Rebalancing the British Economy

From the nineteen eighties the world and in particular Britain’s economy has been shifting from manufacturing towards finance. There was a fundamental shift in the UK and the USA towards what is known as a ‘knowledge economy’. This has created a bubble fuelled by ‘more productive’ financial instruments. The regulatory systems became light touch as the money was flowing. This all came to a head in 2008 with the global financial crisis which showed the fragility of the growth. Paul Volcher former chairman of the Federal Reserve Board said the ‘Only socially useful financial innovation of the last 50 years has been the ATM!’

As the financial sector has prospered the hidden story has been the decline of manufacturing. Once at the forefront, Britain now languishes 20th on the world rankings. Manufacturing is a long-term way of achieving economic growth which has gone out of fashion. The easy millions and billion being made in the city has become the more popular option for obvious reasons.

The solution is not as simple as to just start making things again. The UK has fallen behind in terms of technological innovation. Research and Development investment has been reducing due to the need for companies to show increased profits now and not consider the long term impact. This means that we are no longer at the forefront in many sectors making it hard to compete with the Germans or the east.

To get an understanding of the scale of the problem the current trade deficit stands at three and a half billion pounds. As an island nation which needs to bring in many essential products a deficit is understandable however the scale is disproportional. Through the 1970’s Britain maintained an almost zero trade deficit. In the eighties there were even periods of surplus trade. After a massive deficit in 1989 there has always been some level of deficit. This issue is being addressed with a greater emphasis on helping new companies but manufacturing is still a minor segment of the economy. Trade is also being aided by a weakened pound value so the numbers may suffer once value is regained. (http://www.tradingeconomics.com/united-kingdom/balance-of-trade)

Manufacturing has been dying due to one primary reason which is the lower labour costs available in the east especially China and India. This has meant labour intensive processes have moved offshore. Other developed nations have taken the path of making specialist equipment like Germany.

Germany was mocked for its slow level of growth while the UK steamed ahead however the current situation has turned the tables. Germany is now in a strong stable position with an economy thriving due to a strong manufacturing sector. This focus on steady long term growth is what is needed rather than a hungry quest to make a quick buck!

Now that we have seen the extent of the problem that we face we have to look at what needs to be done to rebalance the economy so we don’t return to the same problems again. In my opinion there are 3 steps which need to be taken to achieve balance.

Increasing regulation

The first and obvious step is to strengthen regulations on the financial industry. The term too big to fail was used as a reason to bail out the major financial institutions by the UK and US governments. The banks hold enormous power and must be held accountable for their actions. We must make sure that they are not able to act in such a reckless fashion again.

Encouraging business to start & grow

The fiscal meltdown has meant a drying up of investors making it very difficult to start a business. A new manufacturing business has two benefits of creating wealth which percolates through the market and also of creating jobs.

There are a number of measures which can be taken to facilitate this. For existing small companies, the government needs to give tax breaks for increasing number of employees and also make it easier for them to borrow capital.

In the US there is a new move toward seed funding which has increased from 472 new start-ups in 2009 to 1,749 in 2012. This has come on the back of a new wave of “start-up schools” which puts people with ideas and people looking to invest together. These schools also teach vital business skills that people may need in running their own business. The number of venture capital firms has more than halved since 2000 from 1000 to 462 however the number of deals made has increased from 418 in 2009 to 692 in 2012. This kind of approach should be encouraged in the UK to develop more ideas and make it easier for people to start a business.

Reducing the trade deficit

The balance of trade is maintained by keeping the selling and buying at similar levels. Where possible, every country should aim for a positive deficit by selling more than buying. This is obviously difficult as Britain is a small island nation where many things need to be imported from bananas to cars. This deficit currently stands at approximately 3 billion pounds. This figure fluctuates wildly and can be small at some times of the year. During the industrial revolution and for some time after, Britain was a global manufacturing hub. This is no longer the case with many companies moving their manufacturing to China due to the high cost of labour. This problem needs to be rectified, with a strong export sector which will create jobs and mean the UK becomes more self-sufficient. There are signs of this already improving with companies such as Jaguar Land Rover opening new factories and so creating jobs and exporting the cars to Europe.

It’s not all doom and gloom, the UK is no longer in recession but, it’s still coughing from the sickness of an unbalanced economy. It is an issue which needs to be addressed for long term stability.