By Michael Baxter 4 Jan 2010 [0 Comments | 1,343 views]
Related articles
Economists across the world use the start of the New Year to turn to their crystal balls for a spot of economic prophesying.
You won’t be surprised to learn that most are struggling to think of anything good to say. What with the fiscal deficit threatening to crush our prosperity for years, the inevitability of public sector strikes and with the new tax regime bound to lead to an exodus of talent from these shores, the media have taken it in turns to take pot-shots at the UK, and reveal predictions of doom.
The only hint of optimism seems to derive from the cheap pound. Although even in this respect, we are told that all this new money being created by the Bank of England will lead to a crash in sterling.
Then there’s the developing world.
This time around, January 1 doesn’t just mean a new year, it means a new decade. And we are told that the decade will see the final nail in the West’s coffin. That the ascendance of China, India, Russia and Brazil spells job loses and disaster for the UK, or so they say.
And yet, the crystal ball doesn’t have to be quite so dark.
Have you ever seen that image of an old woman in most introductory psychology books? Change your angle, and all of a sudden the likeness of a young beautiful girl is revealed. And once you see the younger face, it can actually be quite hard to recall the appearance of the older face at all.
Now let’s take another look at the prognosis for 2010, but this time try and see the other point of view.
Well, one thing is for sure, the fiscal deficit is huge. Even the Tories have now conceded that taxes might have to rise. On yesterday’s Andrew Marr’s Show the Prime Minister made it clear he wants to fund the reduction of the national debt via hammering the rich.
We all know there are inefficiencies in the public sector, we all know that sickness levels in this sphere of the economy are appalling. And yet, rather than try and reduce debt via improving efficiency, Gordon Brown wants to make the hard working private sector employees foot the bill.
Cost cutting and greater efficiency also means jobs losses. That’s why GB doesn’t want to hit the public sector.
And yet we all know there will be huge cut backs. Gordon Brown may not like to admit it, but this is unavoidable, whoever wins the next election. (The only way this may not happen is if the election results in a hung parliament, and the resulting coalition lacks teeth.) It is these expected cuts that have led to predictions of strikes.
But the threat of public sector strikes may be exaggerated.
According to the Sunday Times, public sector workers now earn 7 per cent more, on average, than their peers in the private sector. The newspaper claims that hours worked are shorter, pay rises are greater, and pension benefits up to three times better in the State sector. So, sure, 2010 will see public sector cuts.
No doubt 2010 will indeed see more strikes in the State sector than normal, but it seems the weight of public opinion will not be behind the strikers. They will look with envious eyes at the reports suggesting higher wages, improved working conditions and better pension benefits, and their indignation will overflow, with anger gushing forth from the likes of the Mail and Express like hot lava: “How dare they strike?”
This public attitude may well reduce the scale of these strikes.
Then there’s the pound. Economists reckon that for the UK economy to operate at something close to purchasing power parity with the Eurozone, we need an exchange rate of around 1.25 euros to the pound. At the time of writing there are 1.13 euros to the pound. So sterling is cheap, but not that cheap. Two years ago, the pound was far more seriously overpriced than it is now underpriced. Last year the exchange rate went within a few cents of parity with the euro. At the time, the French complained that the UK was benefiting from an unfair advantage, John Redwood warned the UK was in meltdown, and legendary investor Jim Rogers said the UK was finished. Since then the pound has risen.
The truth is that at the current exchange rate the pound is close to the perfect level for providing the basis for recovery. It will take time, but the cheap pound does provide the second biggest reason to think the UK may actually see a strong recovery, eventually. This is what happened during the period between the wars, when a UK economic recovery was boosted by the decision to take the pound out of the gold standard, leading to a cheaper pound, lower imports and greater exports.
Then there’s paranoia over China.
Glance across the blogosphere and you will see umpteen articles predicting doom as China et al grab the centre stage. Some say the rise of China provides proof that globalisation spells disaster.
The Independent is just as guilty as everyone else. The newspaper may pride itself for thinking differently from the rest, but it is just as caught up with the anti China rhetoric. On Saturday its front page article warned that China is cornering the market on rare metals that are essential for creating renewable energy. Apparently mines in China account for 97 per cent of the world’s supplies of rare earth elements used for the development of low carbon energy. But China, according to the Independent report, is holding on to to these elements. The argument goes that China wants to build itself a monopoly, not merely in the supply of these materials but also in the technology associated with them. China is trying to make itself the low carbon energy capital of the world.
Then the Guardian warned us that the 2 billion euros of money earmarked by the government for investment into green technologies will largely be spent on acquiring products from abroad. The paper quoted the EEF’s head of climate change and environment policy, Gareth Stace, as saying: “In Germany you get government sitting down with business and saying, this is what the targets are for renewable energy and what do you need to provide the kind of necessary capacity.”
In short, the green jobs revolution promised by GB is happening abroad.
And yet, the Guardian and the Independent pieces were arguing against each other. The Independent was accusing China of trying to obtain the maximum possible benefit from its own resources, the Guardian was accusing Britain of the complete opposite.
So on one hand the Chinese government is the villain for doing one thing, on the other the British government is the villain for doing the opposite.
And yet consider this. Supposing someone makes some miracle discovery that means factories making, say, cars, can become 50 per cent more efficient. Cars can then be produced for 50 per cent less cost, 50 per cent less labour. Would this be good or bad? Of course it would be good, how can improved efficiency be bad? But job losses would follow, until eventually the lost jobs are channelled into another area.
There is very little difference between the effects of globalisation and the effects of some new miracle innovation that leads to rapid improvements in productivity.
Globalisation has led to an increase in the world’s ability to produce goods and services. The world produces more, and there is less poverty. How can this be bad?
For the UK, the need now is to become more specialised.
Global demand for financial and creative services is set to balloon. The UK’s big chance is to capitalise on this. The cheap pound can only help.
There’s another even bigger opportunity. This is the single biggest opportunity for the UK and it’s biotech.
Investment and Business News’s prediction for the next decade is different from what you will see elsewhere. We predict that the combination of modern computer power, the networking benefits that have been created by the Internet, and our growing knowledge base, will lead to breathtaking changes in technology. Genetics and biotech will be at the forefront.
And in these industries the UK has a real global lead. Globalisation will boost the demand for the UK’s expertise.
This the great opportunity for the UK in this decade.
The danger is that we retreat behind walls of protectionism. Urge the government to spend its money buying within the UK, when it could obtain goods and services much cheaper abroad, and allow the creeping menace of paranoia to grow and grow.
