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Those who have done well out of globalisation need to pay more attention to those who have not been so lucky

John Mills, June 2017

2016 was the year when the UK voted for Brexit and when Donald Trump was elected president of the USA. Both were events which the political elites either side of the Atlantic neither expected nor wanted to see happening. They both occurred because of heavily discontented electorates. Across the whole of the western world there is an increasing divide between those who are doing well and who are confident and contented and those who feel left behind, undervalued and alienated, with these discontents manifesting themselves in increasingly strident populist nationalism. There is a clear reason why this is happening.

The big divide in western societies nowadays is between those who have done well out of globalisation and those who have not benefited from the changes which increasingly liberalised trade and financial flows have brought in train – or at least by nothing like as much as those who have. This divide is now showing serious signs of destabilising the reasonably stable political environment which the West has enjoyed for many years. Indeed, at worst, it may pose a potentially existential threat to liberal democracy itself, if nothing is done to stop our politics sliding further and further towards irrationalism, protectionism and xenophobia as a result of electorates losing more and more faith in the capacity of those governing them to do so reasonably competently and fairly. All societies are unequal and history shows that free electorates are willing to tolerate this state of affairs, recognising its inevitability, but only provided that it is not to excess. Current developments, however, suggest that we are pushing against the limits of what an increasingly large percentage of voters are prepared to accept as part of what they think is a reasonable social compact.

This might not matter so much if those protesting about the unfairness of the way they feel treated had leaders with policy platforms which were reasonably likely to improve the conditions of their supporters. Unfortunately, this does not generally appear to be the case.  Lashing out against austerity is not a policy if there is no understanding about how to get the economy to grow and to become less unbalanced, so that austerity becomes unnecessary. Declaiming about the downsides of globalisation and trade liberalisation – which may well have not have benefited many people very much – is not a policy for making the situation less unfair. Protectionism may help some sectors of society but always at the expense of making others worse off. Retreating from international obligations generally gets reciprocated, making everyone’s future less secure. Instead, we need rational policies which will deal with the underlying problems of dashed hopes, resentment at static living standards and mounting inequality by making the beneficial impact of global trends more widely felt; by getting the economy to grow so that everyone is better off; and by restoring sufficient faith in the competence and good intentions of our political governing class to make our democratic future more assured and appreciated.

The reason why we suffer from the increasingly dystopian predicament felt by many people to be overtaking them is that the UK as a country – mirroring conditions across most of the West – is too heavily divided between those who are doing well and those who are having a much rougher time economically, with the former too ready to blame the latter for their lack of good fortune. The South of England is now a different place from the Midlands and the North. Those who voted Leave in the June 2016 EU referendum generally have a very different view of life than those who chose Remain. If we want to restore the cohesion which is vital to make liberal democracy work, we need to bind our communities back together again. Sharing out the fruits of prosperity more evenly must be the best way of doing this. Most of the reason why this has not been happening to anything like a sufficient extent is that for a long time, we have run our economy so relatively poorly as a result of policy deficiencies.

We have allowed the proportion of our GDP which we invest to drop to a point where productivity growth has almost completely stalled and where, as a result, median wages, allowing for inflation, are barely higher than they were before the 2008 crash. We have deindustrialised to such an extent that literally millions of people have lost their good blue-collar jobs, leaving them in far too many cases with low productivity, unfulfilling, low paid and insecure service sector employment. Because we have lost nearly all our light industry, we have foregone the increases in output per hour which this sector of our economy is uniquely good at generating. We have also allowed disparities in income, wealth and life chances generally in different parts of our country to proliferate to a completely unacceptable extent. In addition – crucially – we have lost our capacity to pay our way in the world, leaving us with a vast balance of payments gap every year, which we have only been able to fill by selling off national assets on a scale unmatched anywhere else in the world and by getting deeper and deeper in debt to foreign countries.

Because we are not earning the standard of living which, as a nation, we enjoy, we have had to borrow vast sums of money to fill the gap both as a nation, as consumers and through our government. To try to stimulate the economy, interest rates are lower than they have ever been but the result has been to make it much easier for the rich than the poor to benefit from the asset inflation which ultra-low interest rates have generated, exacerbating the tendency for inequality to become both greater and increasingly obvious to everyone. Our society has become more and more divided on both a socio-economic and a regional basis. Those who have done well out of liberalisation and globalisation enjoy wonderfully secure, well paid and interesting lifestyles, while those who have lost out struggle with tight budgets, static or declining life chances and dwindling hope.

