties.

BC: Where would you like to see the exchange rate? In sort of parity with the dollar? The pound to the dollar?

JM: I think it needs to come down by around 25% from where it is at the moment which would be, nowadays, a little bit less than parity with the dollar, if we're going to be internationally competitive. And if we don't do that, we're going to remain uncompetitive and the growth rate's just going to stagnate.

BC: So, John, how would the government actually go about getting the exchange rate down? How would it happen? What sort of steps would we need to take to make that exchange rate lower?

JM: Well, essentially what you need to do – it's the same sort of thing that China did, when it came into the world trading ambit in about 1980. And there's a number of things you can do: you can make the tax situation more unfavourable for capital imports which is what pushes the exchange rate up. You can run a wealth fund where you buy in foreign assets which depresses the value of the pound. You can get the Bank of England to sell pounds rather than buy them, which is what's been done to stabilise the exchange rate up until now.

There's a whole range of different things you can do that will bring the pound down if you've got a determined government intent on getting this done. At the moment, we have no exchange rate policy at all, which means that none of these activities are taking place.

BC: And, of course, in British history, recent history, we have had governments that have adopted a lower exchange rate with subsequent boosts for manufacturing, is that correct?

JM: Well, manufacturing certainly has done better when the exchange rates come down. Interestingly, this happened after the referendum in 2016. The exchange rate came down and manufacturing actually got a little bit better after that which is not something that's normally recognised.

So, the answer is that manufacturing is pretty sensitive to where the exchange rate is. But, because the exchange rate is so far out of kilter from where it needs to be to make manufacturing really prosper in the UK, we do need quite a big and sustained decrease, to get the rate of investment up and get the growth rate up.

BC: On one of the charges that's always made when we are talking about having a more competitive exchange rate, is that it can drive inflation. Now, how do you answer this counter-argument, particularly at the moment as we have got inflationary pressures in the British economy?

JM: Well, in the long term, I think that if you have a competitive exchange rate and a really prosperous manufacturing sector, you'll have less inflation than if you run the economy the way we do. But in the short term, if you do bring the pound down, there may be some additional inflation but there probably won't be much, if any. And, certainly, if you look at past experience, what this shows is that the inflationary impact of devaluation is much less than it's often appeared.

A particular example is in 1992 when we came out of the exchange rate mechanism, and the inflation rate which had been about 5 or 6% before we came out, fell to about 1% afterwards. So, the experience of past devaluations is not that they produce big increases in deflation, so the fear of inflation is greatly exaggerated.

BC: John, in our current, sort of, economic situation, it seems obvious that highly productive sectors like manufacturing should be given a greater priority. Why do you think the government appears to be choosing to do otherwise?

JM: I think it's a really good question. There's no doubt about the fact that productivity tends to be higher in manufacturing than it is in services, wages are higher in manufacturing than they are in services. The increases in productivity are greater in manufacturing than they are in services. These are all arguments for having a reasonable manufacturing sector in any developed economy's portfolio, to make sure that you have a reasonable balance. We've just ignored these problems and finished up with the consequences of very slow rates of economic growth based on very poor levels of investment. That's our core problem.

BC: Of course, the government, not this government, but the recent one, abolished the UK's industrial strategy. Do you think that this government, or any future government, one of its priorities should be to have an industrial strategy?

JM: Well, I think we need to have a plan to get the economy to grow more substantially than it is at the moment, very badly. And, I think that abandoning any sort of idea of having an industrial strategy is a real bit of intellectual vandalism. I don't think that the establishment in this country has got much idea about what to do to get the growth rate up. But I think that thinking about these things and trying to fit them into some sort of strategy obviously does make sense. At our Institute here – it's very much orientated to try and stimulate the sort of discussions to get the growth rate up, to get the economy to perform better.

BC: John, we had, obviously, Liz Truss as Prime Minister for just over a month, last year. During her premiership, we had a falling, or lower rate, of exchange. The pound took a bit of a dive and it ended her career, so I just want to push you: why would you think that the approach you're advocating would be different? Is it more about the perceptions and the objectives, and obviously the communication, around having a lower exchange rate?

JM: Well, I think that the Liz Truss era was one of very poor management of the economy in terms of explaining what was going on and having a coherent policy. And, I think, the root difficulty is that just having lower taxation and higher levels of demand doesn't increase investment. What you really need to do is to make investment more profitable, which is not what the Liz Truss approach was going to do. And, as a result, there was no sort of real credibility to the Liz Truss economic policy, and that's why I think it failed.

BC: Her core argument was, of course, that we need to grow the size of the pie, we need to get growth in our economy, and that was the one aspect where she was right. What do you think the consequences for living standards, for public services et cetera is going to be if we don't get the levels of growth that we want and need in our economy?

JM: Well, I think we're going to be short of resources for everything. We're going to be short of resources for public expenditure, we're going to be shorter in resources for investment, we're going to have lower living standards. And what this is going to do to the politics of this country, I think remains to be seen. I think there's a real danger that we finish up with, sort of, fractious populist policies which actually don't get us anywhere. And more and more discontent with the leadership of the country to some extent, perhaps quite a big extent – undermining confidence in our institutions, in our way of life and our democracy.

So, I think there's very big issues at stake here. If we can't get our economy to operate more effectively than we do, I think there's a real danger that we undermine our political stability, and this is going to produce a pretty poor prospect for the future.

BC: John, we've spoken a lot about the various different things we need to do here. So, if His Majesty rung you up and said "John, I'm going to make you Prime Minister", what would your top major policy changes be, to make UK manufacturing more competitive and to attract higher levels of investment?

JM: Well, I think you've got to make investment more profitable. That does mean lower exchange rates, so that's one big priority that I'd put forward. But, the exchange rate isn't the only thing you need to get right. There's also a big supply-side agenda which needs attention, on education and training, and R&D, on patient capital. What you need is you need to have policies on the demand side which is to do with the exchange rate, and the supply side which is all these other things, pulling together in the same basis. So that's the second thing I'd do.

The third thing is to make it quite clear that there's a sea change taking place, that you need consistent policy over a period of time to make sure that a regime which encourages investment and growth takes place. So, we need to get a kind of intellectual revolution to happen, to make sure this happens and keep it on a coherent basis for a long period. When I say long period, I think within a five year term you could start making some pretty big changes, and that's what we ought to do.

BC: John, I think you've outlined some key policy objectives, which can be found on the John Mills Institute website, a manifesto for growing the UK economy.

But, thank you very much, John, for joining us today on the podcast and for talking us through why manufacturing is in such a difficult place at the moment and how we can make it more competitive, more productive, and get industry thriving in the future.

We do need to start thinking more seriously about how we can revive manufacturing through well-thought-out economic policy and an appreciation, I think, for the people that rely on the industry for their livelihood. So, John, thank you once again for coming on.

JM: You're very welcome.

BC: Thank you again to our guest and thank you for listening. For more information on the Institute and what we do, visit

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