Showing posts with label laissez faire. Show all posts
Showing posts with label laissez faire. Show all posts
Saturday 18 June 2022
Monday 17 January 2022
Welcome to the era of the bossy state
The relationship between governments and businesses is always changing. After 1945, many countries sought to rebuild society using firms that were state-owned and -managed. By the 1980s, faced with sclerosis in the West, the state retreated to become an umpire overseeing the rules for private firms to compete in a global market—a lesson learned, in a fashion, by the communist bloc. Now a new and turbulent phase is under way, as citizens demand action on problems, from social justice to the climate. In response, governments are directing firms to make society safer and fairer, but without controlling their shares or their boards. Instead of being the owner or umpire, the state has become the backseat driver. This bossy business interventionism is well-intentioned. But, ultimately, it is a mistake.
Signs of this approach are everywhere, as our special report explains. President Joe Biden is pursuing an agenda of soft protectionism, industrial subsidies and righteous regulation, aimed at making the home of free markets safe for the middle classes. In China Xi Jinping’s “Common Prosperity” crackdown is designed to curb the excesses of its freewheeling boom, and create a business scene that is more self-sufficient, tame and obedient. The European Union is drifting away from free markets to embrace industrial policy and “strategic autonomy”. As the biggest economies pivot, so do medium-sized ones such as Britain, India and Mexico. Crucially, in most democracies, the lure of intervention is bipartisan. Few politicians fancy fighting an election on a platform of open borders and free markets.
That is because many citizens fear that markets and their umpires are not up to the job. The financial crisis and slow recovery amplified anger about inequality. Other concerns are more recent. The world’s ten biggest tech companies are over twice as big as they were five years ago and sometimes seem to behave as if they are above the law. The geopolitical backdrop is a far cry from the 1990s, when the expansion of trade and democracy promised to go hand in hand, and from the cold war when the West and the Soviet Union had few business links. Now the West and totalitarian China are rivals but economically intertwined. Gummed-up supply chains are causing inflation, reinforcing the perception that globalisation is overextended. And climate change is an ever more pressing threat.
Governments are redesigning global capitalism to deal with these fears. But few politicians or voters want to go back to full-scale nationalisation. Not even Mr Xi is keen to reconstruct an empire of iron and steel plants run by chain-smoking commissars, while Mr Biden, despite his nostalgia for the 1960s, need only walk through America’s clogged West Coast ports to recall that public ownership can be shambolic. At the same time the pandemic has seen governments experiment with new policies that were unimaginable in December 2019, from perhaps $5trn or more of handouts and guarantees for firms to indicative guidance on optimal spacing of customers in shopping aisles.
This opening of the interventionist mind is coalescing around policies that fall short of ownership. One set of measures claims to enhance security, broadly defined. The class of industries in which government direction is legitimate on security grounds has expanded beyond defence to include energy and technology. In these areas governments are acting as de facto central planners, with research and development (r&d) spending to foster indigenous innovation and subsidies to redirect capital spending. In semiconductors America has proposed a $52bn subsidy scheme, one reason why Intel’s investment is forecast to double compared with five years ago. China is seeking self-sufficiency in semiconductors and Europe in batteries.
The definition of what is seen as strategic may well expand further to include vaccines, medical ingredients and minerals, for example. In the name of security, most big countries have tightened rules that screen incoming foreign investment. America’s mesh of punitive sanctions and technology export controls encompasses thousands of foreign individuals and firms.
The other set of measures aims to enhance stakeholderism. Shareholders and consumers no longer have uncontested primacy in the hierarchy of groups that firms serve. Managers must weigh the welfare of other constituents more heavily, including staff, suppliers and even competitors. The most visible part of this is voluntary, in the form of “esg” investing codes that score firms for, say, protecting biodiversity, local people or their own workers. But these wider obligations may become harder for firms to avoid. In China Alibaba has pledged a $15bn “donation” to the Common Prosperity cause. In the West stakeholderism may be enforced through the bureaucracy. Central banks and public pension funds may shun the securities of firms judged to be anti-social. America’s antitrust agency, which once safeguarded consumers alone, is mulling other aims such as helping small firms.
The ambition to confront economic and social problems is admirable. And so far, outside China at least, bossier government has not hurt business confidence. America’s main stockmarket index is over 40% higher than it was before the pandemic, while capital spending by the world’s largest 500-odd listed firms is up by 11%. Yet, in the longer term, three dangers loom.
High stakes
The first is that the state and business, faced by conflicting aims, will fail to find the best trade-offs. A fossil-fuel firm obliged to preserve good labour relations and jobs may be reluctant to shrink, hurting the climate. An antitrust policy that helps hundreds of thousands of small suppliers will hurt tens of millions of consumers who will end up paying higher prices. Boycotting China for its human-rights abuses might deprive the West of cheap supplies of solar technologies. Businesses and regulators focused on a single sector are often ill-equipped to cope with these dilemmas, and lack the democratic legitimacy to do so.
