Economics
HSBC commissioned the Futures Company to report on the key considerations for European business of Asia’s rise. The final product, Looking East: The Changing Face of World Business, tells a daunting story. Globalisation has entered a new stage and the sooner its lessons are absorbed by European businesses, politicians and policy-makers the better.
Globalisation brings opportunities and threats. While this observation has become cliché, it remains true. But the nature of these opportunities and threats is rapidly changing. Failing to keep pace with these changes threatens the health not just of European business but also European society. Mrs Duffy confronted Gordon Brown with some of the insecurities generated by globalisation. These insecurities may become more visceral if the next stage of globalisation is not properly responded to.
Asia’s role in this next stage is, to use a vogue word, unavoidable. Indeed, Asia’s continued rise is far more so than George Osborne’s budget; much of which was ideological choice, not unavoidable necessity. As we fret about whether these choices will reduce us to a double-dip recession, China grew at a rate of 11.9 per cent in the first three months of 2010 and India is expected to grow at 8 per cent this year and next. European growth rates may crawl from the wreckage of the credit crunch, but China and India, along with much of the rest of Asia, have rapidly returned to a gallop.
A key plank of the last government’s response to the credit crunch – the promotion of new industries and new jobs - was a variant on a well-trodden European reaction to globalisation: stressing high skills, R&D and the fruits to be reaped by British industry on the innovation frontier. But what if Asia is reaching this frontier before Europe? While low value production may have shifted from places like Mrs Duffy’s Rochdale to Asia, Europeans have tended to seek reassurance in the view that cutting edge skills and technologies would save their bacon (even if ever less of it is consumed in places like Rochdale).
This view now seems, at best, a simplification. “Globalisation and the integration of the world economy isn’t turning out the way many people expected”, claims Joe Ballantyne of the Futures Company. Take some of the supposedly new industries proclaimed during Peter Mandelson’s tenure at the Department of Business: electric cars, nanotechnology, wind technology. No doubt these industries will continue to be eulogised by the coalition. But the HSBC report flags up examples of new technologies in each of these fields being pioneered in Asia.
These developments expose as outdated a view of globalisation that sees the West as the innovators and Asia as the producers. The outsourcing of production jobs caused the CBI to declare six years ago that by 2014 there would be no jobs for unskilled workers in this country. Asia’s growing innovative capacity places the skilled workers of Europe under the kinds of competitive pressures that the unskilled have known for a generation or more. 75,000 people graduate from Chinese universities each year with higher degrees in engineering or computer sciences; 60,000 in India. Given the ascent of a highly-skilled, entrepreneurial and innovative Asian middle-class, the extension of the CBI’s logic may be that in ten years time no jobs for unskilled or skilled people will exist in this country. But this zero-sum thinking wasn’t right six years ago and certainly isn’t right now.
Instead of fearing Asia, British firms should seize its opportunities. These exist both in terms of demand and supply. Sluggish growth in Europe and America means that if the low value of the pound is to fire an export-led recovery it will be via satiation of Asian demand. The HSBC report notes that half of Unilever’s sales come from developing markets and the company’s Indian branch – Hindustan Unilever – is one of India’s biggest consumer-goods companies and its biggest advertiser. Mumbai wants its champagne chilled. And rightly so.
But what else does it want? British firms, whether established global players like Unilever or much smaller concerns, should be asking this question. Markets have always been conversations. Our firms must now listen to and engage with new consumers. “Successful businesses will need”, according to Ballantyne, “to understand how the dynamics of cultural change play out across different markets”.
As well as servicing Asian markets, British firms should consider what impact Asia’s rise will have on their supply chains. It will be no surprise if demand for raw materials continues to rise. It may be more of a surprise to observe, as the HSBC report does, that Microsoft’s biggest R&D facility outside America is in Beijing. This facility continues an infusion of Asian and American knowledge heralded by an influx of Asian science and technology graduates to Silicon Valley. British firms that fail to structure themselves in ways that leave them open to the best new Asian thinking risk falling behind. “Innovation will need to become more global in focus”, says Ballantyne. This means seeking new kinds of partnership with Asian businesses and universities, as well as, pace Theresa May’s immigration policy, always being able to recruit the best Asian talent.
