Devalue the Pound For Growth and Jobs
- Sterling should be allowed to fall to boost GDP and cut unemployment
- Over-priced pound has made exports uncompetitive and stunted growth
- Spending cuts risk “dismally poor” growth and years of economic torpor
Devaluing the pound by about a third would help get the UK economy growing in line with the world average and reduce unemployment to about 3%, the Labour donor John Mills argues in a new pamphlet for Civitas.
Calling for a “radical rethink” on the economy, the entrepreneur and economist says sterling has been over-valued for most of the time since the industrial revolution, meaning British goods have been uncompetitive overseas, stunting the UK growth rate.
“The UK economy needs lower average export prices to enable our exporters to compete in world markets,” he writes in A Competitive Pound for a Stronger Economy.
“To achieve this, we clearly need to stop over-charging the rest of the world for our domestically incurred production costs. The UK needs to set an exchange rate that is sufficiently competitive to help us recover our export capacity and ability to pay our way in the world.
“This would help us get back to a growth rate of 3% to 4% per annum – about the world average – and to get unemployment down to perhaps 3%.”
Mills argues that the fall in the pound in recent years has – contrary to some commentators’ claims – helped spur growth, but that the pound still has much further to go.
“It is because sterling was so over-valued during the 2000s that we have been blinded into thinking that a $1 to $1.50 valuation must be competitive because this is much less than $2.
“It is not, as our share of world trade and our balance of payments show all too clearly. But it is also not true that there was no response to the reduction in sterling’s value. In volume terms, our exports of manufactured goods grew by 16% between 2009 and 2011 and by 28%by value.
“The problem was that sterling was still far too strong for import substitution to be a major factor. As a result, from a higher base, manufactured imports rose over the same period by 14% measured by volume and 19% by value. Even so, these figures show a significant improvement and were certainly much better than would have been the position if sterling had remained at $2 to £1.”
He argues that sterling needs to come down by roughly one-third to achieve a 3% to 4% growth rate.
“Reducing the exchange rate by about one third would have a dramatic effect on both our capacity to sell more exports and our propensity to import. Net of any efforts made by foreign suppliers to reduce their margins to hold onto market share, imports would become 50% more expensive than they were before, thus very strongly encouraging home production of goods when previously it was much cheaper to buy in from abroad.”
He also warns that cutting government expenditure is more likely to reduce GDP than the deficit because it will such demand out of the economy.
“It may well be the case that government expenditure is uncomfortably high as a percentage of GDP and well in excess of the income available to finance it in all these economies, but the way to tackle this problem is not to cut public expenditure. It is to improve business and consumer confidence and to get the foreign payments deficit under control.”
He warns that the current consensus about the need for cuts means the UK “may sink into the same sort of economic torpor which has gripped Japan for almost all of the last two decades”.
“Even the Labour leadership is now talking about accepting most of the economic policy framework established by the Coalition government. Almost everyone seems resigned to there being no alternative to years of low or non-existent growth for the foreseeable future,” he writes.
“At the moment, what little increase in GDP there is in the UK barely keeps up with population growth. No wonder that living standards are stagnant, when they are not falling. As a result of this consensus that slow growth and high unemployment are inevitable, and that cut-backs and austerity are the only way ahead, we are in great danger that our economic performance is going to remain dismally poor for the foreseeable future.
“Without radical rethinking, the UK and much of the West more generally may sink into the same sort of economic torpor which has gripped Japan for almost all of the last two decades, although there are signs that very recent policy changes may alter the picture there for the better.”
He also warns that supply-side initiatives like investment in infrastructure and improving access to finance will do nothing to solve the problem of lack of demand.
“In the absence of more purchasing power, all these policies to improve efficiency and productivity will tend not to increase output but merely to redistribute existing output in a depressing zero sum game. If total output stays the same, as a matter of simple logic, increased output per head in one part of the economy has to be matched by falling productivity somewhere else.”
Notes
A Competitive Pound for a Stronger Economy is published today by Civitas: Institute for the Study of Civil Society. A PDF can be accessed below. Hard copies are available on request.
John Mills is an entrepreneur and economist. He graduated in Philosophy, Politics and Economics from Merton College, Oxford, in 1961. He is currently chairman of John Mills Limited, a highly successful import-export and distribution company. He has been Secretary of the Labour Euro-Safeguards Campaign since 1975 and the Labour Economic Policy Group since 1985. He has also been a committee member of the Economic Research Council since 1997 and is now Vice-Chairman. He is also Chairman of The People’s Pledge campaign for a referendum on Britain’s EU membership, and Co-Chairman of Business for Britain. His previous Civitas publications include A Price That Matters (April 2012) and An Exchange Rate Target: Why we need one (April 2013).