Garotted by green tape and timidity

In: Uncategorized

17 Oct 2011

This is my regular weekly Perspective column for Fund Strategy magazine.

Given how hard Britain is finding it to escape from its economic morass, it is strange that the economic solutions sound so easy. GDP is still substantially below its peak in the spring of 2008, before the financial crisis really hit, despite two years of supposed recovery. Yet boosting exports, particularly in manufacturing, should in theory narrow the trade deficit and help lead towards renewed growth.

Politicians from all the main parties recognise the importance of exports, even though there appears to be no upward trend. Back in February the government launched a White Paper, a statement of intent, which said: “The UK now needs to rebalance its economy, from the public to the private sector and toward increased exports and investment.” It was endorsed both by David Cameron and by Vince Cable, the Liberal Democrat business secretary.

George Osborne, the chancellor, has also promised government action to bolster exports, despite having a reputation as a free marketeer. In March he told the Welsh Conservatives: “What I want to see is a manufacturing revival.”

Labour takes a similar view. In April 2010, while still in government, it launched a Plan for Growth, which stated: “We need more engineers and less financial engineering.”

Despite all the talk the economy seems to be going in the opposite direction. Thousands of people lost their jobs at firms such as AgustaWestland, BAE Systems and Bombardier in the past few months. Meanwhile, the trade deficit has remained stubbornly wide.

Having said that, some of the statistics used to talk up British manufacturing are often less impressive than they seem. Britain may be the seventh largest manufacturing nation in the world, but it was once number one, and it has steadily fallen down the rankings. It should not be long before it drops further still as more emerging economies work their way up the list.

Although politicians and experts have long recognised Britain’s relative decline in manufacturing, the 2008 financial crisis gave the debate an added impetus. It looked likely that the financial sector would remain troubled for some time to come so the need to bolster manufacturing became more pressing.

Why such moves have so far failed is a big subject but it is possible to make some tentative points. Perhaps the biggest barrier is cultural rather than narrowly economic. In an era where risk aversion is so strong, there is a reluctance to invest – particularly in areas where significant amounts of capital are needed.

This reluctance extends to government as well as private companies. Take the consensus among all the main parties not to build a third runway at Heathrow, despite the overwhelming business case for it. The government’s environmental fears are stopping it from building infrastructure, even where it would have economic benefits. This is only one of many cases where what could be called “green tape”, regulation related to the environment, is restricting economic growth.

Despite the problems there are also opportunities that could benefit manufacturers. The growth of the emerging economies could mean large new markets for Britain’s goods and services. At present total exports to Ireland are only marginally less than those to Brazil, Russia, India and China combined. This indicates the potential for substantial growth for exports to the developing world.

On the other hand, Britain is likely to face increasingly tough competition for these and other markets. Not only is it competing against emerging economies and traditional exporters such as Germany, but other deficit countries are also trying to catch up. Back in January 2010 Barack Obama promised to double exports from America, another persistent deficit country, by 2015.

Although in principle all countries can export, it is mathematically impossible for every nation to have a trade surplus. Without a profound cultural shift it is hard to see how Britain can bolster its exports, despite all the main parties professing this as their goal.