Why the government has failed to live up to its rhetoric on rebalancing the economy
Joe Wright, 28 January 2015
After five years of the government’s strategy to rebalance the economy, manufacturing and construction continue to flounder. Yesterday’s GDP figures show 0.5 per cent growth – wholly driven by services. Low inflation and a fall in oil prices have created a small boon in consumer spending, plus households are borrowing more as credit controls have loosened. Outside of the services sectors (the main beneficiaries of these trends) construction is down by 1.8 per cent, while the Purchasing Managers’ Index which measures industrial growth dropped from 53.3 to 52.5. Across the parliament, the ONS estimates that services is the only part of the economy to have surpassed its pre-recession peak, meaning there has been no real growth in Britain’s industrial base or construction at all.
It is unsurprising then that the rebalancing rhetoric which, alongside fiscal restraint, comprised the Chancellors ‘long term economic plan’ no longer features in his statements. The UK is more unbalanced now than in 2010.
Why manufacturers have struggled is unclear. Cheap oil prices, a significant factor in costs, should mean better results for production too. The SME credit shortage singled out as a major factor in the UK’s prolonged economic downturn has been shown to be somewhat overstated – such as by the think tank Demos which found last year that only 1 in 25 SMEs had been refused a loan and half do not borrow at all.
The easy answer, which the government will use, is that tempered demand in the Eurozone continues to effect sales and therefore growth. EU member states like Germany and France are among the UK’s largest trading partners. Part of the government’s rebalancing strategy, however, sought to get manufacturers entering new markets, particularly developing ones, through the UK Trade and Investment department. If Europe is solely to blame, then there has been some failure on the part of UKTI to make an impact.
Other theories point toward home-grown problems. The shortage of skilled workers for manufacturing is a consistent bugbear of industry representatives. Engineering in particular fails to attract enough students to meet demand, along with a multitude of other technology-based subjects. Many firms look abroad to fill positions, but the UK’s failure to produce the right kind of labour market maybe registering in growth figures.
The likelihood is a mixture of all the above, plus the sheer scale of the task. The knowledge and skills which underpin manufacturing will take decades to regain. Though global circumstances and the sheer size of the task have worked against the government, they have only themselves to blame for promising to reset the trajectory of the UK economy in just five years. So far they have made only a poor start and will not see any benefits for years to come.
However, looking ahead to the elections, it is unlikely that the unbalanced recovery will pose too much danger for the Coalition parties, even if the next figures contain the same mixed results. The debate has already shifted to more contentious matters like the NHS and welfare.
The failure to rebalance the economy towards the manufacturing is down to one thing: globalism.
The idea that a first world country can engage in large scale manufacturing of run of the mill products without protectionist barriers is absurd because the wage costs of the Third and even Second Worlds are far too low for first world countries to compete. Moreover, the more labour an employer can afford the lower the tech of the business and the less need for highly skilled and knowledgeable employees. Once jobs are offshored then the skills base in the first world country will diminish.
Britain is arguably the most extreme of free traders because the great god Market is a core part of the British political elite’s internationalist credo. This blithely permits the import of goods, the offshoring of production and the acquisition of British companies in a way which no other country allows. It also means that the surreptitious use of unofficial protectionist measures such as piling on very demanding safety regulations and hugely complicated bureaucratic procedures for imports is not used., unlike any of our Western competitors.
Economic history suggests that the most effective general strategy to promote economic development in a country is to allow competition within the domestic market (where it does not create serious social discord) whilst regulating international trade through protectionist measures sufficient to maintain the general capacity of a country to point where it can maintain itself in an emergency such as war or blockade and be sovereign in most circumstances.This would require the judicious use of embargoes, tariffs and quotas to ensure that all the vital industries remain as a presence in Britain.
A few industries should be in principle wholly supplied from the British market. These are defence equipment and the various energy sources. The reasons for defence equipment provision being domestic are simple: any foreign supplier can cease to supply goods for political reasons or simply be unable to produce the goods when wanted at all or in sufficient quantities.
Energy supplies should be domestic because if they fail the whole of society is brought to a halt. Self-sufficiency in energy in any advanced country could be achieved in the medium term by nuclear power supplemented perhaps by new sources of energy such as wave and current power and bio-fuels.
A country should also build up a stockpile of essential materials such as metals and the minerals used in the chemical industry. Five years national supply should be a minimum.
A country should be able to feed its population from its own production at a pinch. In Britain this is possible with modern crop yields and animal husbandry. Crop yields are considerably greater than they were even in WW2 and the opportunities for increasing the volume of animal products have multiplied greatly over the past 60 years, for example, in the massive development of poultry farming since 1945.
75% of the market in every other vital industry should be reserved for the domestic market. What is a “vital industry”? Try these for starters: metal (especially steel), chemical, biotech, computers, robotics, motor vehicles, shipping, aerospace, clothing, building, machine tools.
I would also reserve to domestic production at least 25% of the market for goods that are useful but not vital to provide a base for an expanded home production in times of emergency. Trade in wholeheartedly nonessential goods – Christmas trees, pogo sticks and suchlike – could be “free”.
I am not arguing for autarky. What I am advocating are trading circumstances which allow a nation to defend its national interests, particularly in time of war or international crisis. The measures I propose would produce self-sufficiency in food where necessary, the maintenance of the ability to manufacture a complete range industrial goods and most importantly the maintenance of an arms industry which can produce a full range of weapons necessary for the defence of the country.
Such a system would provide the security the state requires and permit very substantial international trade even in essential goods.
Obviously such a regime could not be followed in its entirety by most states. However, all could exist within those parts of it suited to their circumstances, for example, Britain could manage the entire regime, many third world countries could be self-sufficient in food.
Read more at https://livinginamadhouse.wordpress.com/2012/04/20/free-markets-and-free-trade-elite-propaganda/