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by Colman Tue Mar 21st, 2006 at 05:00:46 AM EST

Bad news for the UK economy from the FT.com.

...few economists would disagree that Britain’s performance has been broadly impressive since 1997. Growth has averaged 2.7 per cent, a touch higher than the UK’s long-term 2.5 per cent average. The International Monetary Fund praises the economy’s “remarkable” stability. After falling steadily, unemployment has stabilised at close to 5 per cent.

But dig a little deeper and the picture is not so rosy. Often-cited weaknesses include a failure to improve productivity growth, described by the Organisation for Economic Co-operation and Development last year as “mediocre”; a reliance on a surge in public expenditure since 2000 to sustain growth; and a miserable transport infrastructure.

So the last five years of high growth in the UK are, as Jérôme has pointed out before, due in large part to public spending not wonderful labour flexibility or the free-market magic applied to the economy. This is in the Analysis section of the paper, not the Comment section. Even worse? It's not working - the poorer regions are hugely reliant on public spending and are still falling behind the richer south where the business and financial services industry - where "Britain's comparative advantage" lies - is mostly based.


Mr Brown has long trumpeted closing the regional gap as a key goal of public policy. In 2003 he wrote: “Improving the prosperity of all our communities is the government’s main priority.” Yet Mr Brown rarely lists statistics showing how Labour has created dynamic economies in parts far from London. The reason is that the evidence points in the other direction.

...

Mr Brown started his term in 1997 determined to end a previous boom-and-bust pattern in the economy. The government also wanted to spread economic opportunities away from London and the South-East of England to Scotland, Wales and northern England, the regions dominated by Labour voters. After an initial two years of austerity, the public expenditure taps were turned on full. The effect was to boost poorer areas, which depend on the public sector more for economic activity.

Public-sector workers comprised one in five employees across the UK in the year to last June but in poorer regions that proportion is much higher. Some 30 per cent of employees in Northern Ireland work for the government and the proportions are also high in Scotland, Wales and the North- East of England. In contrast, only 18 per cent worked for the public sector in the prosperous South-East of England.

Reasons Ireland doesn't want the North: we can't afford it. 30% employed by government? Welcome to the Anglo-Saxon economy. This is part of a long-standing policy to bribe the North into peace.

What the surge in public expenditure masked, however, is that the private-sector economies of poorer regions were performing particularly poorly under Labour. The average annual private-sector growth of the North-East of England, a Labour stronghold including the parliamentary constituencies of Tony Blair, prime minister, and many of his cabinet, was only 1.3 per cent between 1997 and 2003.

The problem is that the dispersion in private-sector performance has been so great that even the splurge of public expenditure since 1999 has not stopped the regions and local areas diverging.

London, the richest region of the UK, enjoyed more than 50 per cent faster growth in economic activity than the poorest regions between 1997 and 2004, the most recent data show. And prosperous areas close to London – the South-East of England and East Anglia – also enjoyed faster than average overall growth rates. Growth in the poorer regions – the North-East of England, the North-West, Scotland and Wales – fell below the national line.

Most of the gap arose in the first term of the Labour government, between 1997 and 2001, but there has been no narrowing since. Troubles in the London financial services industry in 2001-04 merely prevented a further widening of the gap for a few years.

[...]

Prof Andrew Henley of Swansea University studied the figures up to 2001 in great detail. He found that the economy under Mr Blair and Mr Brown was diverging faster even than it had under the then Mrs Thatcher in the 1980s. “It’s shocking, really,” he says. “Despite EU structural funds [for poor areas], we had more dispersion between 1995 and 2001 than between 1977 and 1995.”

What? The UK gets money from Europe? That can't be right.

The existence of boom and bust within a nation is rare, according to the OECD. Between 1996 and 2001, only Turkey of the 30 OECD countries had a wider spread of growth rates between its strongest and its weakest regions.

It is difficult to escape the conclusion that regional and local UK economies under Mr Blair’s government have become more divergent more quickly than under Lady Thatcher, in spite of the massive equalising force of surging public expenditure.

With public expenditure growth set to slow sharply in coming years, the disparities are likely to become more visible again, according to Prof Henley. Developments since 1997 are “pointing to a world of extremely productive breakaway regions including London, the South-East and a few cities elsewhere, a few intermediate areas and a big rump of poor performance”.

Not looking good for Gordon at the next election, is it?

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I don't know how the numbers add up for the difference the FT claims between the Thatcher period and New Labour's, but it seems immaterial to me, since Thatcher laid down the guidelines and prepared increasing ruin for the old industrial regions of Britain.