Diminished efficiency and innovation is the second danger. Duplicating global supply chains is extraordinarily expensive: multinational firms have $41trn of cross-border investments. More pernicious in the long run is a weakening of competition. Firms that gorge on subsidies become flabby, whereas those that are protected from foreign competition are more likely to treat customers shabbily. If you want to rein in Facebook, the most credible challenger is TikTok, from China. An economy in which politicians and big business manage the flow of subsidies according to orthodox thinking is not one in which entrepreneurs flourish.
The last problem is cronyism, which ends up contaminating business and politics alike. Firms seek advantage by attempting to manipulate government: already in America the boundary is blurred, with more corporate meddling in the electoral process. Meanwhile politicians and officials end up favouring particular firms, having sunk money and their hopes into them. The urge to intervene to soften every shock is habit-forming. In the past six weeks Britain, Germany and India have spent $7bn propping up two energy firms and a telecoms operator whose problems have nothing to do with the pandemic.
This newspaper believes that the state should intervene to make markets work better, through, for example, carbon taxes to shift capital towards climate-friendly technologies; r&d to fund science that firms will not; and a benefits system that protects workers and the poor. But the new style of bossy government goes far beyond this. Its adherents hope for prosperity, fairness and security. They are more likely to end up with inefficiency, vested interests and insularity.
Friday 26 March 2021
Monday 20 July 2020
Monday 4 April 2016
The dogmas destroying UK steel also inhibit future economic growth
Will Hutton in The Guardian
The elimination of Britain’s steel industry in a matter of weeks – the reality of Tata’s statement that it wants to close its UK operations – is, by any standards, shocking. There will be efforts to save something from the ruins, but the financial and trading truths are brutal.
This has not happened, however, in a day, or even over the past few years. Rather the plight of British steel making is the culmination of 40 years of refusal to organise economic, financial and industrial policy to support the generation of value. This is done in the laissez-faire belief – contested even in economic theory – that any such attempt is self-defeating. Business secretary Sajid Javid personifies this view. In fact, he is surely the most ideologically driven and least practical politician to hold this key post since the war.
The most generous interpretation is that this is creative destruction at work. Steel was an integral element of an industrial economy now giving way to a new knowledge-based capitalism where know-how is more important than brawn. It is tragic for those whose livelihoods and skills are now redundant, but it was no less tragic for ostlers, sailmakers and coal miners in their day.
The trouble is that Britain is very good at destruction, much less good at the creative part. Nor is it clear that steel’s days are over: its usage in a range of key functions – from transport to construction – remains fundamental and is growing. Rather, the economic behemoth China has monumentally over-invested in steel, for which there is too little domestic demand, and is now flooding world markets.
Britain, with a systemically overvalued exchange rate, porous market, high energy costs and ideological refusal to join others in the EU to deter imports dumped below cost with higher tariffs, is uniquely exposed to the threat. Now up to 40,000 workers directly and indirectly connected to steel production are about to lose their livelihoods.
Beneath the specifics of the steel industry lie more deep-seated problems. The day after Tata’s announcement, the Office of National Statistics (ONS) disclosed that the country’s balance of payments deficit in the last quarter of 2015 climbed to a record 7% of GDP. Britain’s international accounts are more in the red than those of any other developed country. Imports of goods and services, which have steadily outstripped exports for decades, are now to be given an extra impetus by the closure of UK steel capacity. What’s more, the same weaknesses that plague the old also inhibit the growth of the new.
After the interventionism of the 1930s – or even the 1950s and 1960s – Britain could boast dozens of substantial companies representing industries as disparate as pharmaceuticals, chemicals, aerospace and electronics. Not so in 2016. Only two high-tech companies are represented in the FTSE 100 – ARM and Sage. Another 20 years of the laissez-faire framework Javid cherishes – he is a devotee of the wild philosopher of hyper-libertarianism Ayn Rand – and the economy will be eviscerated, with a current account deficit so large it cannot be conventionally financed. The consequences – on living standards, employment, inflation, interest rates and house prices – will be severe.
Start with the pound. Since it was forced out of the European Exchange Rate Mechanism in 1992, the consensus has been that the state should make no effort to manage the exchange rate. The result is that for all but four or five of the past 24 years, the pound has been well above any calculation of its real value, buoyed up by money flowing into the UK to buy our companies and our property, notwithstanding our ever higher trade deficit.
This is an auction of national assets unmatched by any other industrialised country. But it also makes it harder for our producers to compete internationally. To manage the exchange rate, to shadow the euro or dollar, or even to consider joining the euro to lock in a competitive rate, are rejected with irrational hysteria. Result – a current account deficit of 7% of GDP.
Britain is rightly committed to free trade, but again to the point of irrationality. China’s Leninist corporatism cannot be understood as a market economy. The world’s steel producers should not be rendered uneconomic because China’s Communist party has overinvested in steel production to create jobs vital to its collapsing political legitimacy, and so dumps steel in world markets at below cost. It is an open and shut case of dumping, with protections provided by the rules of the WTO.
