To summarise the current UK position, ‘demand management’ is out (no money left and anyway it didn’t work), so growth must come from supply-side measures (excluding subsidies or protectionism), and from ‘natural’ private sector growth (born of financial stability and debt reduction).
With the peculiar separation in the UK which has evolved between the ‘real economy’ and the civil service, media & political elites, this has left the political system scratching its head over how to achieve ‘fiscally sustainable quality growth’. The result has been a series of ad-hoc programmes – some designed to substitute for an ailing banking sector (growth funds, loan guarantees), some tax breaks, and facilitation of a few large infrastructure projects – but without a deeper look at the role of government in the real market economy in an international context. So here’s what to do…
- The government needs to recognise the size of the task, the obstacles to change, and the extent of the long-term policy neglect. This leads to a conclusion that we don’t have the institutional structures necessary for the thousands of ‘growth-orientated’ reforms required across the UK administrative structures. For Conservatives, think of the effort needed to get the big privatisations done in the 1980s. Since the fiscal & macroeconomic changes needed are well underway, now is the time to switch the emphasis to growth.
- The bulk of reforms needed include demonopolisations, removals of ineffective restrictions, more responsiveness to business needs in how the state delivers services and solves problems, and major improvements in the way that international trade & technology are promoted.. These systemic reforms cost little but are resisted by those benefiting from the status quo – often businesspeople that make political contributions. The reforms are hindered by lack of familiarity with the subject matter among civil servants, and bewilderment at how other countries run their ‘real economies’ more effectively. As a start, fiscally sustainable real-sector growth needs a Cabinet Committee of its own, where it is not crowded out by macroeconomics and fiscal policy.
- Unfortunately, most such reforms take time. Decades. These include global trade & technology promotion reforms, how, regionally, education provision is better orientated to needs and shortages, and a wide range of equity finance, governance and competition policy reforms. Some however, have more immediate effects, such as re-casting how state R&D spending is managed, addressing excessive monopoly power and cartelisation in commercial banking, and further ‘planning’ reforms. Unlike macroeconomic & fiscal reforms, real market economy reforms are not ‘one decision’ changes. This means that policy requires pro-growth UK institutions internationally and up and down the country, which recognise the long term campaign nature of the changes needed.
Luckily the debate on this is now less clouded by the old market-versus-intervention ideological battles of the past. Also luckily, the Lib Dems are currently in a stronger position than the Tories in advancing these reforms. But not for long; some Tories are catching on…
* Paul Reynolds works with multilateral organisations as an independent adviser on international relations, economics, and senior governance.
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5 Comments
Actually, demand side measures do work. Even David Laws, the driest of our drys, thinks so. That’s why he prioritised £500m of the initial £6bn of cuts he did in his short-lived time at the Treasury to measures like kickstarting public housing schemes – explicitly to boost growth.
Estimates vary about how big the economic multiplier effect is in spending money on housebuilding, but even low calculations put it at 1.5: 1, so for every pound spent there is £1.50 spent in the wider economy (and the Treasury gets at least half of its money back). If we spent some of the budget savings on building much needed infrastructure, such as affordable housing in the south east of england, not only would the eocnomy benefit as large amounts of money would be saved from not having to pay higher private sector rents through housing benefit; but there would also be savings to health, social care, education and even police budgets from better quality housing where people need to live.
“demand management is out”
No, no, no, no, no. NO.
http://centreforum.org/index.php/mainpublications/274-lessons-from-the-1930s
Ha ha, Oh dear. I have touch a nerve. Albeit with extreme brevity, I am summarising the UK government’s position rather than my own, slightly glibly perhaps …. well maybe until I heard the Chief Secretary to the Treasury speak at the Liberal Democrats in Business meeting last night at the NLC. He stated the UK position starkly and clearly – growth must be fiscally sustainable, and come largely from supply side reforms, there being no route to fiscally unsiustainable growth through debt-financed micro-management of demand. I only refer to these matters by way of introduction. My own experience of the implementation of microeconomic policy (commercial policy, indiustrial policy…) in other countries has always suggested that UK is unsophisticated and ineffective in the operation of its approach. In the UK it is common for such policies to be immediately confused with ‘picking winners’ and subsidy, and for policy development to fall at the first fence due to ‘laissez faire versus intervention’ arguments among those with little knowledge of the significant real-world scope for government to play a crucial and positive role without either ‘picking subsidised winners’ or allowing laissez faire to result in lazy ‘crony’ monopolised sectors. Withoiut implying that any other country is perfect, the UK has much to learn (and to an extent, much to unlearn).
Paul
Your formula is far too complicated. First remind the banks that their job is TO LEND MONEY (TO BUSINESS). Is that so hard?
Second, the government must stop investing so much in stimulating and training entrepreneurs. If you want to grow jobs keep the current companies alive (see point 1 above). One firm of 500 people that goes bust would take about 4000 entrepreneurial start-ups to employ the 500 people. Encouraging new start-up to grow jobs is a lie and deceit.
Third: Allow the Social Entrepreneurs access to social needs and funds. Do not make impossible tender demands and stop putting the work through the big so called social companies like Capita and Serco who then farm it out at a much lower rate to the local SEs. These SEs are a good bet, economically. See below, from SES SROI Report 2010:
Traditional Enterprise
• Created 249 new businesses
• Turnover of £7.34 million
• Average investment worth £1,093 for each
• Survival rate 80% @ 12 months
• Survival rate 64% @ 18 months
• Survival rate 63% @ 24 months
• 78% were workless before engagement with SES
• Average turnover after 2 yrs £21,090
• Majority director/ownership gender Male 68% Female 32% (national Female rate 14%)
• Average number of staff after 2 yrs 1.36
Social Enterprise
• Created 22 new social enterprises
• Supported 141 SES social enterprises
• Raised £3.9 million in investment
• 38 successful tender applications worth £8.7 million.
• Combined turnover £26,305,000
• Employ 1,373 staff (most from deprived areas)
• Financial impact £7.64:£1 (SROI)
• Average turnover after 2 yrs £186,565
• Majority director/ownership gender Male 48% Female 52% (national female rate 24%)
• Average number of staff after 2 yrs 7.3
So – 10 times the rate of private enterprise creation, but far higher revenues and job creation is occurring in the social enterprises.
Hello John Carlisle and thank you. What formula are you referring to ? I’m not sure I have proposed a formula – more an approach to the subject matter – scoping and institutions, and defining the problem that microeconomic growth policy is attempting tyo address. That comes before more action-based detailed prescriptions and strategies. Paul