Monday, April 04, 2016
The dogma destroying UK steel
Yesterday's Observer carried an interestiing analysis by Will Hutton on the failure of 40 years of laissez-faire economic policy in the UK that has led directly to the current crisis in the UK steel industry.
Hutton describes Business secretary Sajid Javid as the most ideologically driven and least practical politician to hold this key post since the war. He says that Britain, with a systemically overvalued exchange rate, porous market, high energy costs and ideological refusal to join others in the EU to deter imports dumped below cost with higher tariffs, is uniquely exposed to the threat posed by China's over-investment in steel and their dumping of the surplus on World markets:
Beneath the specifics of the steel industry lie more deep-seated problems. The day after Tata’s announcement, the Office of National Statistics (ONS) disclosed that the country’s balance of payments deficit in the last quarter of 2015 climbed to a record 7% of GDP. Britain’s international accounts are more in the red than those of any other developed country. Imports of goods and services, which have steadily outstripped exports for decades, are now to be given an extra impetus by the closure of UK steel capacity. What’s more, the same weaknesses that plague the old also inhibit the growth of the new.
After the interventionism of the 1930s – or even the 1950s and 1960s – Britain could boast dozens of substantial companies representing industries as disparate as pharmaceuticals, chemicals, aerospace and electronics. Not so in 2016. Only two high-tech companies are represented in the FTSE 100 – ARM and Sage. Another 20 years of the laissez-faire framework Javid cherishes – he is a devotee of the wild philosopher of hyper-libertarianism Ayn Rand – and the economy will be eviscerated, with a current account deficit so large it cannot be conventionally financed. The consequences – on living standards, employment, inflation, interest rates and house prices – will be severe.
Start with the pound. Since it was forced out of the European Exchange Rate Mechanism in 1992, the consensus has been that the state should make no effort to manage the exchange rate. The result is that for all but four or five of the past 24 years, the pound has been well above any calculation of its real value, buoyed up by money flowing into the UK to buy our companies and our property, notwithstanding our ever higher trade deficit.
This is an auction of national assets unmatched by any other industrialised country. But it also makes it harder for our producers to compete internationally. To manage the exchange rate, to shadow the euro or dollar, or even to consider joining the euro to lock in a competitive rate, are rejected with irrational hysteria. Result – a current account deficit of 7% of GDP.
Hutton says that in blocking the EU's efforts to invoke World Trade Organisation rules on dumping of cheap steel, the UK Government has effectively destroyed our steel industry in exchange for Chinese state ownership of the next generation of nuclear power stations.
He says that the combination of a privatised electricity industry in which they have insisted on sky-high returns for strategic investment, with demanding targets for the reduction of carbon dioxide emissions has meant incredible rises in the price of electricity, especially for industrial users such as steel:
Britain needs a genuine march of the makers, in George Osborne’s phrase. But that would need a completely different policy paradigm, overturning the failed attempts of the past 40 years. There was a nascent attempt, launched by Peter Mandelson in 2009, and followed through in the coalition government by business secretary Vince Cable and science minister David Willetts, to create an intelligent industrial strategy.
Eight great technologies were identified in which Britain had strengths; convening councils were created to remove obstacles to their growth; the agency Innovate UK geared up to support frontier innovation; and a network of Catapults created to stimulate knowledge transfer, business start-ups and scale-ups. Foreign governments, impressed by what was happening, commissioned reports on the innovative UK.
Then came Javid, keen to deliver the swingeing cuts in his budget demanded by Osborne in his quest for the 36% state. After hobbling the admired innovation infrastructure with its role for a smart state, his first piece of legislation is the trade union bill.
Javid tilts at Thatcherite windmills – and shows little understanding of today’s industrial revolution. Nor does he seem to grasp how government can co-create opportunities with entrepreneurs – as well as ensuring that the big picture is as attractive as possible.