But the UK government, positioning itself as China’s biggest friend in the west in order to win investment in the UK nuclear industry, blocked the EU’s attempts to invoke the WTO rules. Thus we destroy our steel industry in exchange for Chinese state ownership of the next generation of nuclear power stations.
So the list continues. The combination of a privatised electricity industry – insisting on sky-high returns for strategic investment – with demanding targets for the reduction of carbon dioxide emissions has meant incredible rises in the price of electricity, especially for industrial users such as steel. Relief is too little and too late. More broadly the same effects impact across all of what remains of our manufacturing sector – so it becomes a less solid market for steel, adding one more twist to the downward vicious circle.
Britain needs a genuine march of the makers, in George Osborne’s phrase. But that would need a completely different policy paradigm, overturning the failed attempts of the past 40 years. There was a nascent attempt, launched by Peter Mandelson in 2009, and followed through in the coalition government by business secretary Vince Cable and science minister David Willetts, to create an intelligent industrial strategy.
Eight great technologies were identified in which Britain had strengths; convening councils were created to remove obstacles to their growth; the agency Innovate UK geared up to support frontier innovation; and a network of Catapults created to stimulate knowledge transfer, business start-ups and scale-ups. Foreign governments, impressed by what was happening, commissioned reports on the innovative UK.
Then came Javid, keen to deliver the swingeing cuts in his budget demanded by Osborne in his quest for the 36% state. After hobbling the admired innovation infrastructure with its role for a smart state, his first piece of legislation is the trade union bill.
Javid tilts at Thatcherite windmills – and shows little understanding of today’s industrial revolution. Nor does he seem to grasp how government can co-create opportunities with entrepreneurs – as well as ensuring that the big picture is as attractive as possible.
Something face-saving will be put together to soften the steel crisis, but there are bigger lessons to be learned. Be sure they will be ignored. The enfeebled Labour party is unable to press the points home and the Tory party remains transfixed by anti-state, laissez-faire nihilism. I mix rage with sadness for the next generation, and the inheritance it has been left.
The elimination of Britain’s steel industry in a matter of weeks – the reality of Tata’s statement that it wants to close its UK operations – is, by any standards, shocking. There will be efforts to save something from the ruins, but the financial and trading truths are brutal.
This has not happened, however, in a day, or even over the past few years. Rather the plight of British steel making is the culmination of 40 years of refusal to organise economic, financial and industrial policy to support the generation of value. This is done in the laissez-faire belief – contested even in economic theory – that any such attempt is self-defeating. Business secretary Sajid Javid personifies this view. In fact, he is surely the most ideologically driven and least practical politician to hold this key post since the war.
The most generous interpretation is that this is creative destruction at work. Steel was an integral element of an industrial economy now giving way to a new knowledge-based capitalism where know-how is more important than brawn. It is tragic for those whose livelihoods and skills are now redundant, but it was no less tragic for ostlers, sailmakers and coal miners in their day.
The trouble is that Britain is very good at destruction, much less good at the creative part. Nor is it clear that steel’s days are over: its usage in a range of key functions – from transport to construction – remains fundamental and is growing. Rather, the economic behemoth China has monumentally over-invested in steel, for which there is too little domestic demand, and is now flooding world markets.
Britain, with a systemically overvalued exchange rate, porous market, high energy costs and ideological refusal to join others in the EU to deter imports dumped below cost with higher tariffs, is uniquely exposed to the threat. Now up to 40,000 workers directly and indirectly connected to steel production are about to lose their livelihoods.
Beneath the specifics of the steel industry lie more deep-seated problems. The day after Tata’s announcement, the Office of National Statistics (ONS) disclosed that the country’s balance of payments deficit in the last quarter of 2015 climbed to a record 7% of GDP. Britain’s international accounts are more in the red than those of any other developed country. Imports of goods and services, which have steadily outstripped exports for decades, are now to be given an extra impetus by the closure of UK steel capacity. What’s more, the same weaknesses that plague the old also inhibit the growth of the new.
After the interventionism of the 1930s – or even the 1950s and 1960s – Britain could boast dozens of substantial companies representing industries as disparate as pharmaceuticals, chemicals, aerospace and electronics. Not so in 2016. Only two high-tech companies are represented in the FTSE 100 – ARM and Sage. Another 20 years of the laissez-faire framework Javid cherishes – he is a devotee of the wild philosopher of hyper-libertarianism Ayn Rand – and the economy will be eviscerated, with a current account deficit so large it cannot be conventionally financed. The consequences – on living standards, employment, inflation, interest rates and house prices – will be severe.
Start with the pound. Since it was forced out of the European Exchange Rate Mechanism in 1992, the consensus has been that the state should make no effort to manage the exchange rate. The result is that for all but four or five of the past 24 years, the pound has been well above any calculation of its real value, buoyed up by money flowing into the UK to buy our companies and our property, notwithstanding our ever higher trade deficit.
