Selling the Country Short

Kevin Albertson

Whither Steel?

A disturbance in the forge
The news that Tata Steel (UK) (formerly British Steel) is to shed 1200 jobs in the UK, this news coming on top of SSI’s closure of Teeside’s last iron and steel plant, are the latest symptoms in a story of long-term decline in the UK’s manufacturing capacity. They might well cause us to wonder whether or not it is possible to “rebalance” our economy, a long-touted goal of UK governments of various stripes.

It might appear we can restore UK competitiveness and rebalance our economy simply by depreciating the £UK exchange-rate with our trading partners: And some would argue this is the policy which China is pursuing in its recent depreciation against the US$. However, the UK exchange rate “floats” against other national currencies. Therefore market forces will ensure the UK is always in balance with the rest of the world.

A Capital Problem
Despite our floating exchange rate, it is clear the UK labours under a balance of trade deficit, other things equal, this should cause the exchange rate to depreciate, however, the difference between exports and imports is made up in the capital account. Although the supply of, and demand for, foreign exchange are about even, because of capital flows, the UK does not earn all of the foreign exchange which we attract.

Loans for lifestyles
For example, we can borrow from overseas in order to maintain our lifestyles as incomes stagnate or fall. This only works in the short-term, of course. This situation may well get worse before it gets better (if it ever does): The Office for Budget Responsibility has forecast that, by 2020 UK household borrowing will rise to a level even greater than that which we saw prior to the onset of the financial crisis of 2007. On top of this, we have private sector business and government borrowing. To the extent that loans attract foreign exchange to the UK, the exchange rate appreciates and our exports become less competitive in world markets.

Enterprises for electronics
Alongside of loans, the UK attracts foreign currency by selling off domestic industry. Since 2004 over £400Bn of UK companies have been bought out by foreign owners; other things being equal, this has “crowded out” an equivalent amount of our exports.

Property for playthings
It is not only the title deeds of industry we are inclined to export; we also sell our real estate overseas. Estimates of the precise amount vary, but it is clear foreign ownership is an increasingly common feature of the UK property market. In many cases such “investors” keep their purchases vacant, thus exacerbating the national housing shortage. As we export the title deeds to British housing, the exchange rate appreciates, British manufacturing is crowded out of world markets – and Britons are crowded out of affordable housing.

Investment for imbalances
Along the same lines, we might also highlight the perverse effects of foreign investment in the UK. For example, if China invests hundreds of millions in: Manchester Airport, and/or HS2 and/or nuclear power, this inflow of foreign exchange will cause the exchange rate to appreciate, once again disadvantaging our exports. In practice, Britons invest in other nations as well, of course, partly cancelling this effect. However, we are neither investing enough at home or abroad to offset all these capital inflows.

We should bear in mind, Britain might be better off overall as a result of this investment; it cannot be denied that foreign ownership has saved the UK’s car industry, for example. Better, however, if we learned as a nation to invest in and run our own businesses. If it is possible for foreign governments to make money out of investing in the UK, why is it not possible for our own government to do so?

Oil – the slippery slope

A symptom of Dutch disease?

On top of this, the UK has generated foreign exchange through the export of North Sea oil and gas. When we “earn” money selling such non-renewable resources, the exchange rate appreciates and, as above, we relatively disadvantage other exports. As Sir Michael Edwardes of BL Ltd (aka British Leyland) argued in 1981, if the cabinet of the day did not have the wit or imagination to keep oil revenues from hurting the UK economy, it should “leave the bloody stuff in the ground”.

One government which apparently had wit and imagination was that of the Norwegians, who used their oil revenues to establish a sovereign wealth fund. By investing overseas, the Norwegians prevented excess appreciation of their currency. According to some estimates, the UK could have accumulated between £400Bn and US$1Tn (£650Bn) if we had likewise invested our petro-currency windfall. As it is, hundreds of billions of £s of UK exports have been priced out of world markets.

Stopping the buck
Ultimately, it is reasonable to conjecture, that the relative uncompetitiveness of the UK’s exporting industries has less to do with how hard we work, and a lot more to do with our national and political ideology. Oriented, as we are, to short-term over long-term, we could do more to make sure our businesses and property serve British rather than foreign interests.

The steelworkers of Stocksbridge may be the latest casualties of our national lack of foresight, but they won’t be the last – and they are most certainly not solely to blame for the national policies (or lack thereof) which undermined their prospects.

If we wish to address our unbalanced economy, we must stop selling our country short.

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Please note that blog posts do not necessarily represent the views of other authors on the blog or of the Manchester Metropolitan University

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