“Build it in Britain” – when self-sufficiency becomes self-harm
6 August 2018
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5 August 2018
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8 August 2018
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Economic nationalism is firmly back on the policy agenda, if recent developments are anything to go by. In his ‘Build it in Britain’ speech a few weeks ago, Labour leader Jeremy Corbyn condemned outsourcing practices, trade deficits with foreign countries, and called for a number of government interventions to boost domestic manufacturing.
At the core of these announcements is a belief that the UK economy is inherently weak due to over-dependence on the financial sector – as well as an alleged reliance on cheap labour from abroad. But how would the Labour party propose to realise these aims?
Firstly, it seems, by using the government’s purchasing power to prop up industry. New procurement rules would oblige public contracts to be awarded to British companies – along with “a real industrial strategy”, that would presumably out-spend what the Conservatives have already committed. There are also plans to increase spending in education, skills, and lifelong learning through the National Education Service – as well as facilitating business investment through a much-touted National Investment Bank and a network of regional development banks. The use of subsidies has also been hinted at.
Here, we can detect a strong note of protectionism and the anti-competitive harm it brings. By ensuring that government contracts remain domestic, and that government procurement is limited to British companies, these policies would not encourage UK firms to improve and innovate but would remove such incentives altogether. Lack of competition begets complacency – ultimately leading to lower quality goods.
In this climate, it is hard to see how Britain could become an export powerhouse or compete on the world stage. Such protectionism is analogous to limiting the number of foreign players in the Premier League, and then expecting England to win the World Cup. Playing against the likes of Sergio Aguero and Mo Salah every week has undoubtedly made Harry Maguire a better defender. The same, of course, is also true for competition on a macro level.
Another problem with this rather optimistic view of protectionism is the issue of reciprocity. If the UK government were to shield domestic firms from foreign competition, it is unlikely that other countries would give British firms free rein to sell goods in their domestic markets. Of course, Labour’s current policy tends towards joining a new customs union with EU, which would “provide the same benefits that we currently enjoy in the EU’s customs union…”, and in which Britain would have a say. Whether or not such a customs union is desirable is another matter – but there are serious questions about whether the EU would give a protectionist UK any significant role in this imagined structure at all. Politically speaking, it is doubtful that such a customs union could even exist.
As recent economic history suggests, the introduction of a National Investment Bank (NIB) would also carry unintended consequences. As Oliver Riley points out here, a previous attempt in Tony Benn’s National Enterprise Board proved incredibly wasteful, splurging money on inefficient enterprises like British Leyland and the British leather industry. As well as the high opportunity costs of such investment, we would also expect to see a “crowding out” effect. As the government borrows more, interest rates climb and private firms find it harder to borrow, thereby reducing overall investment.
Politics and finance make uneasy bedfellows. If the government, for example, pushed the NIB to lend ever-increasing amounts to keep failing enterprises afloat, we might see a situation similar to that of India, where government-owned banks are flooded with non-performing assets. Ultimately, the costs of these industrial bailouts will be borne by the taxpayer.
Finally, it is worth questioning the assumption that our economy relies ‘too heavily’ on financial services? One thing is for sure, Britain – the world’s second largest exporter of services – does it well. The Germans are comparatively better at manufacturing, and hence, produce more goods. Yet they also trade fewer exotic derivatives. Tipping the balance of our economy towards manufacture, as per David Ricardo’s famous example, would be akin to the Portuguese wine-merchant switching to cloth making – or the English yeoman attempting to open up a vineyard.
I do not doubt Labour’s commitment to building a more equal Britain, with equality of opportunity for all. Yet idealism alone rarely lends itself to sensible policy-making.
As Milton Friedman pointed out, “one of the great mistakes is to judge policies and programs by their intentions rather than their results.”
At the core of these announcements is a belief that the UK economy is inherently weak due to over-dependence on the financial sector – as well as an alleged reliance on cheap labour from abroad. But how would the Labour party propose to realise these aims?
Firstly, it seems, by using the government’s purchasing power to prop up industry. New procurement rules would oblige public contracts to be awarded to British companies – along with “a real industrial strategy”, that would presumably out-spend what the Conservatives have already committed. There are also plans to increase spending in education, skills, and lifelong learning through the National Education Service – as well as facilitating business investment through a much-touted National Investment Bank and a network of regional development banks. The use of subsidies has also been hinted at.