So, according to this article, a lot of the public spending we have already flagged here on ET was going to the depressed areas to bolster employment. Since we also flagged the high number of long-term unemployed in the same areas who were on Incapacity Benefit (and who, if they were counted as unemployed, would push the national 5% unemployment rate cited up to about 7%), it would seem that, without the Keynesian effort made by Brown, the state of the old industrial regions would be totally, utterly catastrophic today.

But Thatcher knew best. In a globalising world we should open up and play comparative advantage. Switch to services, and Britain's best bet, financial services.

The existence of boom and bust within a nation is rare, according to the OECD

Perhaps there's only one nation in the UK: South-East England ?

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Mar 21st, 2006 at 09:07:42 AM EST
Oh, absolutely: if they hadn't spent as they had they'd be rightly screwed. And Northern Ireland would still be a simmering time-bomb.

The point is that until now the UK has been held up as a paragon to be emulated because of its (largely fictional) free-market policies.

by Colman (colman at eurotrib.com) on Tue Mar 21st, 2006 at 09:18:05 AM EST
[ Parent ]
A paragon to be emulated, yes, of course. Which makes me mad enough. But when I think of the destruction of the economic and social fabric of entire regions I know, I get madder. And I don't even know Northern Ireland, about which I'm sure you're right.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Mar 21st, 2006 at 09:58:44 AM EST
[ Parent ]
underestimate the brokenness of the UK political system and thus overestimate the political consequences of this issue for Gordon Brown.

Overall, the vast majority of "marginal constituencies" are in those areas doing well. The poor bastards who live in areas like here in South Yorkshire already vote Labour and have little option but to do so. The Tories are not going to do anything for places like this.

Of course, what should happen is the rise of a third party willing to tackle this divide. But, it hasn't happened yet.

It's worth noting as well that an ongoing migration into the SE has been continually subsidised by every government since Thatcher, which of course helps make it all a bit of a vicious circle.

by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 21st, 2006 at 11:04:28 AM EST
Devolution would be great for the "rest of England". I can't understand why the few referenda that have been held on the creation of north-English "regions" have failed. Of course, you would need committed local politicians.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 21st, 2006 at 11:08:17 AM EST
[ Parent ]
Hm, well here in Yorkshire, the No campaign focussed on a few things:

a) Yet another layer of government, who is going to pay for it?

(linked to)

b) What is the point of another powerless talking shop?

(separate from)

c) Stirred fears in local councils that they were going to lose powers to the body.

d) Played on "national spirit" suggesting that what was really needed was an English parliament, not anything more regional.

That's about it really. The biggest factor was that there is a whole set of people in the UK who are very distrustful and disdainful of politicians and the No campaing was able to frame the idea as: "Do you want more of your money taken from you in taxes to pay another set of politicians in Newcastle/York/etc."

by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 21st, 2006 at 12:19:57 PM EST
[ Parent ]
And an assembly appointed by the local councils wasn't a winning scheme?
by Colman (colman at eurotrib.com) on Tue Mar 21st, 2006 at 12:21:02 PM EST
[ Parent ]
Well, it wasn't proposed. The great flaw of referenda is that they aare used to settle a specific proposal and then are generalised to "no one wants local governement."
by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 21st, 2006 at 12:30:22 PM EST
[ Parent ]
The evidence from Spain's 28-year experiment with devolution indicates otherwise. The problem is that the yes camp did not really believe in what they were selling.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 21st, 2006 at 12:21:59 PM EST
[ Parent ]
Well, absolutely.

The Yes camp were useless, but the proposals were pretty weak too. Control freaks at Westminister were not willing to give the local assemblies enough powers to make them viable.

by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 21st, 2006 at 12:31:11 PM EST
[ Parent ]
A good point. I occasionally forget how unrepresentative it is. Anyway, I wouldn't expect him to lose, just maybe lose some seats, opening himself up to a challenge. You're probably right though, unless reducing public spending - or reducing its rate of increase - causes some really bad fault-lines.
by Colman (colman at eurotrib.com) on Tue Mar 21st, 2006 at 11:09:12 AM EST
[ Parent ]
It would be really funny to see him lose his own seat. Without multi-seat party lists that is always a possibility ;-)

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 21st, 2006 at 11:17:48 AM EST
[ Parent ]
Which might make this part of the article, which I didn't quote, even more important:
After much effort, the Office for National Statistics now produces figures for gross value added per head at the level of parts of UK cities and small rural areas. Again, these provide little comfort for Mr Brown. The figures for 2003, released late last year, also show conclusively that the richest areas tended to have benefited from faster growth since 1997 than poorer areas.

Prof Andrew Henley of Swansea University studied the figures up to 2001 in great detail. He found that the economy under Mr Blair and Mr Brown was diverging faster even than it had under the then Mrs Thatcher in the 1980s. "It's shocking, really," he says. "Despite EU structural funds [for poor areas], we had more dispersion between 1995 and 2001 than between 1977 and 1995."

