Economic growth still eludes the Coalition. The development of a convincing analysis and programme for (fiscally sustainable) growth is essential for the second half of the Coalition’s life up to 2015. The Lib Dems must take a lead role in developing it.
Before the economic crisis started in 2007 the signs of ‘systemic financial sector failure’ were all around us. Few spotted them, however. Several simplistic economic tenets have since been jettisoned, as politicians have learned about the economic concept of ‘systemic financial failure’.
So what is this ‘systemic failure’ ? In the banking and financial sector it has shown itself to be a complex combination of regulatory dependence and capture, dysfunctional reward structures, corporate governance failure, conflicts of interest, undue influence, legal loopholes, institutional fudge, sectoral custom and practice, and outright fraud.
Stripped of our ‘economic free ride’ from the financial sector, politicians’ attention has turned to the relatively poor performance of the UK non-financial commercial sector. Another educational process is gradually underway, as politicians discover that the UK’s non-financial industrial and commercial sector is also subject to ‘systemic failure’ of similar magnitude, as yet largely unseen. But just as simplistic analyses of the financial sector problems have not helped in solving them, the same applies to the commercial and industrial sector (e.g. calls for ‘easy hire and fire’ or ‘better managers’).
The symptoms of industrial and commercial systemic failure are familiar, however – only we don’t see them that way. For example, why does the UK motor industry do so much better under foreign ownership? Why do British conglomerates prefer acquisitive to organic growth, when they know it will be value-destroying? Why do civil servants understand so little of industrial and commercial life? Why are economic regulations so ineffective yet inhibiting, despite being so voluminous? Why is export performance so lamentable? Why is UK industrial performance so poor relative to that in Germany, Japan, South Korea, Brazil and Scandanavia, despite superior UK universities and research institutions, et al?
When so many studies have shown the value-destroying nature of mergers and acquisitions (MandA), with which British industry seems to be relatively obsessed, there is a case that there are systemic problems involved. Such studies have also pointed to conflicts of interest, and bizarre accounting rules, in the process. Profitable British manufacturers with a long, successful track record of exports tend to be untraded and family firms, relatively insulated from the equity markets.
Top UK civil servants frequently leave to lucrative top private sector jobs, especially with firms that are suppliers to the very departments those civil servants have come from. But to find people from the private sector working at different upper levels in the civil service is rare. For a top UK civil servant, a ‘businessman’ is an investment banker, not a CEO with employees to manage. – All symptoms of systemic dysfunction.
Studies on the background of executive directors of larger UK firms show an unusual bias to accountants and bankers; reflecting the obsession with MandA. Exemptions from competition rules still apply to banking sectors. Cartelisation through board appointments and undue influence in the boardroom is rife in the UK.
Many other sub-systems are dysfunctional. Financial services to small firms are riddled with unfair practices. The UK is ineffective at identifying and responding to demand from commerce and industry for skills and expertise in the educational system. Opaque financials are the norm in larger UK firms.
The Coalition has had to grapple with complex systemic issues in banking and financial reform. Now we have to apply the same approach to commerce and industry in order to return to high growth. Herein lies the future ‘British Reform Model’. The UK Lib Dems, with fewer attachments to vested interests who may object to key systemic reforms, have a key role in furthering the UK’s approach.
* Paul Reynolds is an independent foreign policy & international economics adviser, who has had senior political roles in Afghanistan, Iraq, and Pakistan, among other countries across the globe.