Will the UK retain its global financial role and withstand the threat from China?

22 07 2009
  
imagesThe Government remains confident in the UK’s position as a major international financial centre over the medium- to long-term 
 
 
 

 

This statement of belief is contained within the document Reforming Financial Markets which outlines the government’s response to the financial crisis. It is clear from this and elsewhere that whatever desire there may be to rebalance the UK economy towards ‘more engineering and less financial engineering’ in Mandelson’s words, there is still a widespread hope that the financial services sector can get its dynamism back.

It is easy to see why the government hopes that this will be the case. The financial services sector contributed directly to the boom of the past ten years through the growth of jobs in that sector and the prosperity it brought , particularly to London and the south east. It also paid a large part in financing the growth of public spending during that time. The decline of financial services is now contributing to the decline in tax income and adding pressure to the crisis in funding the public sector.

Creating an alternative dynamo for the UK economy outside financial services would require a level of effort from the ruling elite in the UK which seems way beyond its current capacity. Better to cross their fingers and hope for business as usual.

Financial services in the UK have a lot going for them and there is a strong historical incumbency factor which works where markets are concerned. However there are two main reasons to question the continued dependence of the UK on finance. The first is whether the financial services market in the west can recover full stop. There are still strong reasons to believe that the global financial crisis is far from over.

The second relates to the aspirations of China. As Martin Wolf has pointed out, China is historically unique as a developing world power in that it is simultaneously the world’s most dynamic growing manufacturing power as well as the fastest growing exporter of capital. It is this combination which has created the global imbalances which lie at the heart of the current crisis.

China has now set itself the task of turning Shanghai into the leading global financial centre by 2020. As the article cited makes clear, there are still major obstacles in the way of doing this. However, one has to be very optimistic to hope that the future dynamism of the UK economy depends upon outperforming the Chinese in this area.

 
 
 




What’s the plan,man?

15 07 2009

A8XEFT1CAXT4P7TCA1JOBWCCAJXXQ6PCADUCE7FCAE9O5HFCA2AB2C1CA7RY56NCAUP751PCACXR496CAOP464QCA32RQJMCAHWA3EHCABORIQTCA60IOB9CA95NVCGCA2Q5ZWXCAXXBXCXCAOWF5TWCAX8VIECStill nearly a year away from an election and sunk in recession, the UK is drifting through both a political and an economic crisis. Reports from inside the civil service indicate that Labour’s loss of direction is causing civil servants to sit on their hands and wait for a Tory government to sort things out. Yet as Martin Wolf  argues convincingly in today’s Financial Times, the recovery from recession is going to be very hard work.

The UK lacks a strategy for the future or any kind of vision of what we want to achieve collectively. Politics has become short termist and tactical. (The most influential book on Tory thinking is called ’12 Months To Renew Britain’). There are some very important questions which require answers in order to develop a proper long term answers.

The first is, what’s the plan? New Labour had ten years of relative success based on the boom in financial services. Tony Blair now admits they were lucky. The financial services sector is not going to recover to play the same role as it did before. So what does any incoming government think is going to be the driver of the UK economy? And what are they going to do, through tax incentives, infrastructure improvements, educational policies to encourage whichever parts of the economy offer the most promise?

Is it possible or indeed desirable, for example, for the UK or any developed economy to reverse deindustrialisation? All western economies have seen a continued growth of services relative to industrial production. Yet service industries are notoriously people heavy and so tend to have lower levels of productivity.

Is it possible to reverse the trend for the state to play a greater and greater role in the economy?As James Heartfield and others have argued, the role of the state in the UK economy has encouraged flabby business practices and protected weak businesses from going under. Large chunks of state spending go back into the private sector. Is there a better way of doing this or should the state move out of  many of the areas it currently manages?

What is the legitimate role of the state? There are many things the state should be doing, to develop a modern infrastructure or education system for example which it is not doing well enough. At the same time as the state cannot operate on the big issues it seems to want to micromanage our daily lives through interference and intrusion on a massive scale. How can this be reversed? We need to have clarity on these questions when discussing what public spending we need and what we do not.

These are serious issues facing the UK. In the run up to next year’s election they should be the focus of discussion and debate for anybody who is dissatisfied with the lack of vision being shown by the main political parties.





What future for business? Risk taking and innovation after the recession

8 07 2009

AR0UCTVCA3838BCCAIFF8UXCA19JEK3CAQ8BA1JCA74964FCA1VCLJNCA6PF3CECAA4KB0ZCAIM1R9SCAXA15DGCARAN6ALCADTF3IBCAR9Q12XCAKU4BXVCAYL6X9PCAR7T817CAP861NNCA1HBK90CAPC1B8MThis is an edited version of my speech at this last night.