What seems to be happening, according to Prof Henley, is a divergence on a local as well as a national level: "Just as London and the South-East are pulling away from the rest of the UK, so Cardiff is pulling away from the real periphery in Wales."

The pattern becomes clear from a simple analysis of the hot spots in the economy and the weakest localities. Half of the 10 top performing localities were from London and the South-East and they all enjoyed increases in prosperity per head of 3.5 per cent or more a year on average since 1997.

In contrast, 11 localities have suffered a decrease in gross value added per person since 1997, and four of the bottom five are in far-flung parts of Scotland or Wales.

by Colman (colman at eurotrib.com) on Tue Mar 21st, 2006 at 11:11:32 AM EST
[ Parent ]
I want to thankyou for posting this diary. I think there is buried in this issue a number of key questions about the way we think "post-industrial society" and "globalization" are going to work.

This is, if you like, a small scale experiment, which we should examine to understand the effect of various economic theories. I'm a bit tired at the moment so I'm having difficulty formulating it, but basically, this is at root about the movement of labour. The Tory wet dream is that we all live in squalor in and around London, freeing up the rest of the nation to become "country estates" for rich bankers to use at the weekend.

Someone, somewhere explain to me why this seems to be so inevitable?

by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 21st, 2006 at 11:07:48 AM EST
I think it all stems from a misunderstanding of comparative advantage. If, due to labour costs, the only comparative advantage that wealthy countries have is in nontradeable goods and services, there is no way to exploit that advantage through free trade, is there?

A few months ago there was an economic analysis piece in The Independent celebrating the UK's thriving "unskilled service job market". I couldn't quite figure out whether that was tongue-in-cheek or not, but if that is the UK's comparative advantage (aside from financial services jobs) we have a problem.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Mar 21st, 2006 at 11:14:09 AM EST
[ Parent ]
I think that is a big part of it.

Another question about comparative advantage is that it seems it was developed in a world where labour didn't move that much.

The experience in the coalfields of the UK is that comparative advantage is a nonsense. There is nothing that the people in these areas can actually provide that is of value to the people who have the money. (Well, not nothing, but allow me generalisation for now, we can do subtleties in a diary later. ) As a result what has happened is part depopulation and part economic depression. (I think this pattern can also be seen in Eastern Germany.)

Now the free marketeers say "so what, that's how the market works!"

But, of course, there are two concerns:

a) All this movement comes out of environmental abuse (c.f. rdf's water diary, mine and DeAnander's comments.)

b) If the pattern is repeated on a larger scale, we are basically saying comparative advantage doesn't work, there's only competitive advantage and we'll all have to move to those areas that have it, or just sit in broken economies. Trouble is, it's not feasible to move that many people around, it barely works on the UK scale...

c) This is localised Great Depression all over again, our economy is wasting the potential productivity of tonnes of people. But here I guess I slip into a Keynesian quagmire.

by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 21st, 2006 at 12:29:13 PM EST
[ Parent ]
Another question about comparative advantage is that it seems it was developed in a world where labour didn't move that much.
Adam Smith actually made the point that Labour is the least mobile of the factors of production (though I have been unable to find the exact quotation.

But I think the point is that when Comparative Advantage was developed, capital could not move in pursuit of cheap labour either. Ricardo's example or wine and wool trade between Portugal and England is a case in point. If the capital from the least efficient country could flee to the more efficient country and make a profit there, what would be the point of having the least efficient country produce anything?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Mar 21st, 2006 at 12:35:57 PM EST
[ Parent ]
Paging Drew, TGeraghty, Jerome and anyone else who's done more economics than I have (I know, that's a lot of people, but hell, this is important.)

Migeru asks the question about comparative advantage and free movement of capital. Can anyone explain the answer to me?

Right now, it looks like comparative advantage is a busted flush.

by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 21st, 2006 at 12:48:57 PM EST
[ Parent ]
As the rappers like to say, "Big Ups" for the Smith quote.  Have you finished The Wealth of Nations yet?

I think a big part of the problem is that the developed world is so far ahead of the developing world that the principle of comparative advantage can't hold for the time being.  However, if all countries were all equally wealthy, I think it's safe to say that it would hold.

The principle doesn't account for the "catching-up" effect.  It's not that the idea of comparative advantage is incorrect.  Not at all.  It's illustrated all the time.  It's just that it's incomplete as we typically discuss it.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 21st, 2006 at 04:10:02 PM EST
[ Parent ]
So, the issue with comparative advantage in the "catching up phase" might be:

a) Oversupply of cheap labour, thus demand for goods is lower than supply. (Possibly also due to factors like Chinese prison camp slave labour and the like...)

b) Capital is free to move to sites of cheap labour, so there is no investment in the higher labour areas.