This is an auction of national assets unmatched by any other industrialised country. But it also makes it harder for our producers to compete internationally. To manage the exchange rate, to shadow the euro or dollar, or even to consider joining the euro to lock in a competitive rate, are rejected with irrational hysteria. Result – a current account deficit of 7% of GDP.
Britain is rightly committed to free trade, but again to the point of irrationality. China’s Leninist corporatism cannot be understood as a market economy. The world’s steel producers should not be rendered uneconomic because China’s Communist party has overinvested in steel production to create jobs vital to its collapsing political legitimacy, and so dumps steel in world markets at below cost. It is an open and shut case of dumping, with protections provided by the rules of the WTO.
But the UK government, positioning itself as China’s biggest friend in the west in order to win investment in the UK nuclear industry, blocked the EU’s attempts to invoke the WTO rules. Thus we destroy our steel industry in exchange for Chinese state ownership of the next generation of nuclear power stations.
So the list continues. The combination of a privatised electricity industry – insisting on sky-high returns for strategic investment – with demanding targets for the reduction of carbon dioxide emissions has meant incredible rises in the price of electricity, especially for industrial users such as steel. Relief is too little and too late. More broadly the same effects impact across all of what remains of our manufacturing sector – so it becomes a less solid market for steel, adding one more twist to the downward vicious circle.
Britain needs a genuine march of the makers, in George Osborne’s phrase. But that would need a completely different policy paradigm, overturning the failed attempts of the past 40 years. There was a nascent attempt, launched by Peter Mandelson in 2009, and followed through in the coalition government by business secretary Vince Cable and science minister David Willetts, to create an intelligent industrial strategy.
Eight great technologies were identified in which Britain had strengths; convening councils were created to remove obstacles to their growth; the agency Innovate UK geared up to support frontier innovation; and a network of Catapults created to stimulate knowledge transfer, business start-ups and scale-ups. Foreign governments, impressed by what was happening, commissioned reports on the innovative UK.
Then came Javid, keen to deliver the swingeing cuts in his budget demanded by Osborne in his quest for the 36% state. After hobbling the admired innovation infrastructure with its role for a smart state, his first piece of legislation is the trade union bill.
Javid tilts at Thatcherite windmills – and shows little understanding of today’s industrial revolution. Nor does he seem to grasp how government can co-create opportunities with entrepreneurs – as well as ensuring that the big picture is as attractive as possible.
Something face-saving will be put together to soften the steel crisis, but there are bigger lessons to be learned. Be sure they will be ignored. The enfeebled Labour party is unable to press the points home and the Tory party remains transfixed by anti-state, laissez-faire nihilism. I mix rage with sadness for the next generation, and the inheritance it has been left.
Britain's free market economy isn't working
Larry Elliott in The Guardian
Last week should have been a good one for George Osborne. The first day of April marked the day when the ”national living wage” came into force. The idea was championed by the chancellor in his 2015 summer budget when he said it was time to “give Britain a pay rise”.
Unfortunately for the chancellor, the 50p an hour increase in the pay floor for workers over 25 was completely overshadowed by the existential threat to the steel industry posed by Tata’s decision to sell its UK plants.
Instead of being acclaimed by a grateful nation, Osborne found his handling of the economy under fire. The fact that official figures showed that Britain has the highest current account deficit since modern records began in 1948 did not help.
At one level, all seems well with the economy. Growth was revised up for the fourth quarter of 2015 to 0.6% and is running at an annual rate of just over 2% – close to its long-term average and higher than in Germany, France or Italy.
Two of three key sectors of the economy are struggling, though. Industrial production and construction have yet to recover the ground lost in the recession of 2008-09, leaving the economy dependent on services, which accounts for three-quarters of national output.
Digging beneath the surface glitter shows just how unbalanced and unsustainable the economy has become.
Growth is far too biased towards consumer spending. Borrowing is going up and imports are being sucked in. An enormous current account deficit and a collapse in the household saving ratio are usually consistent with the economy in the last stages of a wild boom rather than one trundling along at 2%.
A little extra digging provides the explanation, with some alarming structural flaws quickly emerging.
Here are two pieces of evidence. The first, relevant to the debate about the future of the steel industry, comes from an investigation by the left of centre thinktank,the IPPR, into the state of Britain’s foundation industries.
Foundation industries supply the basic goods – such as metal and chemicals – used by other industries. They have been having a tough time of it across the developed world, but the decline has been especially pronounced in the UK. Since 2000, the share of GDP accounted for by foundation industries has fallen by 21% across the rich nations that belong to the Organisation for Economic Cooperation and Development but by 43% in Britain. At the end of the 1990s, imports accounted for 40% of UK demand for basic metals; import penetration is now at 90%. Clearly, this trend will become even more marked if the Tata steel plants close.
