I understand the widespread pessimism. The underlying problems of our economy can easily seem daunting. And yet countries can sometimes manage transformations.
In the past 50 years, the leading examples are Asian countries that have undergone a development surge as they industrialised and took a full part in the world economy – China, Korea and Taiwan – or others nearer home, such as Poland, that recovered from the ravages of communism.
Admittedly, the UK has a very different starting position. It is an already developed economy, highly advanced in many ways. Its challenge is how to recover its mojo.
In his book “The Rise and Decline of Nations”, the economist Mancur Olson argued that economically successful countries are always in danger of slipping back as their very success causes institutional structures to ossify and they become less capable of dealing with difficulties or seizing new opportunities. To prevent this, he argued, every so often they need a profound shock of the sort that is often provided by defeat in war.
Two good examples of this are Germany and Japan. In both countries, defeat in World War II brought a complete restructuring of not only the economy but also of society. By contrast, the UK was hobbled by, not just the costs of the war, but also the burdens of victory.
In fact, we did have an Olsonian moment somewhat later. We experienced the equivalent of defeat in war during the 1970s, when it seemed that the UK had become ungovernable. That made possible the radical reforms of Mrs Thatcher during the 1980s.
Like her or loathe her, you cannot but be awed by the radicalism of her governments. She set out to arrest and reverse Britain’s economic decline. And, for a time at least, she succeeded.
The secret of her success was more than just boldness. She and the people around her had ideas which had been hammered out in opposition. And they had thought about sequencing. They wanted to reduce taxes radically but they realised this couldn’t be done immediately. Reducing inflation and putting the public finances on a sounder footing had to come first – although they did manage a downpayment on structural tax reform even in the 1979 budget, when they cut the top tax rate from 83pc to 60pc and increased VAT from 8pc to 15pc.
Circumstances are different now and we cannot simply copy the example of the Thatcher years, even if we want to. Nevertheless, there are things that we can learn from that experience.
To achieve faster economic growth you do not necessarily need a detailed plan. After all, no one planned the Industrial Revolution in the 19th century.
But in today’s world, you do need a strategy, even if it is the one adopted by Hong Kong during its long period of rapid economic growth – namely to minimise interference by government in the workings of the market and to make government as efficient as possible.
We will need to do more than that, not least because the influence of the state is already huge across all the failing aspects of the economy. But what to do? And in what sequence?
Answering these questions is the task I have taken on in agreeing to head up a new unit at the think tank Policy Exchange to analyse our economic under-performance and to develop a policy programme to boost the UK’s productivity.
I know this is ambitious, but it seems to me that it is crying out to be done. Accepting our country’s slide into mediocrity is simply not good enough.
Roger Bootle is senior independent adviser to Capital Economics
Britain does not have to accept economic oblivion
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I understand the widespread pessimism. The underlying problems of our economy can easily seem daunting. And yet countries can sometimes manage transformations.
In the past 50 years, the leading examples are Asian countries that have undergone a development surge as they industrialised and took a full part in the world economy – China, Korea and Taiwan – or others nearer home, such as Poland, that recovered from the ravages of communism.
Admittedly, the UK has a very different starting position. It is an already developed economy, highly advanced in many ways. Its challenge is how to recover its mojo.
In his book “The Rise and Decline of Nations”, the economist Mancur Olson argued that economically successful countries are always in danger of slipping back as their very success causes institutional structures to ossify and they become less capable of dealing with difficulties or seizing new opportunities. To prevent this, he argued, every so often they need a profound shock of the sort that is often provided by defeat in war.
Two good examples of this are Germany and Japan. In both countries, defeat in World War II brought a complete restructuring of not only the economy but also of society. By contrast, the UK was hobbled by, not just the costs of the war, but also the burdens of victory.
In fact, we did have an Olsonian moment somewhat later. We experienced the equivalent of defeat in war during the 1970s, when it seemed that the UK had become ungovernable. That made possible the radical reforms of Mrs Thatcher during the 1980s.
Like her or loathe her, you cannot but be awed by the radicalism of her governments. She set out to arrest and reverse Britain’s economic decline. And, for a time at least, she succeeded.
The secret of her success was more than just boldness. She and the people around her had ideas which had been hammered out in opposition. And they had thought about sequencing. They wanted to reduce taxes radically but they realised this couldn’t be done immediately. Reducing inflation and putting the public finances on a sounder footing had to come first – although they did manage a downpayment on structural tax reform even in the 1979 budget, when they cut the top tax rate from 83pc to 60pc and increased VAT from 8pc to 15pc.
Circumstances are different now and we cannot simply copy the example of the Thatcher years, even if we want to. Nevertheless, there are things that we can learn from that experience.
To achieve faster economic growth you do not necessarily need a detailed plan. After all, no one planned the Industrial Revolution in the 19th century.
But in today’s world, you do need a strategy, even if it is the one adopted by Hong Kong during its long period of rapid economic growth – namely to minimise interference by government in the workings of the market and to make government as efficient as possible.
We will need to do more than that, not least because the influence of the state is already huge across all the failing aspects of the economy. But what to do? And in what sequence?
Answering these questions is the task I have taken on in agreeing to head up a new unit at the think tank Policy Exchange to analyse our economic under-performance and to develop a policy programme to boost the UK’s productivity.
I know this is ambitious, but it seems to me that it is crying out to be done. Accepting our country’s slide into mediocrity is simply not good enough.
Roger Bootle is senior independent adviser to Capital Economics
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