2014 01 – Britain’s Economy

Book Review by Mark Langhammer

“Going South:  Why Britain will have a Third World Economy by 2014”:

Larry Elliott & Dan Atkinson, Palgrave MacMillan, 2012 ISBN 978-0-230-39254-0

The past month has seen George Osborne argue confidently that the economy is emerging from recession. In November, the Treasury published a positive take on the economy, collated from 40 or more city analysts and institutional forecasters[A]. GDP is to rise by between 1.2% and 1.6%, with forecasts for 2014 ranging between 1.8% and 3%. Governor of the Bank of England, Mark Carney considers that the recovery has “taken hold” with unemployment to fall more sharply than predicted: “The economy is growing robustly as lifting uncertainty and thawing credit conditions start to unlock pent-up demand.”[B]

Britain’s Boardrooms certainly concur with FTSE 100 Directors pay having risen by 14%, Incomes Data Services estimating the average pay for FTSE 100 bosses has reached £3.3m.[C]

So, everything’s fine, then?  In this overdue book review of Larry Elliott and Dan Atkinson’s “Going South”  Labour Affairs invites you to consider an alternative analysis to that of Obsborne, and his Treasury analysts.

Larry Elliott, the economics editor of the Guardian and Dan Atkinson, economics editor of the Mail on Sunday have followed up previously published critiques on the British economy

– “The Gods that Failed” and the prescient, pre-bust 2007 polemic on New Labour economics “Fantasy Island” – with another excellent offering.  “Going South” is a confident stab at predicting British economic decline towards “de-developing” third world status, an assessment of how we got there, a guide to how to survive the fall, and an attempt at what needs to be done to improve matters in the context of rapidly narrowing economic options.

The book opens with a comparison of Britain’s economic position in pre-war 1914 with the anticipated position in 2014 in “Lagos upon Thames” concluding that Britain is  “going backwards, de-developing, heading for third world status”.  Notwithstanding its permanent representation on the UN security council, its global diplomatic reach, its military capability (and military overspending) some world class universities and a smattering of genuinely global companies, Elliott and Atkinson argue that the “quick fixes with which we have sought to disguise our shrinking economic performance – imperial preference, European Community membership, North Sea oil, financial de-regulation, asset stripping and periodic property and house price bubbles – are all used up.”

Predicting a fresh financial crisis, they argue that there is no good reason why the UK cannot go the same way as Argentina or Lebanon. “Once the workshop of the world, the United Kingdom is now deeply in debt, with a workforce that is not only poorly educated and unproductive but also, thanks to immigration, considerably in excess of the economy’s medium term needs”  with the biggest budget deficit of any G20 economy and with a manufacturing base “so shrivelled at just 10% of the nation’s output that it cannot take advantage of a depreciating currency.”

 The argument for impending third world status continues: “Since the start of the crisis, the UK has borrowed more in seven years than in all its previous history. It has impoverished savers by pegging the bank rate well below the level of inflation and indulged in the sort of money creation policies normally associated with Germany in 1923, Latin American banana Republics in the 1970s and, more latterly, Robert Mugabe’s Zimbabwe.”

The Elliott, Atkinson summary of the current UK position goes as follows:

“The City has replaced manufacturing as the hub of the economy.Those in charge of the finance sector rook their customers and their shareholders to become filthy rich. Pay and rewards are skewed heavily towards the top 1% of earners. Everybody else has to put up with wage restraint, but is able to consume more by virtue of the City’s willingness to load everybody up on debt and the Bank of England’s willingness to facilitate asset price bubbles by keeping interest rates low. Most work is in low skill jobs, with large dollops of public spending used to create white-collar jobs for graduates that would, in previous eras, have been held down by school leavers … There was in addition, a mountain of off-balance sheet liabilities from the live now, pay later private finance initiative, the future cost of public sector pensions and the need to provide care for an aging population .  There is, however, a difference between credit acting as a lubricant of the economy and credit acting as a powerfully addictive drug.”