The second piece of evidence comes from a joint piece of research from the innovation foundation Nesta and the National Institute for Economic and Social Research being published on Monday. This found that productivity weaknesses are common across the sectors of the UK economy, but particularly marked among newly formed companies. Fledgling firms tend to be less efficient on average, but the report said that in the years since the recession performance had been unusually poor among startups.
Since the economy emerged from recession, the growth of highly productive companies has been curbed and there has also been a slowdown in the number of under-performing businesses contracting in size. This helps explain why Britain has an 18% productivity gap with the other members of the G7 group of industrial nations.
According to the economic orthodoxy that has prevailed for the past four decades, none of this should be happening. The theory was that a good, solid dose of market forces would clear out the dead wood from the manufacturing sector; financial deregulation would ensure that funding was provided to young, thrusting startup firms; and free trade would ensure that British industry remained on its toes. Industrial policy would no longer be about “picking winners” but involve an open door to inward investment and low corporate taxes.
This approach has proved a complete dud. Successive UK governments have allowed good companies to go to the wall for the sake of their free market principles. They have squandered the once-in-a-lifetime opportunity provided by North Sea oil to modernise and re-equip the manufacturing sector. They have sat back and watched as the economy has stumbled from one housing-driven boom-bust to another. They have now arrived at the stage where house price inflation is running at 10% a year; the current account deficit in the latest quarter was 7% a year; and manufacturing is in recession.
The UK has been here before, although this time the numbers are scarier. Traditionally, what happens next is a sharp fall in the value of the pound, which helps rebalance the economy by making exports cheaper and imports dearer.Consumer spending takes a hit because goods cost more in the shops while manufacturers get a boost because their products are more competitive on world markets.
Such a depreciation would almost certainly be triggered by a decision to leave the EU in the referendum on 23 June. The assumption is that this would be a bad thing; in truth, a cheaper currency would be one of the benefits of Brexit.
But only in the right circumstances. There is more to rebalancing the economy and solving the UK’s deep-seated problems than simply devaluing the pound. If it was as easy as that, Britain would be a world beater by now. Getting the right level for the pound is a necessary but not sufficient factor in putting the economy right.
There is no shortage of ideas. Help for steel would be provided if procurement rules were tightened up so that contractors had to show they were sourcing sustainably, with the test being the impact on the environment and on local communities. The IPPR has a range of ideas for boosting foundation industries, including building stronger supply chains with advanced manufacturing and using the regional growth fund to provide more patient finance.
Nesta said its research shows the need for better targeted support for new companies rather than blanket measures such as cuts in business rates.
A new paper for the Fabian Society by the former Labour MP and leadership contender Bryan Gould believes there should be a twin-tracked approach: a 30% depreciation of the currency accompanied by a focus on credit creation for investment. This, he argues, could happen either through the existing banking system under the direction of the Bank of England or, if necessary, through a national investment bank. Gould says this is not about “picking winners” but about setting the parameters for possible good investment opportunities.
What links all these ideas is the belief that Britain needs a proper long-term industrial strategy. The prerequisite for that is an admission that the current model – low investment and competing on cost rather than quality – has failed, is failing and will continue to fail.
Last week should have been a good one for George Osborne. The first day of April marked the day when the ”national living wage” came into force. The idea was championed by the chancellor in his 2015 summer budget when he said it was time to “give Britain a pay rise”.
Unfortunately for the chancellor, the 50p an hour increase in the pay floor for workers over 25 was completely overshadowed by the existential threat to the steel industry posed by Tata’s decision to sell its UK plants.
Instead of being acclaimed by a grateful nation, Osborne found his handling of the economy under fire. The fact that official figures showed that Britain has the highest current account deficit since modern records began in 1948 did not help.
At one level, all seems well with the economy. Growth was revised up for the fourth quarter of 2015 to 0.6% and is running at an annual rate of just over 2% – close to its long-term average and higher than in Germany, France or Italy.
Two of three key sectors of the economy are struggling, though. Industrial production and construction have yet to recover the ground lost in the recession of 2008-09, leaving the economy dependent on services, which accounts for three-quarters of national output.
Digging beneath the surface glitter shows just how unbalanced and unsustainable the economy has become.
Growth is far too biased towards consumer spending. Borrowing is going up and imports are being sucked in. An enormous current account deficit and a collapse in the household saving ratio are usually consistent with the economy in the last stages of a wild boom rather than one trundling along at 2%.
A little extra digging provides the explanation, with some alarming structural flaws quickly emerging.
Here are two pieces of evidence. The first, relevant to the debate about the future of the steel industry, comes from an investigation by the left of centre thinktank,the IPPR, into the state of Britain’s foundation industries.