It may be true that a fix will be found to resolve the steel crisis but unless the UK Government abandons its ideological commitment to laissez-faire economics and restores the strategy started by Mandelson and Cable then in the long term the future does not look bright at all.
Hutton describes Business secretary Sajid Javid as the most ideologically driven and least practical politician to hold this key post since the war. He says that Britain, with a systemically overvalued exchange rate, porous market, high energy costs and ideological refusal to join others in the EU to deter imports dumped below cost with higher tariffs, is uniquely exposed to the threat posed by China's over-investment in steel and their dumping of the surplus on World markets:
Beneath the specifics of the steel industry lie more deep-seated problems. The day after Tata’s announcement, the Office of National Statistics (ONS) disclosed that the country’s balance of payments deficit in the last quarter of 2015 climbed to a record 7% of GDP. Britain’s international accounts are more in the red than those of any other developed country. Imports of goods and services, which have steadily outstripped exports for decades, are now to be given an extra impetus by the closure of UK steel capacity. What’s more, the same weaknesses that plague the old also inhibit the growth of the new.
After the interventionism of the 1930s – or even the 1950s and 1960s – Britain could boast dozens of substantial companies representing industries as disparate as pharmaceuticals, chemicals, aerospace and electronics. Not so in 2016. Only two high-tech companies are represented in the FTSE 100 – ARM and Sage. Another 20 years of the laissez-faire framework Javid cherishes – he is a devotee of the wild philosopher of hyper-libertarianism Ayn Rand – and the economy will be eviscerated, with a current account deficit so large it cannot be conventionally financed. The consequences – on living standards, employment, inflation, interest rates and house prices – will be severe.
Start with the pound. Since it was forced out of the European Exchange Rate Mechanism in 1992, the consensus has been that the state should make no effort to manage the exchange rate. The result is that for all but four or five of the past 24 years, the pound has been well above any calculation of its real value, buoyed up by money flowing into the UK to buy our companies and our property, notwithstanding our ever higher trade deficit.
This is an auction of national assets unmatched by any other industrialised country. But it also makes it harder for our producers to compete internationally. To manage the exchange rate, to shadow the euro or dollar, or even to consider joining the euro to lock in a competitive rate, are rejected with irrational hysteria. Result – a current account deficit of 7% of GDP.
Hutton says that in blocking the EU's efforts to invoke World Trade Organisation rules on dumping of cheap steel, the UK Government has effectively destroyed our steel industry in exchange for Chinese state ownership of the next generation of nuclear power stations.
He says that the combination of a privatised electricity industry in which they have insisted on sky-high returns for strategic investment, with demanding targets for the reduction of carbon dioxide emissions has meant incredible rises in the price of electricity, especially for industrial users such as steel:
Britain needs a genuine march of the makers, in George Osborne’s phrase. But that would need a completely different policy paradigm, overturning the failed attempts of the past 40 years. There was a nascent attempt, launched by Peter Mandelson in 2009, and followed through in the coalition government by business secretary Vince Cable and science minister David Willetts, to create an intelligent industrial strategy.
Eight great technologies were identified in which Britain had strengths; convening councils were created to remove obstacles to their growth; the agency Innovate UK geared up to support frontier innovation; and a network of Catapults created to stimulate knowledge transfer, business start-ups and scale-ups. Foreign governments, impressed by what was happening, commissioned reports on the innovative UK.
Then came Javid, keen to deliver the swingeing cuts in his budget demanded by Osborne in his quest for the 36% state. After hobbling the admired innovation infrastructure with its role for a smart state, his first piece of legislation is the trade union bill.
Javid tilts at Thatcherite windmills – and shows little understanding of today’s industrial revolution. Nor does he seem to grasp how government can co-create opportunities with entrepreneurs – as well as ensuring that the big picture is as attractive as possible.
It may be true that a fix will be found to resolve the steel crisis but unless the UK Government abandons its ideological commitment to laissez-faire economics and restores the strategy started by Mandelson and Cable then in the long term the future does not look bright at all.
