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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.

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