The HSBC report is not the only sign recently that globalisation is changing shape. Strikes have swept China. The low wages and poor conditions that gave Chinese production facilities an edge over facilities in places like Rochdale seem increasingly unacceptable to Chinese workers. This may limit future outsourcing to China. Equally, the HSBC report leaves a sense of China, like the rest of Asia, increasingly being less a repository for outsourcing and more a generator of new ideas, techniques and products.
This doesn’t mean that British business can no longer generate such things. But to do so they shall increasingly need to be abreast of Asian developments. The role of government is to support and incentivise firms to do so. For example, the competitiveness guru Michael Porter has recently argued that a carbon tax would drive innovation in the green economy. This drive is likely to build upon ideas pioneered in Asia. Smart government – not big government or small government – should unlock this potential. If David Cameron doesn’t deliver this, he’ll discover his own Mrs Duffy soon enough.
I had the piece below published on Labour Uncut on 28 July 2010:
Rahm Emanuel never wastes a crisis and neither does the Tory-Lib Dem government. The Thatcherite ends which this government use crises to advance would be anathema to President Obama’s chief of staff. Idealists who cheered Obama’s election have been frustrated by subsequent pragmatism. David Cameron, in contrast, has been much more of an ideologue as Prime Minister than previously; though one more concerned with the low cunning of making his beliefs real than with their principles.
Such an ideologue in Downing Street is more frightening than anything Labour has to offer. After a generation of New Labour, the contemporary meaning of Labour’s values needs restatement. However, the candidates’ visions of the socialist uplands are less important than resisting a PM who threatens the achievements of not just the last Labour government, but every Labour government.
“Dripping wet” was how right-wingers described Cameron a few years ago. The Harold MacMillan picture in his office seemed, in opposition, to prefigure a one-nation PM. His detoxification project accepted that mistrust of Thatcherism was holding back Tory electoral success; an understanding that every other Tory leader since Thatcher either didn’t share or was too weak to act upon. He was, consequently, the first of these leaders to make a determined pitch for the centre ground.
When this didn’t secure a majority government Cameron faced crisis. Tories who never accepted the need for repositioning felt vindicated. This wouldn’t have happened with a more solidly Thatcherite leader like David Davis, they thought. But this crisis created various opportunities.
First, Liberal Democrat cohabitation achieved a detoxification more profound than any previous. “If he agrees with Nick, then Dave can’t be so bad, can he?” Second, in acquiescing Clegg made his party human shields in Cameron’s public spending Blitzkrieg.
Still, what we might loosely call the Davis faction has never been wholly won over. They continue to attack the leadership, while Simon Hughes and other left-leaning Liberal Democrats do so from a different perspective. Being attacked from right and left makes Cameron appear reasonable and a creature of the centre ground, as does being leader of a coalition, with its attendant compromises and trade-offs.
While Cameron’s solid approval ratings suggest he is taken to be a pretty straight kind of guy, the substance of these compromises can be questioned. Raising the income tax threshold was once a Tory right policy. It is now debatable, given recent polling, whether the Alternative Vote would be to the Tory’s electoral disadvantage, if, as Kevin Meagher doubts, the referendum is even won at all. Certainly, the Bill which Clegg will pilot to secure this referendum contains proposals distinctly to the Tories’ advantage, such as reducing the number of MPs and the boundary review.
Clegg is undoubtedly being taken for a ride, but, as Peter Hoskin notes, he has transformed his party in ways that indicate willingly so. The small-state zeal of this transformation meant Danny Alexander didn’t hold George Osborne to the more even-handed trajectories for deficit reduction that the Liberal Democrats and Labour had proposed. The office of budget responsibility has confirmed that Labour’s plan would eliminate the bulk of the structural deficit over this parliament – George Osborne’s stated objective before the election. Yet he is executing £40bn of additional cuts. It requires blind faith in the capacities of private enterprise, once ‘liberated’ from the ‘dead hand’ of the state, to believe this wise.
The NHS White Paper proclaimed liberation, but it requires similar faith to be convincing. What is proposed, in giving such power to GPs, as the SMF’s David Furness notes, is “like asking your waiter to manage a restaurant. They might know what you want to eat but they won’t necessarily be any good at ordering stock, designing a menu or controlling the chef.”