In a chapter on the “Great Reckoning” Elliott and Atkinson say that the “ability to keep the lights on has always been one easy way of distinguishing between a developed and developing country: the United Kingdom is perhaps within five years of failing the test.”

Quoting climate change, tax evasion to the tune of around £70 billion per annum, the failure to civilize its “zombie” banks when the chance arose, they conclude that:

“When the next crash comes, the post-mortem examination on the UK economy will conclude that the banks were not fit for purpose, failing in their basic task of taking in savings and recycling them as loans for productive investment.”

Who could argue with that?

An interesting chapter on “Hanging on in there” advises on likely developments in the fall towards third world status. They predict that less use will be made of PLCs or limited liability vehicles, with more emphasis towards partnerships – a move from communities of law to communities of trust.  Within a less trustful environment, fruitful investments may include stand alone domestic equipment (generators, air-conditioners, water filtration systems, self contained gas supplies etc), as well as in ‘point to point’ communication, predicting “a noticeable come back for those services which have no server, no memory, no hard drive and no other users of that particular channel; telephone calls, letters, telexes and the traditional point to point fax machine”.

They also predict that arable farms may be a useful investment bet, given the likelihood of food shortage. “Water, food and energy are about to become scarce” argue Elliot and Atkinson. Thefts of crops and livestock will become more prevalent. Land or property investments will favour gated communities, or properties under the mansion tax threshold, which they expect to be implemented. They assume, as a matter of course, that there will be more civil unrest and rioting such as that seen emanating from Tottenham in 2011

Concluding that “..no democratic country has ever imposed so great a burden on its ordinary citizens for the benefit and protection of that country’s wealthiest élite. The worst kleptocrats of Africa and Asia must be watching in astonishment. They never knew it could be this easy”

The crude choice is on which industrial development model to follow.  The absence of a vocational economy is noted in a scathing assessment of the apprenticeship programmes: “the reality was that many were simply 12 week training courses provided by private sector firms with no guaranteed jobs at the end. Historically, apprenticeships had always been a form of cheap labour, but for the young worker there had been the promise of a ‘trade’ at the end of it.  Learning how to stack a shelf at Tesco or how to collect the shopping trolleys from the far flung corners of the car park at ASDA does not really live up to the sepia tinted image.”

Elliott and Atkinson argue that Britain has been following an active interventionist policy, in support and defence of the City of London and financial speculation.  An analysis in favour of the “Sweden” versus “Freeport Ho” models is undertaken, but noting that the traditional UK response has been “to bang the drum for free trade, to reject the idea of an activist industrial strategy …and to assume that a lower exchange rate and some severe belt tightening by the state will lead to a rebalancing of the economy.”

The thesis that the UK supports an active industrial strategy is politically useful, just that support is for the wrong vehicle – that of the City of London, speculation, financial chicanery and the rest. This has resulted in the City “crowding out” manufacturing and productive industry, with the best university talent heading for the ‘Square Mile’.

The argument is clear. What is less clear whether any major party on the British stage is capable of using such an argument.

Strategic Planning would, for instance, require turning RBS (80% nationalized) into a state investment bank with a remit of providing a long term source of cheap funding to manufacturing – quoting Cambridge economist Ha-Joon Chang as noting “there is no recorded example of a country successfully making the leap from developing to developed status without the use of protectionism.” However, they argue that there is little point in putting up tariff barriers “unless there is something to protect. At present, there is not …” 

Elliott and Atkinson are not blind to the pitfalls, understand the failure of the British left in rejecting industrial democracy in the 60s and 70s, and are admirers of the Mittelsand companies and industrial systems in Germany whilst aware of the difficulties of transporting this solution to a culturally different  society such as the UK. They nonetheless point encouragingly at recent TUC efforts to learn “German Lessons” in the search for a robust industrial policy.

Another excellent book, but likely to be wasted on the British centre left!  Read it and weep!

[A]              www.gov.uk/govedrnment/publicatioins/forecasts-for-the-economy-november-2013

[B]              www.bankofengland.co.uk/publications/Pages/inflationreport/2013/ir1304.aspx

[C]              FACT service, RSD Publications Vol75, Issue46, November 2013

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