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It’s the country’s deficit not the government’s that matters – devalue to re-industrialise

Save our steelThe imminent crisis in what is still laughingly called the British steel industry is being greeted just as other similar developments have been for decades – with consternation and anger, with concern for the implications for social cohesion in general and for workers’ families in particular, but with no recognition that this is just the latest episode in what is now a depressingly long saga.

As one British industry after another has either passed into foreign ownership or closed down, or – as in the case of the steel industry – both, very few recognise that this is not just a one-off but is part of the long and not so slow de-industrialisation of Britain.

As we emerged from the end of World War II, the UK’s share of world trade in 1950 was a respectable 10.7%. It is now just over 2%. Our share of trade in manufactures has fallen by a similar proportion.

Manufacturing accounted for 32% of national output in 1972, but that proportion is now about 10% and still falling. In Germany, the figure is 21%. No other major developed country attempts to maintain its developed status with such a low contribution from manufacturing industry.

Not surprisingly, we run a huge deficit in our trade in manufactured goods. Much of that deficit arises in our trade with the other developed economies of the European Union – the countries that, we are told, will stop trading with us if we leave the EU.

The consequence of the decline of manufacturing is that we have run a perennial trade deficit in every year since 1982. We have, in other words, traded at a loss and failed to pay our way in every one of the last 34 years. That deficit, the country’s and not the government’s, is of course the one that really matters – yet it is now so much part of the familiar economic landscape that it scarcely warrants a raised eyebrow.

How do we get away with pathetic rates of investment (a net rate of nil) and productivity growth (almost zero), and with running at a loss year after year? We don’t. We have to borrow from overseas and sell off our assets to foreigners to close the gap. We have sold over £600 billions’ worth of assets over recent years. This is a rake’s progress that cannot be sustained for much longer.

On the few occasions that the matter is raised, we are given reassuring answers. We can’t compete in manufacturing against low-cost, low-wage competitors, we are told – so how come the Germans can, and that some of those “low-cost” economies now enjoy higher living standards than our own?

Then we are told that it makes sense to concentrate on high-value activities like financial services rather than on dirty, smelly manufacturing. But doesn’t that leave the economy too narrowly based and isn’t it special pleading on the part of the City of London which in any case hogs all the benefits and leaves the rest of the country, in both social and geographical terms, scrabbling for a crust?

So, if we were for once to take these matters seriously, what is to be done? The first essential is to understand why de-industrialisation continues to gather pace.

The stark truth is that we can’t pay our way because we can’t persuade enough customers, either at home or abroad, to buy British-made products at the prices we ask for them. And that, in turn, is because it costs more to make goods in Britain than it does elsewhere. And why is that? Because we say that it should.

About 70% of the costs in manufacturing are domestic costs, such as the costs of labour and so on. Those domestic costs are translated into international prices by the exchange rate – and, in the end, we set the rate.

If the rate for sterling was higher, our goods would be even less competitive, so that our market share in international markets would fall further, as would profit margins on international sales. In the long run, if the rate is kept at too high a level, it will inevitably fall, but not necessarily to the point where we could start again with a level playing field.

If the sterling rate was lower, sales and profit margins would pick up – a lesson learned by many other countries which have grown at our expense. So, why don’t we learn from them, and manage our exchange rate so that it doesn’t prejudice our economic health?

The answer is that we set a high exchange rate because it seems to suit our interests – or at least of some of us. It suits those who hold assets, but it means that wage-earners are made to bear the whole burden of trying to improve competitiveness by accepting lower wages – a major factor underpinning widening inequality.

But the exchange rate is decided by the market, we are told – we couldn’t change it even if we wanted to. But if that were true, how is it that other countries have engineered lower exchange rates without difficulty and do so regularly? Just ask the Chinese, or Prime Minister Abe of Japan, who has brought about a depreciation in the yen’s value of more than 30%.

There will of course be much wringing of hands and crocodile tears over the steel industry, but there will be more of the same, continuing seven decades of decline, unless we face some hard facts and take the required action.

This article previously appeared at Bryan Gould’s own website

5 Comments

  1. David Pavett says:

    What I find disconcerting about articles like this is that we are are asked to accept a large number of wide-ranging judgements either on trust or as if they were obvious.

    The economy is a big and complex matter with many differences between expert opinion, even on the left, as to the appropriate solution.

