How to run a company and run down an economy: the effects of closing down steel-making in Corby

Abstract

This paper is an exercise in social accounting. Its specific purpose is to quantify the overall economic implications of the state-owned British Steel Corporation's plan to close down an iron and steel-making plant at Corby in Northamptonshire. Its more general purpose is to argue that projects should not be evaluated solely on the narrow com mercial criterion of profit and loss to the firm in question, and that in comparing various alternatives their macro-economic implications should be taken explicitly into account. In particular, in an economy like that of the UK, which is experiencing severe balance of payments difficulties, foreign trade is of paramount importance, and the effect of alternative projects upon imports and exports should be a major consideration.! In such an economy the need to secure an acceptable balance of payments imposes a tight external constraint on the level of economic activity, and there is no guarantee that labour and other resources released by measures designed to reduce costs will be re employed elsewhere in the economy. Unless these measures help to relax the external constraint on national output, by raising exports or reducing imports, any improvement in productivity will simply mean less labour is used to produce the same volume of output as before, and unemployment will rise. Moreover, if the measures in question involve a switch from domestic to foreign sources of supply without any compensating improvement in export performance, the balance of payments will deteriorate and the external constraint on output will be tightened still further. The level of output consistent with a satisfactory balance of payments outcome will be lower than before and deflation ary measures will need to be implemented, so as to reduce the demand for imports and save on foreign exchange. If this happens there will be an overall reduction in national income, and even those who would otherwise gain from higher productivity may find themselves worse off.