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 works with multilateral organisations as an independent adviser on international relations, economics, and senior governance.
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9 Comments
quote – “The UK is ineffective at identifying and responding to demand from commerce and industry for skills and expertise in the educational system.”
So the educational system’s main function is to provide pre-trained, ready-skilled, expert employees for commerce and industry, is that right?
I certainly agree that the incompetence and self-interested self-deception of academics, economists and financial wizards has been staggering. Short of shooting or imprisoning those people, we need to somehow either learn to get along without then, or develop ways of disciplining their mad utterances so that only the random sensible things get taken seriously.
I suggest that a “British Growth Model” has to be integrated within, and be part of, a “European Growth Model”, which itself needs to functions within a “Global Growth Model”. Similarly for things like financial rules.
It is a tragedy that we are not part of the Eurozone – we might have been able to foresee and avert the European crisis – and it is even more tragic that Cameron and Osborne have misunderstood the nature of Europe so much as to have voted us out of the decison-making process there altogether.
There are some very important points here – but I’d love to hear some suggestions for ways to solve them. Is it low capital stock? Is it education? Is it incentivisation? We were the first industrialised country so it can’t be impossible for us to have an industrial base.
To Mike Cobbley. There is no suggestion that the sole purpose of the education system is to create pre-tailored drones suited only for the benefit of big business. What a horrendous aim that would be. Education has as it’s central (liberal) aim the creation of rounded, free thinking individuals equipped with undertanding and skills in pursuit of fulfilling lives and social participation. Some educate themselves for its own sake. Some education is ‘blue sky’ science, or history merely to enhance our understanding of the world – and ourselves. Of course much education is directly or indirectly vocational, and vocatons are diverse and constantly changing. For much of the population, employment is a key factor in educational choices, unsurprisungly. The response of educational institutions to this diversity of aims and needs, is important fir the life of the country. One factir in this is the set of demands from commerce, the source of the majority of employment and self employment. If state institutions are to take these needs into account, they should at least do it properly and ensure they have an enlightened view of needs. What is lamentable is that in much of the UK there are masses of poor unemployed, whilst local employers suffer from ‘revealed’ and latent skill shortages. That can’t be a beneficial state of affairs. And it’s not just about ‘big business’. The majority of employment in the UK is in small businesses, and the UK to its credit has a higher proportion of employment in small firms than any other OECD country.
To Charles Beaumont. In a short article it is impossible to detail all the established (but unimplemented) solutions to the problems referred to. These no question of there being an absence of ‘what to do, and how to do it’. The obstacles are rooted in unsuitable institutional structures and the regrettable lack of understanding on the part of civil servants, many of whom seem to hold to the motto ‘If I don’t understand it, I will swear it cannt be done’.
As a manufacturer, I am very aware of the way a Britain dominated by the financial sector slowly weakens the other parts of British wealth creation. I am thinking along similar lines to Paul, and believe that there can be a real opportunity for the Lib Dems to be the party that nurtures growth and wealth away from the City of London.
The roots of the problem go back to the disastrous economic path our country was pushed on from 1979 onwards.
We will only save this country when that is realised – when the political world stops treating the Prime Minister of that time as some sort of heroine who saved the country and instead recognises that she was in fact the reverse of what propaganda has painted her. The policies she initiated, and which have been followed by every government since, have led to much of our country being sold off and taken over by overseas control, to the destruction of the idea that hard work is the way to wealth (because it was all about making money through owning things rather than working), and to family disintegration ground down by commercial and consumerist pressures.
Matthew,
“The roots of the problem go back to the disastrous economic path our country was pushed on from 1979 onwards.”
The financial journalisr, Dan Atkinson,, goes back further to World War 1 in this piece Facing relegation: Why Britain’s ‘undeveloping’ economy means the country could be about to join the Third World
The author concludes:
“Britain is in a state of denial, our leaders convinced that the economy is a winning side. The alternative is to accept that we are starting from scratch. Developing countries need a development model, and undeveloping countries such as Britain do too.
Two approaches are on offer. We could try to emulate the so-called Swedish model, with a social-industrial-government partnership and extensive public welfare, or we could aim to be an Atlantic Hong Kong, with minimum State interference, low taxes and only basic welfare services.
We must choose. It is our long-term refusal to do so that has led to our current predicament.”
An excellent post which asks the right questions.
The system that exists – that has existed in Britain for a very long time – is structured to facilitate economic rent extraction rather than socially useful investment. The ways this is done are so subtle, so complex and so interrelated that it is difficult to tease out what is really going on – but not impossible.
At the root the neo-liberals belief system is that provided government lays down a red carpet for capital all will be well. Hence for instance Osborne’s moves on tax for big companies so that what was once (illegal) evasion is now (legal) avoidance and to cut the top rate of income tax. From a Tory sectional point of view this is of course entirely reasonable – those who start with big pools of capital will get even more and also the political power that inevitably goes with it; in promoting such policies they are serving a certain constituency – a rather small one but a disproportionately powerful one. Hence also the very same people that argue for deregulation of everything also want strict regulation of unions – nothing must be allowed to interfere with the accumulation of capital in their hands. Economic ‘theory’ is largly nonsense driven by and derived from self-interest and the boundary between neo-liberalism and an outright kleptocracy is a gradational one.
An alternate view is that, while capital is undoubtedly a vital part of the economy it should always be subservient to the needs and interests of ordinary people which should come first. In this universe capital is rather like a river in a dry country; it is necessary for irrigating the crops but must be channelled and directed and not allowed to go to waste. If it gets out of control it can do enormous damage.
In Britain today we have a City that enriches its participants vastly; it bets incessantly on share prices but actually provides remarkably little capital to industry. It looks after our pension pots but while doing so gambles with them for its own advantage creating costs substantially higher than necessary while the banks enjoy covert subsidies via government guarantees and ultra-low interest rates amounting to vastly more than the budget deficit. Meanwhile the vast (and expensive) superstructure of regulators pretends to regulate but is actually about as useful as a chocolate teapot because their real job – as distinct from their official one – is to present a facade of respectability but actually not to get in the way.
So what could we do differently? Well think back to that irrigation analogy and think about how to channel savings via the banks into investments. This might mean limiting the amount the banks can invest in property or overseas so they are constrained to invest in businesses. Or it might mean setting up regional banks dedicated to business lending analagous to the way building societies work for housing. It would also mean a complete reworking of how the City relates to big firms so CEOs aren’t judged largely on quarterly results (which virtually mandates both short-termism and fiddling the books) and so they are properly subject to oversight on pay and strategy. When it comes to tax establish a ‘pay to play’ principle meaning that firms wanting to do business here must pay a proper amount of tax on their UK profits. Etc., etc.