Foundation industries supply the basic goods – such as metal and chemicals – used by other industries. They have been having a tough time of it across the developed world, but the decline has been especially pronounced in the UK. Since 2000, the share of GDP accounted for by foundation industries has fallen by 21% across the rich nations that belong to the Organisation for Economic Cooperation and Development but by 43% in Britain. At the end of the 1990s, imports accounted for 40% of UK demand for basic metals; import penetration is now at 90%. Clearly, this trend will become even more marked if the Tata steel plants close.
The second piece of evidence comes from a joint piece of research from the innovation foundation Nesta and the National Institute for Economic and Social Research being published on Monday. This found that productivity weaknesses are common across the sectors of the UK economy, but particularly marked among newly formed companies. Fledgling firms tend to be less efficient on average, but the report said that in the years since the recession performance had been unusually poor among startups.
Since the economy emerged from recession, the growth of highly productive companies has been curbed and there has also been a slowdown in the number of under-performing businesses contracting in size. This helps explain why Britain has an 18% productivity gap with the other members of the G7 group of industrial nations.
According to the economic orthodoxy that has prevailed for the past four decades, none of this should be happening. The theory was that a good, solid dose of market forces would clear out the dead wood from the manufacturing sector; financial deregulation would ensure that funding was provided to young, thrusting startup firms; and free trade would ensure that British industry remained on its toes. Industrial policy would no longer be about “picking winners” but involve an open door to inward investment and low corporate taxes.
This approach has proved a complete dud. Successive UK governments have allowed good companies to go to the wall for the sake of their free market principles. They have squandered the once-in-a-lifetime opportunity provided by North Sea oil to modernise and re-equip the manufacturing sector. They have sat back and watched as the economy has stumbled from one housing-driven boom-bust to another. They have now arrived at the stage where house price inflation is running at 10% a year; the current account deficit in the latest quarter was 7% a year; and manufacturing is in recession.
The UK has been here before, although this time the numbers are scarier. Traditionally, what happens next is a sharp fall in the value of the pound, which helps rebalance the economy by making exports cheaper and imports dearer.Consumer spending takes a hit because goods cost more in the shops while manufacturers get a boost because their products are more competitive on world markets.
Such a depreciation would almost certainly be triggered by a decision to leave the EU in the referendum on 23 June. The assumption is that this would be a bad thing; in truth, a cheaper currency would be one of the benefits of Brexit.
But only in the right circumstances. There is more to rebalancing the economy and solving the UK’s deep-seated problems than simply devaluing the pound. If it was as easy as that, Britain would be a world beater by now. Getting the right level for the pound is a necessary but not sufficient factor in putting the economy right.
There is no shortage of ideas. Help for steel would be provided if procurement rules were tightened up so that contractors had to show they were sourcing sustainably, with the test being the impact on the environment and on local communities. The IPPR has a range of ideas for boosting foundation industries, including building stronger supply chains with advanced manufacturing and using the regional growth fund to provide more patient finance.
Nesta said its research shows the need for better targeted support for new companies rather than blanket measures such as cuts in business rates.
A new paper for the Fabian Society by the former Labour MP and leadership contender Bryan Gould believes there should be a twin-tracked approach: a 30% depreciation of the currency accompanied by a focus on credit creation for investment. This, he argues, could happen either through the existing banking system under the direction of the Bank of England or, if necessary, through a national investment bank. Gould says this is not about “picking winners” but about setting the parameters for possible good investment opportunities.
What links all these ideas is the belief that Britain needs a proper long-term industrial strategy. The prerequisite for that is an admission that the current model – low investment and competing on cost rather than quality – has failed, is failing and will continue to fail.
Wednesday 31 October 2012
The market can’t deliver growth without government help
8:31PM GMT 30 Oct 2012
172 Comments
Like so many of The Daily Telegraph’s readers, I am an entrepreneur. And when
I first left the small business I had created to join government in the
1970s, I was convinced that the best thing government could do was get off
our backs – cut red tape, deregulate, lower taxes. These things are still
important. My time in business still shapes my outlook. I believe there are
many areas where government should stand aside completely. But I have learnt
that there are some things that only government can do to drive growth.
In March, the Prime Minister asked me to report to the Chancellor and Business
Secretary on how we might more effectively create wealth in the UK. My
report has been shaped by my belief that in the vast majority of cases, we
will only get the very best results if government, business and local
leaders work together in partnership.
When producing recommendations, I have always asked: “Does this make us more competitive?” There are no easy ways to do this. Competition from an ever more educated, motivated and capable world is facing us every day. We do, however, have much to celebrate – from the very smallest of businesses striving on the street to the large multinationals headquartered here, from inspiring local leaders to a government that encourages enterprise. We have many strengths and should be proud of talking them up. But how do we go that extra mile and make sure we can beat our global competitors for generations to come?
There is no easy answer – we must face the reality that we can’t be complacent and rest on our laurels as a country. I have not selected a handful of popular suggestions. I make 89 recommendations – each one important. Taken together, they provide a blueprint for the future.
