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The UK: paying the price for failure

The last week has seen a whole slew of economic figures, but much of this was drowned out by the failure of the pre-budget report to address the growing fiscal crisis in the UK. However this crisis is just one of the problems that now beset the British economy.

We have seen an increase in the gap between the value of what Britain exports and what it imports. This reflects the fact that import costs have increased as a result of weaker Sterling. Meanwhile there was the announcement that British industrial production has stagnated. Yet, this stagnation is despite the fall in the value of the Pound that should make our goods much more competitive in the global market place.

The trend is instructive: in 1980, manufacturing represented 26.5% of UK GDP, in 2005, the last year for which we have comparable figures, the figure was 13.6%. It is estimated now that manufacturing represents less than 10% of current British GDP. Whereas the United States can return to being a workshop for the world, the UK has lost the skills required to compete in global industry. The industrial base of Britain is now exceptionally small when compared to its global competitors. The country has put virtually all its eggs into the financial basket- and now the whole basis of that sector is being undermined.

The response to these numbers is usually that manufacturing- being polluting and dirty- is far better off being relocated to China or India, while the high value added service of design and the control of intellectual property that this comprises remains in the UK. However, we are now seeing that this rests upon a fundamental fallacy: that the quality of design in the manufacturing sites cannot rise to match that of the West, and from mobile phones to automotive products we are now seeing not just competitive products, but competitive brands emerging from the emerging economies. In the same way that Japanese auto brands, Toyota, Honda, Datsun/Nissan emerged to compete and then destroy the previously dominant brands such as Austin, Riley or Triumph, now we even see Western brands, such as Jaguar, coming under Indian control.

The British have happily auctioned off their core brands, from Rowntree to Marconi. Control of intellectual capital is following industrial production in leaving these shores.

Yet we have been free to fall into every single one of these elephant traps because at every crisis since the Second World War, we have chosen to take the soft option. Instead of challenging the communist cadres who, funded by the Kremlin, were the root of much the British industrial unrest in the 1960s and 1970s, we compromised. Instead of using our capital as an endowment, we chose instead to eat our seed corn. We failed to invest in capital infrastructure and instead chose to generously fund welfare provision: a current expenditure that only had a current benefit. All of this was short term decision making based on the swing of the political pendulum. It was said of the 1930s that they were the years which the locusts did eat up; how much more true was this of the post war world of "Butskillism".

Perhaps the great measure of this industrial failure was in our currency. In the world of fixed currencies, Sterling did not move much for decades. Whether linked through gold or the managed system of Bretton Woods, Sterling kept its value. Yet even during that time Sterling devalued substantially. When my Grandfather was at sea in the 1920s, the Dollar exchange rate was $4.85. In 1940, as part of lend-lease the ratio was pegged at $4.03. In 1947, began the first policy of devaluation, with the Labour government re-pegging the currency at $2.80. In 1967 came a further crisis and a further devaluation, this time to $2.40. After Sterling floated, it began a steady fall to near-parity before settling in a trading range of $1.40-$1.60. Each devaluation could have been a breathing space to allow restructuring to improve the productivity and competitiveness of the British economy. Each time, that breathing space was wasted.

I am often asked how countries can stay members of the Eurozone. Lacking the ability to competitively devalue- people suggest- is a fundamental weakness. However, what a fixed currency forces is the discipline to be flexible in every other sphere. Meanwhile, the ability to devalue allows crucial decisions to be put off- exactly as has been done in the UK. The state of health of the British economy is a classic example of why flexibility without discipline equals failure. At every turn the British have taken the soft option of reducing the value of their currency- and this latest crisis is no exception. From roughly €1.40 to the Pound, we have seen the single European currency rise nearly 30% to around €1.10.

Despite that 30% fall in the value of the UK currency, exports have stagnated and imports have actually risen. Industries have continued to contract, inward investment has continued to fall. Even with a 30% fall in the currency and the concomitant improvement in productivity that should represent, our economy has continued to contract.

On top of the fiscal crisis generated by the rescue of the banks we have an industrial crisis. Despite interest rates practically at an all time low, our economy has continued to contract. Only the public sector has continued to boom- and that is a sure way to perdition.

We have devoted all our energy to the property market- but there is no value added in that sector- it is only a rent seeker. The huge allocation of resources to a property market that has been distorted by centralised planning has massively inflated costs across the whole economy- and is a massive competitive disadvantage.

After a half century the decline of Britain as a significant industrial power is now almost complete. Over 80% of British economic activity is services. I feel a little like we are the inhabitants of the Golgafrincham B Ark - the useless third of the economy that the Golgafrichamites chose to blast into space.

I, for one, would not want a child of mine to have as their highest aspiration the ambition to be...

An Estate Agent.

Comments

Newmania said…
Our future is in niche products and fast moving responsive high value manufacturing
We must get the regulators off our backs to make this happen though .It cannot and will not be driven by the State.
Newmania said…
Terrific article by the way ...sorry but insert usual bemused recollection of what the Liberals Party were up to.( In opact with labour during the Miners strike forn example ?)
Cicero said…
But what niche products? we don't make anything under our own control beyond pharmaceuticals and aerospace components. It is not enough.

Where are the small entrpreneurs who can build up new businesses- they have been turned into clients of the public sector- and that ain't good.

ERR.. we bitterly opposed Scargill- one reason why Derbyshire is swinging to us. We also opposed the brutality of the government poliy response. Scargill was a vilain- that does not mean that MT was wholly in the right.
Dave B said…
It's not all doom and gloom:

"Britain is the sixth largest manufacturing nation in the world after the USA, China, Japan, Germany and Italy, larger than France. The manufacturing sector is still over one-and-a-half times larger than the financial sector."

http://www.civitas.org.uk/press/prcs92.php
Unknown said…
Your diagnosis is spot-on: the UK has repeatedly squandered the breathing space offered by a currency devaluation or depreciation, failing to address structural problems, price/wage uncompetitiveness etc.

In the era of fixed exchange rates politicians saw devaluation as an alternative to fiscal retrenchment whereas in reality both were rquired to rebalance the economy without letting inflation take root.

You're right, therefore, that 'flexibility without discipline equals failure'.

But the answer is not to give up the flexibility of a floating exchange rate, but rather to exert some self-dicipline in fiscal and monetary policy.

The pursuit of fixed exchange rates was only ever a poor substitute for domestic self-discipline, and resulted in the economic distortions we saw during the Lawson boom (when Lawson was shadowing the DM) and during our membership of the ERM (when interest rates were unsuitable for our domestic economy and we had a long recession and associated fiscal mess as a result).

Arguably it forced an improvement in industrial productivity and lowered inflation expectations in the 1990s, but at the price of mass corporate bankruptcies and home repossessions.

And of course, after a rare period of sensible fiscal policy (1993 to 1999) we soon reverted to our bad old spendthrift ways.

Irresponsible fiscal policy seems to be a common feature of UK governments whether or not we have the supposed 'discipline' of a fixed exchange rate. So let's not confuse the symptom with the cause.

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