Whenever there is a panic in society, for example around swine flu, I usually find myself on the side of those saying ‘calm down, its not as bad as you think’. I generally take the view that as a society we are too risk averse and liable to panic. However, as far as the recession has been concerned the opposite is the case.  The recession now appears to have been a bad dream about greedy bankers and corrupt politicians from which we are awaking. The concensus appears to be to forget about it as quickly as possible and get back to business as usual. I feel like Cassandra, condemned to tell the truth but to be disbelieved, because there is no ‘business as usual’ and here are three reasons why.

The first is that the damage done by the recession is deep and likely to be prolonged. I say the damage done by the recession rather than the recession itself because technically the recession, defined as consecutive quarters of nagative growth, may be over or almost over, but the damage will linger on:

  1. Unemployment is continuing to rise
  2. Toxic debt has not been removed from the system
  3.  Banks are not lending
  4. The securitization business, provider of investment finance, has disappeared
  5. World trade has collapsed
  6. Global capital flows have slowed dramatically

Secondly, for the UK there is no business as usual for three main reasons. For the past ten years financial services have been the main driver or the economy. there is very little chance that this will return. Also the crisis in public sector finance, affected badly by the reduction of taxation from the finacial services sector and the costs of propping up the banks, will mean big challenges for the public sector in terms of employment and services. Lastly our political class has run out of ideas and lost a large amount of authority. This will make any hard choices difficult for it to take.

Thirdly, real change in the economy will require inevitably some risk taking and more innovation. Yet even before the recession the UK had the lowest Research and Development and Venture Capital investment in the developed world. The recession, according to the Future Foundation, has made business even more risk averse.

We are culturally a safety first society. We view new developments in science and technology with suspicion and hostility. We are over protective to an absurd degree of our children and ourselves. Is it possible to imagine that this kind of attitude will foster and encourage a dynamic econopmy?

Take the banking crisis. We have capitalism which cannot stand on its own two feet and a state which cannot act decisively. The banks have been protected from their own recklessness by a state too feeble to either force them to face the market or to take complete control. Instead we have a half way house which allows the banks to stop playing their role as providers of credit. Some people see the banking crisis as an example of taking too much risk. But there is a big difference between taking a calculated risk and sheer recklessness and stupidity.  The creation of toxic debt began as an attempt to spread and minimise risk. It became reckless once the people buying the debt stopped checking on what they were buying. This was just plain stupid.

There is not one part of our society , business, politics, culture, which has not become more risk averse. The way to challenge it in the first instance is through politics, something anybody can play a role in. We have to renew our democracy as the prelude and the process of renewing our economy and our society.





Making the trains run on time

3 07 2009

imagesFollowing the de facto nationalisation of the East Coast Rail line, no doubt David Miliband will be popping up to tell us this is another example of New Labour radicalism, alongside the nationalisation of the banks. What really happened is that another deal that the government did with the private sector has unravelled as soon as it looked as if National Express, the company concerned, would have to make some hard choices about how to run the railway during a downturn.

What does this episode tell us? Firstly it confirms the point made by James Heartfield in his essay on the state and the economy, that the state and private industry have become more and more interpenetrated. A key aspect of the deal between the government and National Express was that the government would pick up 80% of any losses. This is not free enterprise by any stretch of the imagination. It is effectively a state subsidy to a private industry, as are many of the big government related projects, particularly in the IT sector. This process is likely to go even further as the government struggles to provide key services during the recession.

The state certainly does have a key role in the management of big infrastructural projects such as the railways. But the current system where neither the state nor private enterprise take full control is the worst of all worlds. It is possible for the capitalist state to run big infrastructural projects successfully, as anybody who has travelled on French high speed trains or driven on their motorways knows. In Britain this ability appears to have been lost.

As it stands the system we currently have allows neither the market nor the state to operate effectively. The deal with National Express allowed them to walk away just as they should have been bringing their management skills to bear in keeping the railways going through a recession. Even with the 80% subsidy against loss, rather than tackle the difficulty choices, of how to cut costs, improve service and productivity, they simply gave up.





Does he take Sugar?

8 06 2009

Alan SugarNews that business owners are applying in large numbers to stand for parliament must be one aspect of the growing dissatisfaction with the existing political options. Conservative Central Office said it had received about 3,000 applications since David Cameron appealed for candidates from outside politics and about a third had come from business owners.

It is understandable that the kind of people who typically set up and run their own businesses would be feeling frustrated with politics today. Being an entrepreneur means trying to make things happen quickly. It means taking risks. It often also means working in new and untested areas of the economy. The UK, as I have argued here for some time, is not typified by any of these entrepreneurial traits.