Here, we can detect a strong note of protectionism and the anti-competitive harm it brings. By ensuring that government contracts remain domestic, and that government procurement is limited to British companies, these policies would not encourage UK firms to improve and innovate but would remove such incentives altogether. Lack of competition begets complacency – ultimately leading to lower quality goods.
In this climate, it is hard to see how Britain could become an export powerhouse or compete on the world stage. Such protectionism is analogous to limiting the number of foreign players in the Premier League, and then expecting England to win the World Cup. Playing against the likes of Sergio Aguero and Mo Salah every week has undoubtedly made Harry Maguire a better defender. The same, of course, is also true for competition on a macro level.
Another problem with this rather optimistic view of protectionism is the issue of reciprocity. If the UK government were to shield domestic firms from foreign competition, it is unlikely that other countries would give British firms free rein to sell goods in their domestic markets. Of course, Labour’s current policy tends towards joining a new customs union with EU, which would “provide the same benefits that we currently enjoy in the EU’s customs union…”, and in which Britain would have a say. Whether or not such a customs union is desirable is another matter – but there are serious questions about whether the EU would give a protectionist UK any significant role in this imagined structure at all. Politically speaking, it is doubtful that such a customs union could even exist.
As recent economic history suggests, the introduction of a National Investment Bank (NIB) would also carry unintended consequences. As Oliver Riley points out here, a previous attempt in Tony Benn’s National Enterprise Board proved incredibly wasteful, splurging money on inefficient enterprises like British Leyland and the British leather industry. As well as the high opportunity costs of such investment, we would also expect to see a “crowding out” effect. As the government borrows more, interest rates climb and private firms find it harder to borrow, thereby reducing overall investment.
Politics and finance make uneasy bedfellows. If the government, for example, pushed the NIB to lend ever-increasing amounts to keep failing enterprises afloat, we might see a situation similar to that of India, where government-owned banks are flooded with non-performing assets. Ultimately, the costs of these industrial bailouts will be borne by the taxpayer.
Finally, it is worth questioning the assumption that our economy relies ‘too heavily’ on financial services? One thing is for sure, Britain – the world’s second largest exporter of services – does it well. The Germans are comparatively better at manufacturing, and hence, produce more goods. Yet they also trade fewer exotic derivatives. Tipping the balance of our economy towards manufacture, as per David Ricardo’s famous example, would be akin to the Portuguese wine-merchant switching to cloth making – or the English yeoman attempting to open up a vineyard.
I do not doubt Labour’s commitment to building a more equal Britain, with equality of opportunity for all. Yet idealism alone rarely lends itself to sensible policy-making.
As Milton Friedman pointed out, “one of the great mistakes is to judge policies and programs by their intentions rather than their results.”
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The writer’s observation above “By ensuring that government contracts remain domestic, and that government procurement is limited to British companies, these policies would not encourage UK firms to improve and innovate but would remove such incentives altogether …..” exposes the flaws in Jeremy Corbyn’s thinking on how government purchasing power can be used for all the wrong reasons.
Consider the market in defence equipment for which the Government is the only customer.
For many decades, Governments of all persuasions were absolutely convinced that placing uncontested, single-source development contracts with selected UK-based defence contractors on a preferential basis, was the best way to protect the UK’s operational advantage, freedom of action and sovereign capability, because they considered this type of procurement to be fundamentally different from other forms of procurement – such as through fair and open competition, on the basis of best value for money.
This Government no longer is. In a major reversal of policy, it has now ditched the operational advantage, freedom of action and sovereign capability consideration, and instead opted for fair and open competition, as the procurement strategy for the Type 31e general purpose frigates – because, despite favouring such contractors with a steady stream of uncontested, cost-plus contracts for many years, the Government has been rewarded with appallingly poor performance, characterised by persistent delays and cost overruns.
This amended policy expressed in the National Shipbuilding Strategy, published in September 2017, is now seen as a template for all acquisitions from the defence industrial base. The NSS implicitly acknowledges that it is only right that all bidders are treated equitably – not just favour the select few, as has been the case hitherto.