What kind of faith sustains such action? The kind of faith that rashly and incompetently decimates the successful building schools for the future programme to fund the untried experiment of ‘free schools’. A faith in doctrinal conviction over the lessons of experience. A faith that isn’t conservative but Thatcherite.
This is a dangerous psychosis, which we must resist. But, as we do, we must avoid excessive defence of an imperfect status quo or being unrealistic about public finances. Cameron has proposed a new dividing line: “Is this Labour’s great new tactic, to be left defending the bureaucracy of PCTs and SHAs and all the quangos and all the bureaucrats, all of whom are paid vast salaries and huge pensions? They back the bureaucracy. We back the NHS.” We can expect this line to be run alongside the long-established coalition claim that our economic vandalism made cuts unavoidable.
Pat McFadden has highlighted the nonsense of this claim. Ed Balls has impressively opposed Michael Gove. Andy Burnham is equally forceful in taking on Andrew Lansley. We need to join up the departmental dots and craft a narrative that exposes Cameron’s government across the piece. Joined-up opposition, if you will.
The deficit crisis is real. However, as McFadden has shown, there is a Labour response between Thatcherism and denial. While the government wants us to think differently, there are no crises in education and health. Nonetheless, for us to simply defend the status quo makes it easier for Cameron to caricature us as big state dinosaurs.
There is a Labour response between swivel-eyed, small-state evangelism and defending the status quo. This would distinguish public service reform grounded in past results from reform grounded in blind faith. The former builds upon 13 years of Labour success, and some disappointments, and the later senselessly risks all of these successes. A candidate able to convincingly deliver this response would have a strong claim both on leadership and the centre ground of British politics; the territory that Labour needs to dominate to return to government.
I had the piece below published on Labour Uncut on 16 June 2010:
The budget response is the great set-piece political challenge. Your opponent has an age to prepare and all the resources of treasury. You stand up when they sit down. By the time you sit down, the political context is virtually set, not least because your opponent’s spinners have tried to fix this. Given the centrality of economics to present politics, it is a bigger challenge than ever. Harriet Harman must rise to this as our acting leader. Which transience of tenure, of itself, reduces her potential agility compared with a permanent leader. You have to feel for her. Here are a few, hopefully helpful, suggestions.
The first task is to distinguish pragmatic economics from small-state ideology. As the need for deficit management is widely acknowledged, pragmatism is required, but only Thatcherites see this crisis as an opportunity for ideological resurgence.
The second task is to oppose the manifestations of this ideology, while the third is to provide a coherent alternative economic prospectus. This prospectus must contain tax increases and spending cuts, but the mix should reflect a very different ideology from that supported by Tory MPs agitating for a budget akin to the Thatcherite “cold shower” of the 1981 budget. Overarching all of this is the need to gain an audience in a media climate favourable to the coalition.
These steps are crucial to Labour’s hopes of returning to government. However, while this budget intends to frame public finances over the full parliament, Labour’s navigation of these steps will evolve. Harman cannot provide a definitive take. This isn’t just because events – for example, a double dip recession; the risk of which is increased by Osborne’s cutting – could overtake whatever fiscal consolidation plan Osborne has. It is also because the necessary Labour policies will only emerge under new leadership.
David Miliband last week produced some neat ideas: mansion tax on £2m homes (ok, but why not simply a land tax?); extending the bankers’ bonus tax (fine, while it works – evasion this year was surprisingly low and the tax take, therefore, unexpectedly high, which is unlikely to persist); and ending the tax subsidy to private schools (great for Croslandites like me, but Friday’s “Miliband’s class war” editorial in the Evening Standard indicates that it won’t be a completely easy sell).
Ed Balls has played the VAT card, stressing its regressive nature. However, the coalition probably sees this coming and will try to protect those who are on low incomes through changes to income tax – and in so doing, protect themselves from Balls’ attack. Balls isn’t wrong to be assertive on VAT, but our VAT-based attacks should acknowledge the full consequences of the coalition’s tax changes or we will appear partial.