An influx of people into government with experience of running  businesses, or for that matter schools, hospitals or any significant parts of our economy, would not be a bad thing in itself. For too long government has become the preserve of professional politicians. The front benches are full of people who went straight from student politics into mainstream politics with little experience of doing anything else, occasionally stopping off for a brief stint in PR, like Cameron himself, or in the media like James Purnell.

This deficit of real experience in running things has led to an increase in the number of unelected people being brought into government via peerages in an attempt to make up for it, hence Lord Drayson for example at the (now abolished) Department of Industry, Innovation and Skills. The terminally crippled Prime Minister has even turned to Sir Alan Sugar in a desperate attempt to marry a reputation for entrepreneurialism with celebrity and thus kill two birds with one stone.

More real life experience would no doubt be an asset in government. But, and it is a big but, this alone would not be enough to create a new start for British politics. We would still need to know what these people believed in and what policies they would wish to pursue. At the moment the Conservatives are no less empty of a real political vision than the discredited Brown government. New blood by all means, but new politics still seems a long way off.

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The Battle for the Economy is on

24 04 2009

Battle for the Economy, Institute of Ideas

EVENT
Battle for the Economy
16 May 2009 (9.30 am-6.00 pm)
Googdenough College, London

On Wednesday we had a nothing budget from a politically exhausted and demoralised government.  There was a populist and financially meaningless tax rise for the rich but almost no recognition in any of the measures, or in the debate around the budget, of what we could be doing to tackle the deep seated problems of the UK economy.

This would not be so bad if there was an opposition with better ideas waiting in the wings. However the Tories have promised only one thing, to take a harder line on public spending than Labour has projected to do. In fact even this is not a real difference, for if Labour did win the next election against the odds it too would cut spending. The only reason Labour is not saying that now is to avoid alienating even further an already deeply discontented electorate.

Recently there have been efforts to suggest that the recession is coming to an end. It is certainly possible that the rate of decline is slowing . That does not mean that the recession is over, nor that there is any certainty of an early upturn. What is certain however is that the most important problems are still not being addressed. In the UK that includes the whole issue of excessive public spending.

In the coming year there will be a great deal of discussion about cutting  public sector spending. The public sector will account for around 48% of the UK economy by next year and there are no doubt parts of it which we could do without. The question of the role of the state in our society could do with a thorough examination, but it should not begin with what are the easiest parts to cut, but what kind of state we need and what role it should play.

It is issues like these which need to be subjected to the maximum public debate.  From the various discussions I have taken part in recently it is clear that many people have very strong views and opinions, some of them quite sensible, about what should be done. The dead nature of our political process means that there is very little opportunity for serious public discussion which can involve us all.

On May 16th (2009) The Battle for the Economy  conference, organised by the Institute of Ideas will begin to do just that. As you will see from both the speakers and the sessions, the Conference will directly address difficult issues led by speakers who are well informed about the background to the problems we face. I would urge you to buy your ticket now.





Sharing out the misery

22 04 2009

A recent study by Keep Britain Working has found that many workers have responded to the threat of job cuts by proposing that their own pay and benefits should be cut in order to save the jobs of others.  While I have no idea how sound the methodology of this survey is it does chime with anecdotal evidence.  How can we understand this apparently altruistic response, for which one struggles to think of a historical precedent?

There is a positive element of solidarity in not wanting to see your colleagues lose their jobs.  Perhaps there is even the fear that if you accept the redundancies of others then you may well be next.  However, whilst in previous recessions there has been a similar and quite strong tendency to fight for the defence of jobs, in the past people simultaneously fought to defend wages.  One need only go back to the UK Miners’ Strike in the early 80s to see that.  During this period, workers tended to focus on forcing employers to not make redundancies, cut pay or close businesses.  It would seem then that the virtual elimination of organised labour as an effective force in society today plays a significant role in fuelling a widespread mood of acceptance that cuts have to be made somewhere for us all to survive.

The prevailing popular reaction to the recession in the UK has been passive acceptance with underlying anger, where the anger has been directed mainly at bankers or foreign workers.  Very little active hostility or organised resistance has been directed at the government or at employers.  This recession is increasingly being seen as the product of greed in the City and perhaps also greed in general.  In light of that, we can see how the willingness to take cuts in living standards is the flip side of this diagnosis, in the sense that people now feel that a period of austerity is a necessary antidote to the age of greed.

The unwillingness of people to fight for what is in their best interests, which for many of us means the maintenance or improvement of living standards, shows how low our self-expectations have become.  Current discussion about the public sector and possible cuts in public spending will now take place within this milieu of virtuous and necessary austerity and prudence, in no small part influenced by our modern-day preoccupations with what is good for the environment. 

Perhaps it is time to focus our efforts elsewhere and create a different agenda which puts development and growth at the centre of our discussions on the recession, the economy and the future.  Let us put our time to better use and quit trying to work out how best to share out the misery.