Commentary on Political Economy

Monday 18 March 2024

 Economic transformation remains elusive

Martin Wolf · Mar 18, 2024

If the UK’s real gross domestic product per head had continued on its 1955-2008 path, it would now be 39 per cent higher. I made this point in a column on Jeremy Hunt’s recent Budget. This performance is dreadful. But it is far from unique. France has been doing about as badly.

In the long run, continued stagnation creates severe social and political challenges: higher taxes; worsening quality of public services; pervasive disappointment; and zero-sum struggles for advantage. The country definitely needs an economic transformation.

Fortunately, such shifts have happened in the past. The questions raised by Economic Transformation: Lessons from History, a new report from Policy Exchange by Roger Bootle and James Vitali, is what lessons can be drawn from them and whether they are relevant to the situation of the UK and many other high-income countries now.

Cross-country studies of this kind, which involve historical judgment, not mere manipulation of vast databases, have a distinguished history. One of the most influential was Industry and Trade in some Developing Countries, by Ian Little, Maurice Scott and Tibor Scitovsky. But this book’s chosen cases were even more heterogeneous: Thatcher’s Britain; postwar Germany and France; Ireland (the Celtic Tiger); post-communist Poland; South Korea after 1963; Hong Kong; and Singapore. We have countries recovering from war and those enjoying peace, countries with vast catch-up potential and those already quite close to the productivity frontier; autocracies and democracies; small countries and considerably bigger ones.

Can anything be learnt from such a variegated group? Is what can be learnt relevant to the UK?

The authors suggest 10 lessons: a strategy is needed; transformation requires a package of measures; fiscal prudence is a necessary, but not a sufficient, condition for success; low inflation, too, is helpful, but not decisive; tax can matter, but not always; high rates of investment are critical, which also necessitates high rates of saving; fierce competition; a focus on microeconomic measures; strong leadership, but with a team, rather than one individual; and, finally, both early success and a compelling vision, to retain political support.

This list is broad. But it is quite useful from the UK’s present viewpoint. Here are just four relevant points.

First, savings are staggeringly low. In 2023, for example, the share of national savings in GDP was 14 per cent. If investment is to rise, as it must, to deliver faster (and sustainable) growth, so must savings. Where is the strategy for that? One answer must be to raise substantially the standard contribution rate for pensions.

Second, competition does not seem to be anything like as strong as one would wish. A fascinating new paper on “The Shrouded Economy” from the Behavioural Insights Team provides compelling evidence that among the big problems is the (often deliberately created) inability of purchasers to compare value for money among available goods and services. Membership of the EU single market, a project Margaret Thatcher championed as premier, improved competition in the UK economy.

Third, there is a list of microeconomic reforms that simply must be made. Among the most obvious is planning reform and, as a result, better use of land. Needless to say, the failure to deal with this binding constraint had nothing to do with membership of the EU. One consequence of these constraints is the high costs of building infrastructure. Yet another priority is reform of pension and capital markets, in order better to support innovation and expansion of dynamic new enterprises.

Finally, as the report rightly notes, significant reform demands leadership with a long-term strategic vision. Perhaps the most depressing aspect of the current debate is the huge gulf between the urgency of the situation and the response. The bigger the challenges, the more timid politicians seem to have become. Worse, Brexit and a host of cultural and identity issues have taken almost all the air out of the needed debate on the UK’s economic future. Sir Keir Starmer presumably feels that leaving the governing party to conduct its circular firing squad is wise politics. But it is also likely to be foolish strategy. He is not going to have a mandate for the radical changes that are necessary.

I do not entirely agree with the authors. In retrospect, the Thatcher era proved far less transformative than they suggest: performance did not improve much in the UK; it rather worsened in peer countries, such as France. But their lesson is big changes are possible, espe- cially once things are bad enough. Are they not bad enough yet? I hope they are.

No comments:

Post a Comment