While I expect any VAT increase to, rightly, produce Harman fireworks, as acting leader she has limited ability to pick up the good ideas that the leadership contest is generating and craft them into a response redolent of Labour philosophy. Perhaps a permanent leader would have already made a better fist of the case that, rather than scrapping the child trust fund, it would be fairer to reduce tax relief on ISAs, say. Sadly, we can expect many occasions today when it would be preferable to have someone at the dispatch box able to say: “you wouldn’t need to do X if you had done Y”, where, to paraphrase J K Galbraith, X equals something disastrous done by the coalition (e.g. scrapping the child trust fund) and Y equals something unpalatable that Labour would have done instead (e.g. reducing tax relief on ISAs). The coalition knows this and will try to take advantage.
However, disastrous things have already been done and popular protest has been underwhelming. Since the election of President Obama, possibly the biggest change to the American political landscape has been the emergence of the tea party movement. This has been fantastically effective at mobilising grass-roots opposition to Obama’s “big government”. Labour leadership contenders grasp towards elements of Obama’s movement politics. But, this is already slightly old-hat. Alternatively, they could plant more seeds for the emergence of a leftist equivalent to the tea party movement to rally against injustices like the abolition of the child trust fund.
Robin Cook once said that millions of people think that they benefit from tax credits due to obscure machinations of the inland revenue, not because of Labour decisions. A leftist equivalent to the tea party movement – building on campaigns like don’t judge my family – would leave people in no doubt as to which politicians are responsible for reversing popular Labour policies.
The utility of such a movement is underlined by how quickly media coverage of the deficit has shifted since the General Election. Then, the main focus was when to start cutting and the £6bn at issue is the tip of the iceberg to come. We rightly conceded, during the election campaign, the need to address the deficit over this parliament, but were also right to argue that this job shouldn’t begin this year, as to do so would imperil a fragile recovery. Harman should repeat these points in her budget response, but she shouldn’t expect much media kudos for them. Coverage has moved on, swallowing the coalition’s line that cuts had to come this year, with too few tears shed for the child trust fund and the future jobs fund. The outrage that these cuts merit won’t come from the media, but should come from a mobilised grassroots movement.
Another thing illustrated by the speed with which debate has moved on since the General Election is the thin, but real, distinction between economics and ideology. Were the cuts this year pragmatic or Thatcherite? Certainly the micro consequences – the loss of the child trust fund and the future jobs fund – should be resisted. But lots of economists who would balk at being labelled Thatcherite, including the Labour peer Lord Desai, indicated that cuts this year should be part of a pragmatic deficit response. Economists do not speak as one and it’s usually possible to find one who buttresses your ideology.
The easy course is to seek out this economist and use their arguments to provide a veneer of protection for ideological positions. However, like most veneers, cracks can easily be exposed. The tell-tale sign of this tactic is argumentation predicated upon less than credible claims. For example, the coalition’s habitual canard that their austerity programme is needed to stop us turning into Greece. Harman should read Rachel Reeves on why their scaremongering is ideological motivated. But, just as the coalition are grasping towards economic arguments that allow them to retreat to their Thatcherite comfort zone, so, too, there are economists who encourage Labour to remain in our ideological comfort zone.
Their charms should be resisted by Harman, who should instead be carefully studying last week’s report by the office of budget responsibility (OBR). It showed that the economy is in stronger shape than the coalition’s apocalyptic talk implies. Consequently, if Osborne takes actions as dramatic as this talk suggests, then, he will have defaulted to Thatcherite instincts. If Harman can use the OBR’s report to expose this, she will have done a great job. The other things that we need – a full Labour plan for deficit management and growth; a left-ist movement to resist the coalition’s extremes – are for further down the line; hopefully, to be crafted and inspired by our next leader. But an important task can be accomplished today: to damn Osborne’s fiscal trajectory as regressive, ideological and Thatcherite.
I had the piece below published on Labour Uncut on 16 June 2010:
The Daily Telegraph isn’t normally essential reading for Labourites. But yesterday it should have been, especially for Harriet Harman. Fraser Nelson set the backdrop to the politics of the deficit and the “emergency” Budget, to which she, as acting leader, will respond. This week’s report from the new Office of Budget Responsibility (OBR) dramatically changes this political context. Nelson has been quick to realise this and, while our instincts differ markedly from his, we need to be equally fleet-footed.
