Last week was, behind the scenes, an important one for the future of UK economic reforms. Four reports were published which were, one might say, bang on for the new mantra of ‘re-balancing the economy’.
The first was Lord Heseltine’s report on the role and methods of the UK government in ‘achieving’ economic growth. The other three were reviews conducted via the Bank of England in response to criticisms of its handling of the financial crisis – specifically its bailouts, and its evident surprise in 2007 that much of the UK banking system would collapse without such bailouts.
The Heseltine report was somewhat narrow in ‘scope and remedy’ in that it focused on the UK’s low productivity. It defined the obstacles to growth in terms of how the state uses its economic development money and expertise – specifically that business support and infrastructure development cooperation were both badly run and too centralised. The solutions proposed included a consolidation and then decentralisation of business support budgets and private infrastructure investment facilitation activities. Heseltine also proposed one of my old calls – for a Cabinet Committee on economic growth.
The implied but obvious point of this report is that the government, two and a half years into its life, has no robust definition of ‘the growth problem’ and no robust strategy.
The three reports from the Bank of England very politely conclude that its very governance systems were flawed, particularly that they were too hierarchical and deferential. The Tory MP Andrew Tyrie, Chairman of the Treasury Select Committee, has been a vocal critic of the Bank of England’s governance and that of the Financial Services Authority. He has criticised these three reports, for being too polite, but more importantly for being too weak. He has argued that a more comprehensive and independent report was needed on how on earth the well-funded and detailed system of bank regulation by the Bank of England and the FSA, with extensive bank-by-bank monitoring, could have been ‘surprised’ by the UK banking system being in a bankrupt state! Tyrie’s implied but obvious point is that the UK still has no robust definition of the banking problem, and no robust set of remedies beyond ‘Chinese Walls’ between retail and investment banking, still unimplemented.
Both sets of issues represent a failure of the ‘political class’ to get to grips with institutional failure. Transforming the support role of the British state in non-financial sectors so that it up there with Japan, Germany and Scandanavian countries, is a major but necessary task yet to be embarked on.
I recall a small meeting I attended at the Bank of England some years ago at which Alan Greenspan was present. Bank of England officials quietly explained that they were in favour of a more monopolistic UK banking sector and generally against new market entrants and the kind of dynamic banking sector found in successful economies. The reason given was that it makes for a strong and soundly resourced sector. Well, it didn’t work did it ? As ever, monopolistic sectors end in tears. The results are evident in Britain’s communities where Heseltine wants to devolve powers. The wonderful case of ‘The Bank of Dave‘ shows clearly how this strategy in favour of a restricted sector is still being applied, to the clear detriment of UK growth.
So can the Coalition finally get to grips with these two challenges? They will require extraordinary effort. Perhaps the answer would be to ensure that an outsider is made Governor of the Bank of England. My suggestion would be Sharon Bowles MEP. Perhaps Heseltine should get his Growth Cabinet Committee, but with Vince Cable as Chair. But somehow the political class must overcome the entrenched obstacles.
* 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.