Is that what you are saying?

by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 21st, 2006 at 04:32:10 PM EST
[ Parent ]
Or more accurately perhaps, is that what I am saying?
by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 21st, 2006 at 04:41:57 PM EST
[ Parent ]
I finished The Wealth of Nations in 2004. I was going to read Ricardo next, but I skipped to John Stuart Mill as my Ricardo ended up in a box in a friend's garage. I was now planning on reading Marx and Walras or Pareto.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 21st, 2006 at 04:35:45 PM EST
[ Parent ]
Also, remember that there is no trade if one of the two countries can't produce, because that would imply that they have no money.

From a more political standpoint, I think we should be looking for unionization of service-sector employees more and more in the near future.  That will enable them to secure stronger wages increases.  And their employers will be able to pay it, because, hey, they make big profits from cheap manufacturing.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 21st, 2006 at 04:14:16 PM EST
[ Parent ]
But isn't that effectively the case for a country that is deep enough in debt? It doesn't actually have any money, so it subsists off recycling the money it can borrow? (e.g. Chad?)
by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 21st, 2006 at 04:33:35 PM EST
[ Parent ]
Ok, so there will be no trade, but the capitalists won't care, even those from the least efficient country, since they can make a profit buying producition facilities in the more efficient country. Also, they will pay for services at home. In this say, the least efficient country will be able to import products from the more efficient for both the capitalists and the service workers in the least efficient country.

By 'efficient' read cost-efficient. My point is that China is more efficient (in terms of return on capital) than the UK because of labout costs, and so the UK is losing its entire manufacturing economy to China and replacing it with UK capitalists who own Chinese production facilities and UK service workers catering to the capitalists.

Here 'UK' stands from developed countries, and 'China' stands for emerging economies, with both agricultural and industrial production being outsourced.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Mar 21st, 2006 at 04:41:41 PM EST
[ Parent ]
contrast that article with the other one in the opinion pages:


How the City of London came to power

By Hywel Williams (a former advisor to John Major)

The political and cultural consequences of the City of London's hegemony over British life are as important as the financial and commercial ones.

For here is an elite of the elites whose power has grown to a dimension that is truly imperial in the modern world - stretching across countries and continents, able to ignore the previous constraints of national sovereignty.

(...)

The ability of the British political elites to cut a good financial deal as a result of their power arrangements has been a constant theme. There is a direct line of crooked dealing that connects the church lands grabbed by early 16th-century politicians because of the Protestant reformation with the share options and directorships ­garnered by their late 20th-century successors because of the Thatcherite ­privatisations.

The hegemony of today's City elites is, however, very different from the eminence of their predecessors, who had to compete and coexist with other forms of elite power. Britain's once self-regulating professional elites have had the heart ripped out of them by the benchmarking, target-focused state and by a bogus consumerism, with its empty jargoneering about "customer-shaped service delivery".

This is as true of doctors and of dons as it is of teachers, soldiers and policemen. In the process, Britain has lost its independent-minded public service elite. City lawyers and accountants now derive their status from the firms they work for rather than from their membership of a professional body.

Meanwhile, the political elites have collapsed into introspection as the gap between the parties narrows in reflection of their unanimous view that markets work.

The intellectual victory of capitalism - a battle advanced and won by political ideologists - has deprived the political elites of independent power and placed them in the service of financial markets.

In the process, the only elites left standing are the financial ones, which also exercise predominance over the business elites as Britain's manufacturing economy produces less and less.

(...)

In the absence both of alternative sources of power and of any independent-minded critique, the City of London has become the central bastion of an elite whose attitudes are more like that of an off-shore centre.

A benign tax regime and a prosperous economy means that it makes sense for the financial elites to live and work here for the moment. But the same work could be done anywhere that has a broadband connection. The country through which the financial elites travel at the end of a working day has, to them, many of the qualities of a foreign one. They use, after all, few of that country's public services.

(...)

The beautifully suited and well -spoken agents of City finance embody, by contrast, the 18th-century attitudes of a guiltless lust and a self-serving preparedness to stand aside from the national cause and to go wherever the money leads them.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Mar 21st, 2006 at 02:14:53 PM EST
Preach it, brother Hywel!

I've been banging on about this for ages, although I have been known to say it is a world problem, not just a UK problem.

The sadness is that so few people seem to recognise it and even fewer are prepared to try to do anything about it and fewer still have an idea what can be done...

by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 21st, 2006 at 02:53:52 PM EST
[ Parent ]
Now there is a Welshman who's worth reading!
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Mar 21st, 2006 at 03:17:53 PM EST
[ Parent ]
I had to leave you something to write about.

And I missed that article.

by Colman (colman at eurotrib.com) on Wed Mar 22nd, 2006 at 03:08:14 AM EST
[ Parent ]


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