The limited discussion on the deficit in the leadership election has denied our candidates the opportunity to demonstrate this quality. Though, of course, they could engineer such an opportunity for themselves. I’d be impressed if any of them do flesh out a more substantial economic platform, not least as The Economist is right to note that, “nothing will make or break the next leader of the opposition like his response to the government’s austerity programme”.
The coalition, preparing the ground for the scorched earth to come, has grasped any and every opportunity to exclaim their horror that “it is even worse than we thought”. Labour, apparently, have not just cooked the national books, but eaten and spat them out again. It’s what we always do. We can’t help ourselves. It is the coalition’s duty to pick up the pieces; in the national interest, of course.
The coalition has pushed this story since its creation. It matters whether it is believed. It wasn’t until after black Wednesday that the spectre of the winter of discontent stopped being a drag on Labour’s support. If the deficit is perceived as Labour’s deficit, then the pain of reducing it will be a similar drag. However, a major spanner has been thrown in the coalition’s attempts to embed this perception. As Nelson observes, “something is going badly right” for the British economy.
The OBR reported earlier in the week, as Nelson noted, that unemployment “will be almost 200,000 lower than had been feared. Economic growth will not be quite as strong but the tax revenues – which are far more important – will come in much more strongly than Mr Darling gloomily forecast.” So, the reality is that public finances are in better shape than the Treasury forecasts bequeathed to the coalition gave them to expect.
How troubled George Osborne must be that this reality, so out of kilter with his desired spin, has been presented by the OBR. After all, he established this body, as Nelson puts it, with the intention to “demolish the economic Potemkin Village that Gordon Brown built during his time in Downing Street and reveal the full extent of his fiscal vandalism”. Yet, rather than exposing Labour irresponsibility, the OBR has shown “Mr Osborne’s election goal – to abolish “the bulk” of the structural deficit by 2014 – would have been easily achieved had Mr Darling remained in place. No more taxes need to be raised, or budgets cut, to honour this Tory manifesto pledge.”
This is a tremendous vindication for Darling and inconvenience for Osborne. If Osborne now persists with plans to cut further and faster than intended by Darling, he will be doing so for reasons of political belief, not economic pragmatism. Nelson understands this and urges him to press on “because he wishes to restore the power balance between state and society. A true liberal believes that people spend their own money more wisely and effectively than government can do on their behalf.”
While Rachel Reeves has expertly explained why comparisons – encouraged by the scaremongering spin of the coalition – between the UK and Greece are spurious, our deficit does require careful management. However, there is a world of difference between the careful prudence of Darling’s plan and the ideological, small-state zeal that would carry Osborne beyond it. Nelson encourages Osborne in this direction because “with Labour embroiled in a five-way leadership contest, he will never face weaker opposition”. Precisely why we must be vigilant against him.
What the formation of the coalition told Philip Stephens about David Cameron was that “he is a Conservative in the centrist tradition of Harold Macmillan rather than a radical such as Margaret Thatcher”. However, we need to be ready for his Chancellor leading the coalition on a distinctly Thatcherite course in his first Budget. Having scrapped the Child Trust Fund and the Future Jobs Fund this might be no surprise, particularly after the coalition agreement made, as James Purnell noted, “no mention of abolishing child poverty. Of reducing inequality. Of protecting education funding. Of guaranteeing jobs for the long-term unemployed.”
In responding to Osborne’s Budget, the key distinction is between actions that can be justified as decisions of economic necessity and those that are driven by political belief. We strip ourselves of credibility if we do not acknowledge the necessity of some pain. We can absorb more of this pain in the form of taxes than Osborne will propose, but we can’t hide from the need for some spending cuts. To remain credible we need openly to concede this, but we also need clearly to identify the areas in which Osborne is acting as the ideological vanguardist that Fraser Nelson wants him to be, losing sight of the sober economic reality presented by the OBR.
That this reality is much brighter than the coalition’s spin is a credit to the decisions we made in office. We need to be equally strategic and forensic in our economic decision making in opposition.
