7. The global economy
Over the last twenty years successive governments have been able to point out to the electorate that their standard of living has been improving faster than it has ever done because consumption was ever increasing. What the Government has never said is that this was due to more and more goods and services being imported and more and more jobs being sacrificed at home. In other words people's standard of living has improved but only on the back of cheap, imported goods, and more recently service jobs, being transferred abroad. It did not come from the industry of the British people. This is a downward spiral that has to have serious consequences.
Over the last decade Tony Blair and Gordon Brown have frequently stated that opening up the global economy would dramatically increase trade and with it wealth. When politicians keep on making statements without there being any real need there has to be a good reason to get worried. All politicians know that the population needs to be continually reassured that there will be no problems if the country loses its manufacturing and trading base. Giving the population cheap foreign goods was a way to keep the electorate happy. Drastic measures would have to be put in place to lower the cost of labour and hence goods produced in Britain and the Western World to that of India and China. However without this happening exporting will become progressively harder except for the most prestigious goods.
The concept of the global economy is folly for the Western Nations in the long term. Politicians like to be able point out to the electorate that they are materially better off than they were the year before because they have been able to buy more consumer goods. The consequences of not welcoming cheap imports would be to make the electorate feel poorer and this will always be politically unacceptable because people will soon become unhappy. The old Communist countries that have recently joined the EU demonstrate this point. The population in Eastern Europe was very resentful when they could see the increasing standard of living in the West but could not share in it. The resentment of the people of the old EU countries will be extreme when they find that their ability to consume is declining.
One of the great untruths of the modern World is that free trade will somehow result in increased wealth. All that will happen is that goods will be made in the cheapest place which will usually mean the country with the lowest tax regime and with poor social conditions. This is the only way that a small part of the World's population can have a totally unsustainable standard of living based on borrowed money. The ability to manufacture goods is ultimately limited by the natural wealth of the planet and the ability of people to pay for finished goods. There may be a lot more apparent activity as materials and products are moved around but overall there can be no real gain from having a global trading environment. The concept of free global trade might appear to be wonderful but ultimately the money will flow to the country which has the lowest cost of manufacture or the most plentiful supply of natural resources. No resource is unlimited and eventually World trade has to fail when the financial reserves of the main consumers are exhausted.
The anti-globalisation lobby is correct for being worried about the way that matters are progressing, but for completely the wrong reasons. To import something you have also to export something or at least to do something useful to justify your right to exist. For the last two decades the West has been importing more and more, and exporting less and less. Using the Third World to supply the essentials of life is good as long as there are the financial reserves available to pay for it. There are few companies that trade solely in Western produced goods still in existence and those that remain are under considerable pressure from overseas competition. There is little reason why the bulk of the UK's manufacturing capacity should not be transferred to the Far East to take advantage of the lower labour costs and the better trading environment. When this process reaches its logical end the ability of Western societies to import raw materials will end. Countries that manufacture goods and export them will be able to buy resources on the open market. Countries in which the population sell each other cups of coffee in exchange for hair cuts will have little to bargain with.
It is hard to see how the British economy can recover from the recession that it is sliding into as it no longer has the necessary manufacturing capability to mount an export drive. The idea that technical innovation and creativity can create wealth is a forlorn hope as it assumes that no one else in the world is technically creative. The number of graduates being produced in China and India shows the naivety of this proposition. The fact that the Chinese have already launched a man into space and in a few years time will be building a full range of commercial airliners shows the way that things will eventually go.
No politician is going to tell the electorate that there is a problem. Instead the population will be reassured that the global economy is a wonderful thing, that the working population is rising, and that the gross domestic product is increasing. The reality of the situation is that pensions and comprehensive health care will soon become a thing of the past in a country that is fast approaching bankruptcy. When the money finally runs out one end of the supply chain will collapse and the other will experience severe difficulties.
Having a world divided into East and West meant that governments thought strategically. It also meant that it was possible to keep billions of people out of the West's trading system. Now that the markets of the West are open to all no British manufacturer stands any chance of competing when saddled with workers who carry a massive tax burden, heavy regulation, and an underfunded infrastructure.
The British Government is always confident that large amounts of money will flow from the skills to be found in the City of London. The money that has been earned in the Square Mile has kept the British economy running for years. Without this income the British economy would have been in a poor state for the last twenty years. What many people do not factor in is the Chinese love of gambling and their dexterity with numbers. In a few years the Chinese will be able to handle the stock markets as well as the best traders in London and New York. When this happens the City of London will decline as a financial centre. From then on the Chinese will have the lion's share of the World's financial resources and it will be under their direct control.
The problem is now politically impossible to recover. No British politician could persuade the majority of the population that they should pay twice as much for their consumables just so that companies based in the UK and burdened with a high tax regime can compete with a company in a developing country. Most people have a very short term view of life and will not accept any reduction in their standard of living even if it means destroying their own future and that of their children.
So few people in Britain are now engaged in making anything that there is no opportunity for real growth to take place. The current Government has created one million new jobs since it came to office but these are not productive jobs in the commercial sense. The Government just introduced a job creation scheme that recycled tax revenue. The people employed in these jobs could be out of work and spending their time at home. It would be much better for the environment. Most importantly 70% of these jobs have been taken by migrants which explains their real purpose. This action has allowed the Government to claim that the level of employment and the Gross Domestic Product has increased year on year. When a Government has to resort to such measures to keep the statistics moving in the right direction it is time to get worried.
Each month the value of the goods that are imported into and exported from the UK are recorded and the balance of trade figures issued. Every year the Government proudly announces that Europe is Britain's most important trading partner. However the EU is a common trade area. Exporting goods between member states of the EU is no different to exporting goods between say England and Scotland. The fact that a German farmer sells beef to France and that a French farmer sells cheese back to Germany makes no difference whatsoever to the ability of Europe to earn its way in the World. Europe is not well served with raw materials and although it has labour the tax regimes and social costs mean that this labour is very expensive. As Europe is largely dependent upon raw materials imported from outside the only figure that matters is the amount of trade that takes place between Europe and the rest of the World. This is just one of the reasons why the countries in the Euro Zone have seen no real business development over the last ten years. Much of the 'trade' is reciprocal and its quantum distorted by multiple accounting. If the Euro Zone was treated as a single financial entity the conclusions would make depressing reading.
The importance of recognising the difference between 'real money' and 'recycled taxation' is crucial to the economy yet is ignored by government departments which take a very short term view of balancing their books. This difference is the reason why it is short term folly to purchase goods and services from abroad. If a Government department buys goods from within the country most of the money finds its way back to the Chancellor in the end. Buying the same product from abroad might make a department's budget look good for that year but over an extended period of time it is financial suicide. It is money that is being lost to the system or energy that is being wasted from the economic flywheel of the country. For a time the Ministry of Defence purchased its meat from Argentina. Paying four times the amount to British farmers would have made commercial sense because most of the money would have found its way into the economy and then back to the Treasury. To the Civil Servants who have the job of balancing an annual set of accounts such logic does apply. Similarly if individuals purchase low cost products that are manufactured abroad then part of that money is lost from the British economy. Up to half the money that the British have borrowed in the last ten years has, by now, been transferred abroad. It creates the illusion of prosperity but in the long term it is financial suicide.
Published: August 2008