Too clever by half

Civitas, 9 May 2011

The current British Government has been characterised by many commentators as one of the most radical. Free schools, GP commissioning, payment-by-results public services, the ‘Big Society’, whatever your views on such policies it is hard to argue that they do not suggest a government committed to wholesale, rather than incremental change. There is much to be said for radical ideas and extensive change, however in the economic sphere the Government could do with a good dose of old fashioned Tory incrementalism.

One of the most damaging neologisms of the last Government was the ‘knowledge economy’ and the idea that Britain’s future was now wholly dependent on providing services. Knowledge (seemingly devoid from action) being the country’s main, if not sole, competitive advantage. David Cameron’s Government has marginally distanced itself from these ideas calling for a ‘rebalancing of the economy’. Some of this ‘rebalancing’ refers to a movement away from public, to private sector growth, some of it refers to a renewed focus on manufacturing as opposed to services.

Both goals, but in particular the latter, is to be welcomed. Nevertheless this goal is still permeated with grand thinking and radical ideas which fly in the face of economic reality. It would appear that the ghost of impractical, hollow ideas, as represented by the ‘knowledge economy’ has not been laid to rest.

Looking at just two facets of the Government’s current thinking concerning manufacturing, it is clear that a dose of reality is sorely required. First: the focus on export-led growth. Here the Government seems to ignore some very basic facts, and appears to overestimate globalisation. Figures quoted in the Economist from ‘World 3.0: Global Prosperity and How to Achieve It’ by Professor Pankaj Ghemawat of IESE Business School in Spain indicate that the vast majority of economic activity is still based within the confines of national borders. Exports are equivalent to only 20 per cent of global GDP, foreign direct investment (FDI) accounts for only 9 per cent of all fixed investment and even in terms of venture capital, that most ambitious type of investment activity, only 20 per cent of capital is deployed outside of the fund’s home country. Even in terms of information, less than 20 per cent of internet traffic crosses borders. This not to say that exporting and international economic activity is not important, far from it. Nevertheless it is a basic economic insight that it is far more difficult for businesses to serve international customers. Furthermore the world is not flat; in general it is far easier for a British firm to tap into the EU market than the Brazilian one.

Many accept this facet of economic reality but argue that Britain should aim for ‘export-led growth’ because international competition hardens firms and immense income can be generated when a company taps a global market. Both true, however the deleterious effects of a focus on export-led growth are only really apparent when coupled with another misguided facet of the current Government’s thinking: the focus on ‘advanced’ manufacturing.

Listed in a Government report last year under the banner of ‘advanced manufacturing’ were the following sectors: aerospace, defence, bio-pharmaceuticals, microelectronics, chemicals and low carbon vehicle technologies. Undoubtedly the UK stands to benefit a great deal from the continued and hopefully increasing success of these industries, yet dogmatically focusing on them is dangerous.  Many in government seem to reserve significant scorn for ‘non-advanced’ manufacturing sectors such as steel, paper and glass to name but a few industries which still have a significant presence in the UK. The idiocy of this is that ‘advanced’ and ‘non-advanced’ is a false dichotomy, industries are interlinked and many businesses in ‘non-advanced’ industries have incredibly advanced production techniques even if their products are not similarly seen. Recent criticism of China’s lack of innovation and advanced industries ignore the fact the country is, in many sectors, leading the world in terms of innovative processes; in production and distribution.

This is not a diatribe against exporting, globalisation or technological development. Britain needs to ensure that its successful domestic firms are supported when they attempt to access other markets. Similarly the Government should be facilitating the expansion of new or ‘advanced’ industries. However these two goals should not be pursued to the detriment of the rest of the economy, the domestic or ‘non-advanced’ side. Some current policies, particularly in terms of energy and climate change, risk picking a few ‘winners’ to the detriment of many losers. In other areas, most notably, regulations and the credit market, the Government needs to do more to help all businesses.

Being radical and forward- thinking are laudable qualities for any government. However, British politicians have often viewed radicalism and ideological agendas with an appropriate degree of scepticism, in terms of economic policy this scepticism needs to be rediscovered by the current administration.