Economics: League leaders

Globalisation is a clumsy label that is attached to a series of political, economic and social developments, such as the influx of overseas footballers into the Premiership, off-shoring of British jobs, the rise of India and China as major trading nations and the growth of a multi-cultural society in the UK.

People, goods and capital now move with greater freedom around the world. The net effect of these and other changes is to reduce the significance of nationality as economies become increasingly integrated. The fact we are an island offers no protection from these global trends.

It clearly has an impact on government, and the role of the Chancellor has changed fundamentally over the past few years. A trend discernible under Kenneth Clarke has been formalised by Gordon Brown. The Chancellor no longer manages the economy by tweaking interest rates or taxes, or even introducing an incomes policy, to manage demand. Control of interest rates now rests with the MPC, fiscal policy is used to meet other social or political objectives, while incomes policies have been confined to the history books.

Nowadays, the Treasury has taken on something more challenging and longer-term, the task of improving the supply side performance of the economy. In the new global marketplace, not only do British goods and services have to win overseas buyers, but the UK also has to be able to attract investment, which is the key to growth and competitiveness. At the same time, policymakers cannot afford to lose sight of the fact that domestic companies can choose to move to other countries if the operating environment no longer suits them.

Today, thinking of the Chancellor as the financial director of a company called UK plc is a redundant concept. It is more realistic to regard him as the chief financial officer of a subsidiary company called UK Ltd, while the parent company is now Global Inc. The Chancellor’s role is to ensure that his subsidiary is viewed as a competitive and attractive location for the multinational investment that underpins growth.

A vital aspect of government policy, therefore, is to ensure that Britain is a good place to do business or, as Mr Brown has put it, that the UK is an investment-friendly environment.

Some surveys suggest that the UK is slipping in the competitiveness rankings. The 2005 World Economic Forum put the UK in 13th place in terms of its Growth Competitiveness Index, down from fourth in 1998. The IMD World Competitiveness Yearbook 2005 shows a similar pattern, putting the UK in 22nd place, having been ninth in 1998. Yet the Ernst & Young European Attractiveness Survey still has the UK in pole position as an investment location and the OECD’s recently published data on global flows of foreign direct investment (FDI) shows that the UK was the leading recipient in 2005. Both of these seem to represent a vote of confidence in the British economy.

What seems to be happening is that the UK is still the most popular European location, but less so than previously. Eastern Europe is gaining ground, particularly in manufacturing, where the UK is no longer a heavyweight player. On a global basis, Western Europe still has a great appeal for international decision-makers, but its lead is diminishing as China expands.

Various explanations are offered for the decline in Britain’s comparative advantage. Many businesses believe that a steadily rising tax burden and increasing regulations (such as health and safety, employment and environment) are undermining the UK’s ability to compete. The UK also has a long-standing labour productivity problem. The other six countries of the G7 produced 10% more per worker than the UK in 2004. Lower investment (relative to GDP) than our international competitors was a likely contributory factor, while the current rate of R&D spending, at 1.9% of GDP, is well below the OECD average. An inadequate transport infrastructure and limited government support are other negatives about the UK (relative to the rest of Europe).

But not all the news is bad. The industrial unrest, which undermined the UK’s reputation in the 1970s and 1980s is history. Just 157,000 working days were lost through industrial disputes in 2005 (six per 1,000 employees) compared with 6.4 million (282 per 1,000 employees) in 1985. The UK’s record in recent years has been consistently better than the EU average.

Labour markets here have greater flexibility than in the EU and the UK’s more welcoming attitude to migrant workers has widened and deepened the skills base. And we have the great natural advantage of the English language as well as a cultural heritage and social climate many foreigners find appealing. Stability (political and economic), access to capital and the transparency of regulations are also significant pluses over the rest of Europe.

The conclusion is clear. League positions are not for life and standing still in an increasingly competitive world of international trade and footloose capital, is not an option. There are always others willing and able to take measures to improve their positions and a lead once lost, is hard to regain.