What does that future look like? Above all, it is a world with stronger local leadership. We must continue to reverse the trend of the past century by unleashing the dynamic potential of our local economies. Key to this are Local Enterprise Partnerships, which should be given a much greater role in supporting their business communities. Much more of the inspiration for our economy should be based on the strength, initiative and ambition of our cities and their communities.
There are those who hanker for the old rules of free trade, for the market to
look after itself, who want to shut the Business Department and for
government to have a minimal role. This is a clear and simple message. To
some it is attractive. But it has one major weakness. No other leading
country or emerging nation believes it can work. The US, our European
cousins, the BRICs – they certainly don’t practise it. Why should we be out
of sync with the rest of the world? You can close your eyes to the threat of
an ever more competitive world, but that threat will not go away.
We need a number of significant changes to provide a stable yet flexible architecture for the future. These include: creating a National Growth Council chaired by the Prime Minister, to ensure all parts of government play their part; inviting local business partnerships to bid for significant funding from central government on a competitive basis every five years to build local economic growth; an enhanced role for chambers of commerce in helping develop the capabilities of businesses; devolving funding for the skills system to improve its alignment with the needs of local economies; injecting greater urgency into the planning system; improving public procurement by employing an experienced chief procurement officer in every department; allowing all county councils to move to unitary status; and incorporating business engagement far deeper into the school curriculum.
The location of Birmingham Town Hall could not be more fitting to announce my report. It is a city with a proud tradition of civic leadership, going back to the days of Joseph Chamberlain. It is vibrant, entrepreneurial and prosperous: it saw tough economic problems in the past and faces challenges in the present. In this, it is a microcosm of Britain as a whole.
The drivers of our economy – business, central government and local leaders – should be organised and structured for success. I have therefore reassessed the way that we, as a country, conduct business. I’ve re-evaluated each of their roles with the single overall aim of embedding a culture of wealth creation. As the saying goes, we are all in it together.
It has been a privilege to produce this review for George Osborne and Vince Cable. The Government has shown strength and confidence by commissioning and facilitating this exercise. The Coalition is fundamentally on the right track, and in many areas I praise its work: Vince Cable for announcing the recent industrial strategy plans; Greg Clark for pioneering city devolution; Michael Gove and Iain Duncan Smith for their revolution in education and tackling unemployment. These initiatives need to be built on.
What I suggest is challenging – but it is not just a challenge to central government. It’s a challenge to the public and private sector, boardroom and business leaders, and to us as individuals. The end goal has to be wealth creation. There are debates as to how wealth should be divided, but ultimately these are sterile until it is created in the first place.
I am positive that if we work together, we can build a strong, sustainable future for the British economy – one we can be proud to pass on to our children and grandchildren.
Lord Heseltine is a former deputy prime minister
We need a number of significant changes to provide a stable yet flexible architecture for the future. These include: creating a National Growth Council chaired by the Prime Minister, to ensure all parts of government play their part; inviting local business partnerships to bid for significant funding from central government on a competitive basis every five years to build local economic growth; an enhanced role for chambers of commerce in helping develop the capabilities of businesses; devolving funding for the skills system to improve its alignment with the needs of local economies; injecting greater urgency into the planning system; improving public procurement by employing an experienced chief procurement officer in every department; allowing all county councils to move to unitary status; and incorporating business engagement far deeper into the school curriculum.
The location of Birmingham Town Hall could not be more fitting to announce my report. It is a city with a proud tradition of civic leadership, going back to the days of Joseph Chamberlain. It is vibrant, entrepreneurial and prosperous: it saw tough economic problems in the past and faces challenges in the present. In this, it is a microcosm of Britain as a whole.
The drivers of our economy – business, central government and local leaders – should be organised and structured for success. I have therefore reassessed the way that we, as a country, conduct business. I’ve re-evaluated each of their roles with the single overall aim of embedding a culture of wealth creation. As the saying goes, we are all in it together.
It has been a privilege to produce this review for George Osborne and Vince Cable. The Government has shown strength and confidence by commissioning and facilitating this exercise. The Coalition is fundamentally on the right track, and in many areas I praise its work: Vince Cable for announcing the recent industrial strategy plans; Greg Clark for pioneering city devolution; Michael Gove and Iain Duncan Smith for their revolution in education and tackling unemployment. These initiatives need to be built on.
What I suggest is challenging – but it is not just a challenge to central government. It’s a challenge to the public and private sector, boardroom and business leaders, and to us as individuals. The end goal has to be wealth creation. There are debates as to how wealth should be divided, but ultimately these are sterile until it is created in the first place.
I am positive that if we work together, we can build a strong, sustainable future for the British economy – one we can be proud to pass on to our children and grandchildren.