I had the piece below published on Comment is Free on 12 June 2010:
David Cameron has argued that our economic fortunes have become “hitched to a few industries in one corner of the country, while we let other sectors like manufacturing slide”. His business secretary, Vince Cable, has since bemoaned “deep-seated problems: a dysfunctional banking system; an economy that is seriously unbalanced”. The previous business secretary, Peter Mandelson, wanted “more real engineering and less financial engineering”. The political consensus seems clear: our economy should be rebalanced away from finance and in favour of manufacturing.
This seeming either/or approach to finance and manufacturing says nothing about business services, which fall into neither category. London’s streets remain, as the Economist notes, “thronged with lawyers, management consultants, accountants and ubiquitous marketing types”. Statistically, these “types” may be classified in our blossoming creative industries, not business services. Concluding that comparative advantage can only accrue to us in finance or manufacturing risks missed opportunities in other sectors. This will be increasingly detrimental as technological advances make ever more goods and services internationally tradable.
Another problem with an either/or approach is that it presumes finance and manufacturing are substitutes. As we have more of one, it is thought, we must have less of another. The scale of the City of London supposedly explains the decline of British manufacturing. This thinking contains two kinds of misconceptions.
First, that British manufacturing is in decline. It isn’t. We’re the world’s sixth largest manufacturer. This isn’t to say that performance can’t be improved. But this objective isn’t helped by a false narrative of decline.
Second, that finance and manufacturing cannot be complements. It makes no more sense to argue that the sectors are inevitably complementary than to argue that they must be substitutes. What we should be asking is: what kind of financial sector would be most complementary to our manufacturing in particular and our wider economy in general? And how can public policy best encourage such a financial sector?
The passions of political debate on the future of banking generate more heat than light when it comes to these questions. If this were not the case, perhaps, the consensus on rebalancing would give way to divergent views on the proper role of finance in developing manufacturing.
Green manufacturing is heralded by politicians of all stripes as a manufacturing sector ripe for advancement. Blythe Masters, global head of commodities at JP Morgan, claims: “You can’t have a successful climate policy” – nor, by implication, a successful green manufacturing sector – “without the heavy, heavy involvement of financial institutions.”
Precisely how heavy and in what form are debates that are being played out on both sides of the Atlantic, particularly in deliberations over carbon trading. Green manufacturers will require capital and ability to manage risk, especially around the price of carbon. These requirements create important roles for financial institutions; no matter what exact form these carbon trading mechanisms take.
Given the significance of these mechanisms, the relative lack of protest and comment on the highly disappointing European Union emission trading scheme (EU-ETS) by British politicians is as depressing as it is deafening. We are more likely to be treated to glib remarks on the sexiness and potential of biosciences and such like. But, we are unlikely to be told that it is no coincidence the world’s most successful biosciences industry is found in the country – the USA – with the largest venture-capital industry. And we certainly shouldn’t hold out any expectation that the policy implications for British industry of this will be unpicked. Yet, it is this kind of thinking which needs to be spelt out if politicians are to move beyond broad-brush commitments to rebalance our economy.
The failure, until now, of politicians to move beyond such commitments creates an opening for Labour leadership contenders. The Milibands et al could define this terrain and, in so doing, provide part of the answer to the biggest and most pressing of economic questions: how will we generate the economic growth that will make the deficit more manageable and spread jobs and hope to our communities? Rebalancing the economy sounds good, and in a basic sense is good, but it is an incomplete response to our economic growth challenge. In addition, we require the necessary policy means for the creation of a financial sector that will do most to aid our wider economy, particularly manufacturing.
It’s easy for Labour politicians to feel good about the provisions of the Climate Change Act 2008 and for Labour activists to cheer wind farms and similar. But without the regulatory infrastructure that will allow manufacturers, through financial institutions, to adequately manage their carbon price risk, we won’t give ourselves the best chance of meeting the emission targets contained in that act, pioneering more advanced technologies than wind farms and really growing employment in green manufacturing. Labour would be best served by a leader who understands that if we want to help manufacturing, we shouldn’t simply bash bankers, but seek to create bankers best able to serve manufacturing – and who is able to convincingly tell their party and country how they would do this.