    So at the very least the sources for the main factual claims should be given. It is so easy to do this these days with hyperlinks. Even Bryan Gould’s site gives none of this. Why not? I really don’t get it.

    Besides, the de-industrialisation of the UK should be set in a broader context of the de-industrialisation of the former industrial countries with the shift of material production to the less developed world. This may be right or wrong, it may be something to be resisted or not. What is certain is that it is a global phenomenon and therefore discussion of related national issues should surely be set in that context.

    On the specific question of exchange rates and devaluation I am at a loss to understand the claims BG makes. He says

    But the exchange rate is decided by the market, we are told – we couldn’t change it even if we wanted to. But if that were true, how is it that other countries have engineered lower exchange rates without difficulty and do so regularly?

    So how does it work? What is the answer? My very limited understanding of these issues is not advanced by this at all.

    1. Mervyn Hyde (@mjh0421) says:

      David: Rather than voicing my own recipes for own predicament I hereby list a set of links that sum up what you are referring to.

      Trade Deficit over the last 10 years and beyond:

      http://www.tradingeconomics.com/united-kingdom/balance-of-trade

      Currency exchange rates and policy affect:

      http://www.brightknowledge.org/knowledge-bank/business-and-finance/features-and-resources/how-do-exchange-rates-work

      A world Bankers view on how trade has changed since he left university compared to the students just leaving Stanford, between the East and the West. James Wolfensohn:

      https://www.youtube.com/watch?v=6a0zhc1y_Ns

      Finally we are told that we don’t have the money for our public services and the country is broke, which is a total fabrication, and this last video nails that lie.

  2. Karl Stewart says:

    Ban all steel imports

  3. Peter Rowlands says:

    It is disappointing that Bryan Gould, for whom I had a lot of time when he was a leading left winger in the Labour Party here, continues to peddle the ‘competitive devaluation’ line, the main thrust of his book with John Mills last year, Call to Action.
    Competitive devaluation can of course bring about an improvement in terms of the balance of payments and exports, but it is by definition at another country’s expense, and is unlikely to last because the same trick will be used by competitors. It is certainly no answer to the immense problems faced by the UK and world economy.

  4. Laurie Rhodes says:

    During the Great Depression, classical economists retained their faith in the free market. Yet, economies retracted, wages, disposable income, growth and demand all fell. Instead of accepting the laissez-faire / free market idea was responsible for the unwinding economy the solution of devaluation was seized upon by all countries with disastrous effects! The solution was flawed in failing to recognise the essential problem was a demand crisis. Without any nation holding large capital reserves or unmet demand, the impact of devaluation simply pushed up the cost of imported goods and debt servicing.

    Last week, Australia’s steel manufacturer Arrium moved into administration with the potential loss of 7,000 jobs. The world’s largest user of steel, China, is also the world’s largest consumer and in 2014 consumed nearly half of all of the world’s steel. Zhu Jimin, the head of the China Iron and Steel Association commented at the end of 2015 “China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” … “As demand quickly contracted, steel mills are lowering prices in competition to get contracts.”

    The Australian dollar is about half the value of the British Pound. China is swimming in steel and Australia with its cheap currency and mountains of iron ore is now facing a complete collapse of its industry. The suggestion that devaluing the Pound will result in “sales and profit margins” picking up is without basis.

    A devaluation of the Pound may be attractive for foreign interests keen to see a net reduction in commodity costs but the other effect is to deliberately reduce the buying power of average wages. As almost all manufactured goods consumed by British working people are now imported, Bryan’s proposed solution is actually an across the board wage cut as it guarantees to reduce the real purchasing power of wage and salary earners. Any real increase in disposable income or wages in the future, would also necessitate further devaluation to retain cost competitiveness.

    In 1984 New Zealand’s incoming Thatcherite government announced a 20% devaluation of the currency for the same justifications Bryan mentions. The advanced notice of currency devaluation saw a run on the dollar as every investor and corporation that could, pulled their reserves out of the nation before devaluation… only to bring the cash back after. Those with the power to shift funds out of the country gained an instant 20% leaving the costs of the exercise to be carried by salary and wage earners left behind. With floating exchange rates there was no benefit to the economy but the structural cost of capital flight caused major damage.

    I have a lot of respect for Bryan Gould but can’t agree with his analysis on this. The issue is not that production costs (and by definition wages) are too high – it’s that the international economy cannot be relied upon to manifest any demand for British products.

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