Lord Heseltine is a former deputy prime minister
Sunday 12 August 2012
Olympics: the key to our success can rebuild Britain's economy
We need politicians who understand why we were so successful at the 2012 Games. Cameron and Osborne do not
Chris Hoy's victory was the product of a finely tuned system of financial and technical support. Photograph: Tom Jenkins
Everyone has marvelled at the success of Team GB, but the best haul of medals in 104 years is no accident. It is the result of rejecting the world of public disengagement and laissez faire that delivered one paltry gold medal in Atlanta just 16 years ago. Instead, British sport embraced a new framework of sustained public investment and organised purpose, developing a new ecosystem to support individual sports with superb coaching at its heart. No stone was left unturned to achieve competitive excellence.
The lesson is simple. If we could do the same for economy and society, rejecting the principles that have made us economic also-rans and which the coalition has put at the centre of its economic policy, Britain could be at the top of the economic league table within 20 years.
The turnaround began in the run-up to Sydney in 2000 as the first substantial proceeds from the lottery began to flow into sport. There was investment in infrastructure – tracks, swimming pools, velodromes – but crucially also in the structures supporting individual sportsmen and women. There were funds for world-class coaches, such as Jim Saltonstall in sailing and Dave Brailsford in cycling, and for nutritionists and sports psychologists. Also for science and technology where appropriate, ensuring we had the best bikes and boats.
Crucially, the money was not distributed through one statist institution pursuing a centrally determined strategy, but through the varying intermediate bodies, from theRoyal Yachting Association to British Cycling. They knew their sport well, could direct the spending where it was most needed, but still had to show – through results – that they deserved the cash. Last but not least was a ruthless approach to picking potential winners and grooming them for success in a world of intensely global competition, all dramatised by the reality that Britain would host the Olympics.
Everything was underpinned not by a raucous jingoism but by a determined pride in what our country now is and to show that we can be the best, a patriotism that allows us to be open to the cream of the world but also to use it for our own purposes. The alchemy is, as we have seen, extraordinarily powerful.
Not only do we need to sustain these principles so they become structurally and culturally embedded for continuing Olympic success, but they should also be applied elsewhere. The problem is that they are born of an ideological hybrid that wrong-foots our political class. They are mostly rooted in liberal social democratic values that understand the importance of public investment, public organisation and institution-building. But they also involve an unashamed recognition that in the end individual application, resolve and will to win are indispensable.
David Cameron and London mayor Boris Johnson are happy to celebrate the element that is rooted in competition, elitism and individual effort. But they flounder the instant the conversation moves to the role of public investment and the necessity of understanding and sustaining our unique sport ecosystem, just as nearly every Labour politician flounders the other way round.
The number of British politicians who understand this hybridity – and will argue for it – is tiny. Michael Heseltine always has and Peter Mandelson finally got there in the dying days of the New Labour government, a government that should have been all about such hybridity but was racked by the desire to show its "business friendliness" and warmth to the City.
In today's government, only Vince Cable consistently argues for it and is thus nicknamed the "anti-business" secretary by many on the right whose understanding of what drives success in modern economies and societies is close to zero. The big point is that success depends on recognising that both elements count.
So what to do economically? The first part of the alchemy is for the state to trigger substantial public investment in everything that supports enterprise – communications, science, knowledge generation and transfer, housing and education. And to do so with purpose and consistency. It should be running at least £30bn a year higher than the Treasury currently spends, financed either by taxation or borrowing, depending on the particular economic conjuncture. Currently, it should be financed by borrowing at the lowest interest rates for 300 years. A plan B should begin immediately with such an ambition.
But that is only the start. The next step is to reproduce sector by sector the kind of ecosystem that sport has developed. There needs to be specialist knowledge, commitment, long-term finance and coaching for business and a new web of intermediate institutions that can do for companies in life sciences, robotics and new materials what the RYA, British Gymnastics and British Cycling have done for sportsmen and women. For example, the fledgling network of "catapults" designed to transfer technology into varying sectors must become centres of open innovation, coaching and support and scaled up quickly so they can reproduce the Olympic effect for business.
But for any of that to work, engaged owners have to be committed to their companies over time and banks need to behave more as business coaches – not sellers of credit and of useless financial products. They need to become organisations that attempt to co-grow the companies in an active partnership, not organisations that opt for money-laundering, Libor manipulation or mis-selling. This will demand a wholesale recasting of Britain's system of business ownership and finance, informed by the same pride and ambition for Britain as our athletes and Olympic crowds have shown.
There then has to be a commitment to management and performance – a world where achievement is genuinely rewarded and poor performance penalised. The principles are common sense. Wherever applied – from Team GB to the success of the German car industry or American IT industry – they work. Mr Osborne assures us of his complete focus on growth and jobs even as the UK economy remains locked in depression and an escalating balance of payments crisis. But such focus is meaningless unless informed by an understanding of what to do and a determination to do it.
Osborne and Cameron believe in the same ideas – public disengagement, free markets and laissez faire – that brought Olympic failure. Either they change or political leaders who do understand what to do must take their place. Britain could so easily be a world success. But first it has to find politicians who understand the necessity of hybridity. They are not Osborne and Cameron.
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