Our aim should be a growth economy not a balanced one

17 11 2010

 * This is a seconding speech I made alongside Richard Lambert from the CBI against the following motion at this debate organised by the Royal Academy of Engineering, 

 This House believes that a manufacturing sector accounting for at least 20% of GDP will provide the only basis for a balanced UK economy

Many myths have grown up around the problems of the UK economy post recession-not the least of which is that the recession was apparently caused by some unemployed scroungers in Newcastle. But before we consider what kind of economic policies we need and how we should shape the future we need to avoid falling for the myths rather than the facts.

For example, we all know that it was the financial services sector that provided much of the dynamism of our economy in the past 15 years. It was the fastest growing sector, the motor of the economy, and had enormous positive knock on effects for the rest of the economy, not the least of which was to enable the state to create nearly a million new jobs. Even today, post recession, living standards in the UK are far higher than they were 15 years ago.

The financial crisis has been interpreted by some as a sign that we should look for a different way of organising the UK economy, hence today’s debate. There has been a growing distaste for the financial services which created prosperity, summed up by Vince Cable’s attack on the ‘spivs and gamblers’ in the city, and a more general sense that greed is to blame for our problems.

But it would be a mistake to conclude that what has happened over the past two years was because of an over reliance on the financial sector or the product of outrageous greed. The problem with the financial sector was not its dynamism per se, but that ultimately it fuelled a bubble which then burst-as bubbles tend to do. The problem was  not the dynamism which it brought to the country, ie the growth itself -which most of us enjoyed the benefits of- but the fact that it was based on a credit bubble and was ultimately unsustainable. Had the bubble not burst we would I am sure all still be happily doubling up on our credit card bills and inflating our house prices.

The point is that it would be a mistake to infer from the financial crisis that any one type of business would be necessarily immune from this kind of bubble. Currently it looks as if there is a bubble emerging in the BRICS, the developing countries, as huge amounts of money are moving into manufacturing and other businesses there. We saw in the recent past how a bubble emerged around the digital industry at the time of the dot-com boom and bust. There is nothing about the specific character of any  industry which can guarantee stability or prevent bubbles. The problem of investment bubbles is a general one, outside the scope of this debate

Secondly, the idea of balance is itself problematic, as it implies that balance is more important than growth. The concept  of a balanced economy has two major problems. Firstly it runs against the tide of globalisation. The world economy has become globalised and operates increasingly through an international division of labour. Countries which develop a particular area of expertise, such as the Finns in electronics or indeed the UK in financial services, can then sell their products globally.

Secondly, balance also carries connotations of the status quo ante, of going back to some prelapsarian state  when the making of things rather than money was virtuous, almost a romantic idea of how economies work. At this stage it is far more important for us to be trying to identify what we can bring to the world market in a better way than our competitors, to identify what can provide the engine of growth we need to break out of the current stagnation. Balance also contains within it the idea of sustainable growth, code for a slow or even stagnant economy. Consciously or unconsciously it is an endorsement of the lack of dynamism of our economy and offers only a further diet of austerity.

Of course, it may turn out that manufacturing can play this locomotive role , or the digital sector I work in and which the Coalition Government is very keen to push, but it might also continue to be the expertise we have in financial services, on a non bubble basis. Or indeed it could be a combination of one or other of them.  Indeed, I must confess an enthusiasm for engineering more generally, I would certainly like to see more large-scale infrastructure projects being backed by the state for example.

To sum up, it would be a mistake to put arguments for promoting manufacturing in order to achieve balance in front of arguments for growth. We need to focus on value, however it is created. Better a one-sided growth economy than a balanced stagnant one.

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4 responses

17 11 2010
Steve Daley

“The point is that it would be a mistake to infer from the financial crisis that any one type of business would be necessarily immune from this kind of bubble”

I agree totally with your defence of the value creation and dynamism of the financial services sector over recent decades. As you say we need to focus on value, however it is created. However, this is where my agreement stops.

Your points have exposed a subtle but important error in my thinking on the common features of the crisis in Ireland and the UK (obviously, there are key differences, specifically Ireland’s enormous leveraging of the euro in the property bubble).

I have argued that the one-sided character of [Ireland’s] economy was a a marker of its structural weaknesses in the general economy. Unfortunately, this does not adequately express the issues satisfactorily. In particular, it underlines why it is important to understand how most non-financial businesses in the real economy reinvented themselves as financial operations rather than regular firms. Property developers, retailers and utility providers redefined their products and services into financially tradable instruments and assets (capital gains, insurance underwriting/brokering, risk management, finance, carbon credits etc became essential drivers of non-financial firms’ profit and loss).

This financialisation of the real economy and the rise of arbitrage [not value creation] was welcomed as the saviour for stagnant domestic industries and services for decades. Financialisation is not simply the one-sided reliance on the IFSC and property (or The City in UK), but represents the hollowing out of value creation across the private sector. This is why no business is immune from becoming the locus of another bubble.

The underlying weaknesses of the real economy are still present and won’t be resolved unless and until we face the difficult task of restructuring the real economy to create new value (goods and services) and reduce its dependence on financial arbitrage. It’s not about curbing the financial services sector, it’s about expanding the production of goods and services in new industries with pro-growth long-term investment from the private and public sector.

30 12 2010
Neil Craig

Manufacturing is strongly dependent on cheap power, whereas financial services basically aren’t. We have some of the world’s most expensive power because we pour 10s of billions into subsidising windmills while doing everything possible to prevent nuclear power being developed.

The “H&S” mafia also have a disproportionate effect on businesses that make things – see the fact that things like the Dome, Crossrail & the proposed Forth Bridge cost 10 times what they do elsewhere in the world.

It is not that financial services are doing well but that industry is being deliberately suffocated.

21 10 2011
James

We have been lead to believe that manufacturing has been sent abroad to save money on labour costs. How can this be true when Germany is well known for paying their workers well and their manufacturers have always been successful and profitable.

22 10 2011
scepticscot

Germany is doi8ng pretty abysmally too – perhaps not quite as abysmally as us.

However Singapore, which is considerably wealthier per capita than the UK, achieved 14.4% growth last year so clearly employee wages are not a significant factor. Corrupt, thieving, incompetent, ecofascist, parasitic Luddite government is the sole ultimate cause. We suffer from it, Singapore doesn’t.

QED

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