The fundamental reason why we suffer from all these problems is that we have allowed our country to become so deeply uncompetitive with those along the Pacific Rim – and with others, such as Germany and Holland, which have wage rates just as high as ours but who enjoy much higher productivity as a result of greater capital equipment per worker and much better trained workforces than we have. The reason why we have allowed ourselves to drift into this condition is that for many decades our exchange rate has been far too high for manufacturing to thrive.  It is true that we have a vibrant and very successful service sector with a large export surplus, but this does not make up for the much larger deficit we have on goods, about 80% of which are manufactures.

Because most services are not very price sensitive, the exchange rate does not make a huge difference to those who sell them abroad, buttressed by the fact that we have strong competitive advantages in our language, geography, legal system, etc. which make our services attractive to foreign buyers. For manufacturing, however, where we lack comparable natural advantages, and especially for light manufacturing which is very price sensitive, the exchange rate – essentially what we charge the rest of the world for our labour costs – is absolutely crucial.  If we charge too much – as manifestly, for a long time, we have done in relation to the level of productivity we have actually achieved – all the usual adverse consequences described in this book are bound to follow.  Our share of world trade has gone down because we have not had enough to sell to the rest of world at prices foreign buyers are prepared to pay; investment has faltered because most manufacturing has been unprofitable and large amounts of it have been closed down; because of poor prospects competent people have been put off a career making and selling, so our industrial management in too many cases has got worse and worse; balance of payments problems have become increasingly acute; and deflation, low growth, static incomes and increasing inequality have all followed.

If we are going to break out of this vicious downward spiral, we need to recognise what the fundamental cause of it is and to take action to counteract it. We need to get our economy rebalanced. We do not need to have as large an industrial base as countries such as Germany and Singapore because we have such a strongly exporting service sector, but we do need a bigger manufacturing base than 10% of GDP. Something like 15% of GDP looks like being a reasonable target, if we are going to be able to pay our way in the world at least to a point where we are not accumulating debt on an exponential basis in relation to our capacity to service and eventually to repay it.

To retrieve the degree of industrial strength we need, we will have to have a much larger percentage of our GDP than at present spent on physical investment – perhaps 20% or more rather than the current barely 13%. This will only happen if light industry is profitable. No industrial strategy is going to work without this condition being fulfilled. Public sector investment – in roads, schools, hospitals, rail and housing – requires resources but not profitability to make it happen. In the private sector, without positive returns on investment being clearly achievable, there is no prospect of expenditure on the required scale materialising.

If we ran policies to get sufficient industry back to get our economy rebalanced, it would obviously make sense for most of the new manufacturing to be located in our erstwhile industrial areas rather than in London and the South East, and this will go a long way towards evening up prospects between different regions of the country. It will also produce a fund of new well paid jobs where they are most needed. The already well-favoured areas of the country – London in particular – need to continue to be encouraged to flourish while other parts of the country, which have no done so well, are given maximum opportunity to catch up.

The key to getting all this done is for the authorities – and politicians, the commentariat, the academic world and public opinion – to realise just how crucial competitiveness is in regulating our relationships with everywhere else in the world. We need an exchange rate policy just as badly as we need to make sure that we have fiscal and monetary policies which make sense. We cannot afford any longer the neo-liberal insouciance as to the value of the pound on the foreign exchanges – leaving it to market forces on their own to fix the going rate, with no official guidance or involvement. Very few other countries in the world with the capacity for controlling their own destinies do so, and nor should we. This does not mean that we would need to operate on a beggar-thy-neighbour basis, running a surplus which has to be someone else’s deficit. Instead the most sensible policy would be to run a manageably small deficit while making sure that we maintain a fair and sustainable share of world trade and the manufacturing capacity to underpin it, so that we are not falling behind everyone else all the time.

For the UK electorate does not look likely to tolerate in future the static wages and lost opportunities from which far too many of its members have suffered. Those who have done well need to pay more attention to the lot of those who have not been so lucky. Using an activist but benign exchange rate policy as the lever for doing so has a much better chance of success than any other policy option on the horizon.

This is an edited extract from Britain’s Achilles Heel: Our Uncompetitive Pound, published by Civitas

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