The most effective way to get best value for public money is through the application of the market-based instrument of fair and open competition – by running a multiple-phase, winner-takes-all competition on the basis of a level playing field genuinely open to all-comers, including non-domiciled suppliers, with the rules of the contest declared at the outset – that is to say, exposing bidders to the full rigours of the free market, not shielding them from “feeling the heat” of competitive market forces. See this illustration pic.twitter.com/RUToAZ6thx.
Accordingly, the Government will use the instrument of fair and open competition, to select the Prime Contractor for the new generation of Type 31e general purpose frigates to be built for a fixed, not-to-exceed price of £250 million each.
The Government usually frowns upon private sector players in the free market who engage in the anti-competitive practice of price-fixing. And yet, this Government has done exactly that, i.e., fixed the price of the Type 31e frigate – albeit, whilst exercising its privilege as the buyer. Why? Because, despite indulging some defence contractors with uncontested cost-plus contracts for many decades, the Government has been repaid by these same contractors who have consistently failed to deliver equipment to the Armed Forces which is fit for purpose, adequately sustained in-service and constitutes value for money through-life. In so doing, the government is sending out a strong message that it will no longer tolerate shoddy workmanship on defence equipment acquisition programmes, when it comes to time and cost performance.
What’s more, for the first time in the history of defence procurement in the UK, it will be mandatory for the ship to be designed with exports in mind from the outset, and to this end, bidders will be required to prove that they have secured the commitment of potential nation state customer(s) which the Government will verify, before placing the Type 31e shipbuilding contract with the winning Prime Contractor, on the basis of best value for money. This requirement will also serve to achieve the Government’s wider goal of a Global Britain in the post-Brexit era, so that it can pay its way in the world.
In so doing, the Government implicitly acknowledges that the wants, needs and expectations of a foreign government will take precedence over the whims of the Royal Navy, when it comes to designing the configuration of the ship, including the offensive and defensive equipment installed therein – another first.
There is no reason to believe why this sensible policy should not also be extended to all exportable military equipment designs that the defence industry might come up with, for tomorrow’s market.
@JagPatel3
No, no, no. This is just a lazy repetition of the old cliches about international trade. I am definitely no Labour supporter but your criticism of the “Build it in Britain” proposal is completely wrong.
Firstly, you say “Lack of competition begets complacency”. Of course this is true, but that is not what is proposed by those who support “economic nationalism” (as you put it). There will be plenty of competition from UK-based manufacturers – including foreign companies who have factories here. Indeed, by limiting contracts to those companies with factories here this policy is likely to encourage more to move production to the UK. We are a big economy and need to use our muscle to strongly encourage – or even force – foreign companies to move production to the UK. At the moment we do not seem to have this as a government policy.
You also bring up the old chestnut of “reciprocity”, wrongly assuming that other countries will automatically adopt the same polices we do. All the evidence suggests the opposite. Countries adopt policies on the basis of their political and world view – not as a copycat response to what others do. Take China, for instance. China imposes numerous restrictions on foreign companies, but the UK does not do the same to Chinese companies. There is no evidence to suggest that other countries would retaliate against us.
In any case, you simply need to do the maths to see that the UK would be a winner in any game of retaliation. The UK government awards more contracts to EU companies than the whole of the EU awards to UK companies. So by being open to EU companies the UK is the loser.
Your criticism of the proposed National Investment Bank is also without foundation. The equivalent in Germany – the KfW – is a vital component of their industrial success. The failure of British Leyland had nothing to do with the government’s investment in it, and everything to do with the government’s failure to tackle trade union power. That problem has, thankfully, now been resolved.
And as for your statement “Germans are comparatively better at manufacturing” – well, that is really the greatest absurdity of all. Do you think tis is due to some innate Teutonic superiority? Britain is the country that bean the industrial revolution, so using your argument Germany should never have bothered getting into manufacturing as they should have said ‘the British are better at it’. Germany is successful at manufacturing precisely because this has been supported by the government. If we too support manufacturing we will be at least as good as the Germans, if not better.
Very well written Raghav.This reminds me of the futility of ‘Make in India’ program launched by our PM in 2014 due to which the share of manufacturing in India’s GDP did rise marginally from 15.06% in 2014 to 15.4% in 2015 but has been consistently falling since then. In the short run,’Build it in Britain’ might be successful but in the long run,what Ricardo said will hold true.Britain must not risk its fingers getting burnt.Wisdom lies in learning from other countries’ mistakes.