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My nagging concern at #CPC12

    The atmosphere at the Conservative party conference was far more optimistic and upbeat than I expected, despite the on-going economic problems. One gets the feeling that the party is the only one that really gets just how hard-earned real (as opposed to debt fuelled) economic growth is, as evidenced by the IMF’s recent downgrade of the UK sustainable growth rate from 2.7 per cent in 2007 to 1.7 per cent today. Quite simply, long-term growth is driven by improvements in productivity, which will require us as a country to be more enterprising, innovative and competitive – key themes of David Cameron’s speech. The IMF’s re-assessment of the UK’s pre-crisis position suggests that our growth then was even more unsustainable than first thought.  In fact, as Chris Giles reports, it thinks the economy was running 3.6 per cent faster than the sustainable level of GDP in 2007. Thus government spending and revenue increases were based on somewhat illusory growth. Judging cuts against spending unsustainably therefore presents a warped narrative: if spending was producing false growth, then we might well expect cutting it to eliminate that false growth. It seems the key economic aim of this government should be to set out a path for balanced public finances while doing all it can to raise the sustainable growth rate.

    But among all the good stuff I heard at the conference, I felt a nagging concern that many in the party are beginning to see globalisation as a challenge, rather than an opportunity, and some of the arguments about the need to export more are beginning to resemble the sort of mercantilism that Adam Smith so forcefully debunked. Many talk about the rise of emerging markets as if the competition they provide in the production of manufactured goods is a bad thing – i.e. exports are regarded as a good thing for us, whilst imports are regarded as a bad thing. What’s more, many seem to be becoming a bit starry eyed about producing manufactured stuff as opposed to adding value in other ways.

    In reality, whilst exports are of course necessary to give us the income to spend, trading through comparative advantages and importing goods makes us more prosperous, because importing stuff with a higher opportunity cost for us to produce ourselves enables us to have both the products and more income left over than we would otherwise have. Trading is therefore mutually beneficial, and imports enhance us. Growth in developing economies enhances the opportunities to trade and specialise. These trades are not a zero-sum game.

    In addition, the growth of China and India and their middle-classes represents a huge opportunity for service-based economies like the UK. Economic evidence suggests that as people’s incomes increase, their demand for services increase much more quickly than their demand for manufactured goods. Yet, I sense that many members of the party are becoming obsessed with rebalancing the economy in favour of a manufacturing renaissance – seemingly falling for the Leninist view that real value is only added by industrial production. In reality, capitalism is about adding value. Producing physical products is no nobler than adding value in service industries. After all, a pound’s worth of legal services has the same effect as a pound’s worth of bought car. It’s up to the market to decide where value is added.

    So while the Conservatives are right that Britain must do more to pay its way in the world, with the government required to be much more radical in setting the conditions for higher sustainable growth and competitiveness, we should urge caution. Of course there are plenty of examples of brilliant innovative UK manufacturers who will, deservedly, continue to thrive. But the way in which importing goods makes us better off should not be forgotten, and a nostalgic desire for a larger manufacturing sector should not entail policies which work against market signals.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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    Comments

    Steve F - About 2531 days ago

    'After all, a pound’s worth of legal services has the same effect as a pound’s worth of bought car.'

    Hmmm ... Are you sure?

    Car manufacturing tends to employ a lot of support services and companies & hence has strong multiplier effects - I don't think the same can quite be said for legal services?

    Also, cars are expensive items and buying cars from overseas just sends more and more UK capital, orders, skills and tax receipts overseas.

    Even the Tories doing most business overseas seem to have some concerns about all of the effects of globalisation & I think that their concerns are justified.

    I think you've written a good article and I enjoyed reading it - Thank you!

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