{"id":2465,"date":"2019-03-11T11:32:06","date_gmt":"2019-03-11T11:32:06","guid":{"rendered":"https:\/\/politicalquarterlyblog.preliveweb.site\/?p=2465"},"modified":"2019-03-18T17:33:52","modified_gmt":"2019-03-18T17:33:52","slug":"what-brexit-means-for-the-future-of-uk-capitalism","status":"publish","type":"post","link":"https:\/\/politicalquarterlyblog.preliveweb.site\/?p=2465","title":{"rendered":"What Brexit means for the future of UK capitalism"},"content":{"rendered":"\n

Long before it acquired the name\nof Brexit, the project of making the UK leave the European Union was a solution\nin search of a problem. <\/p>\n\n\n\n

This EU?bashing was always based\non a fantasy, with concerns ranging from bureaucracy and immigration to the\nplight of fishermen and farmers, as well as the view that trade with faraway\neconomies is better than trade with Europe. <\/p>\n\n\n\n

But two other facts are not fantasy.\nThe first is that the problems of the UK economic model, and its failings,\ncontributed to the Brexit vote. The second is that while that economic model\nwas the result of home-grown political choices, the effects of these choices\nwere shaped by the external economic conditions created by EU membership.<\/p>\n\n\n\n

The way in which Britain leaves\nthe EU, too, will shape the workings of the current model and whatever changes\nfuture UK governments make it undergo.<\/p>\n\n\n\n

\u2018The other Brexit question\u2019<\/strong><\/h4>\n\n\n\n

When Theresa May took office, it\nlooked like she wanted Brexit to be about something, not just against something.\nThat effort quickly ran into the sand, but she was right to identify a\nfrustration with an economy that left too many behind as the core of the Brexit\nvote. This is \u2018the other Brexit question\u2019. <\/p>\n\n\n\n

Britain\u2019s economic model can be\ncharacterised as follows. First, on the demand side of the economy, the key\ncharacteristic is high consumption and a low savings rate, whose counterparts\ncan be seen in low investment and a persistent current account deficit. This is\nlinked to high indebtedness and high house prices driven by fast mortgage credit\ngrowth, in turn linked to a large financial system long treated with a light\ntouch by regulators.<\/p>\n\n\n\n

Second, on the structure of\nsupply, the share of manufacturing in total output is low by rich?country\nstandards, and share of services correspondingly high. Even more striking is\nthe very high share of services in UK exports. Britain distinguishes itself\namong larger economies by exporting about the same value of services as it does\nof manufactures.<\/p>\n\n\n\n

Then there is a starkly\npolarised labour market. UK economic activity is unusually labour?intensive for\na rich economy. This model has led to high employment numbers, but an excess of\nlow productivity and hence low wage jobs; a problem of the working poor. At the\nsame time, Britain has one of the highest rates of income inequality in Europe.<\/p>\n\n\n\n

And finally, the UK suffers from extreme regional inequality. London is among Europe’s richest regions, but some areas are on a par with the poorest parts of Slovakia and Portugal. And we know that support for leaving the EU was higher among those living in poorer regions.<\/p>\n\n\n\n

The characteristics of the British economic model are not separate ills; they are rather alternate symptoms of the same disease. And they are the results of a set of deliberate policies, charting a course towards a \u2018mid?Atlantic\u2019 position for the UK economy between US?style liberalisation and private enterprise and continental regulation and state control. <\/p>\n\n\n\n

The upshot of all this is, to\nchange anything, one has to change a lot. And that is just what the Brexit\nreferendum established. Whether there is any prospect of such a transformation\ndepends both on what form Brexit takes, and which domestic policies the UK\nautonomously adopts once it has left.<\/p>\n\n\n\n

What \u2018Brexit means Brexit\u2019 may\nmean<\/strong><\/h4>\n\n\n\n

Think of the sectors in which\nthe UK does well at the moment. The most obvious area is of course commercial\nservices: finance, and a range of auxiliary and other professional services.\nBritain excels in cultural service exports too, as well as its university\nsector. <\/p>\n\n\n\n

The other area is\nhigh?productivity manufacturing, despite a relatively small manufacturing\nsector overall. Of the 1.75 million motor vehicles produced in Britain in 2017,\n80\nper cent were exported, mostly to other EU countries.<\/a> <\/p>\n\n\n\n

These, Britain’s most successful\neconomic sectors, have two traits in common: high productivity and export\norientation. These are intrinsically linked. Exporting both requires and\nfosters high productivity. And they are linked to a third factor: both sets of\nsectors are deeply integrated with the pan?European economy and the EU’s Single\nMarket. <\/p>\n\n\n\n

Jobs in high?value manufacturing\nand services are not good British jobs as much as good\nEuropean jobs located in Britain<\/a>. Brexit puts them at risk of moving elsewhere, and\nconventional trade deals (less deep than the EU Single Market) cannot bring\nthem back. This fact is deeply underappreciated in the debate over Britain’s\npost?Brexit economic policy choices. Britain relies on Factory Europe; the\nalternative will not be integrating with Factory North America, it will be\ndisengaging from the international supply chain altogether. The same is true\nfor some services.<\/p>\n\n\n\n

The most likely consequence of\nBrexit, then, is to increase barriers precisely to the sectors in which\nBritain’s comparative advantage lies and which offer Britons (and high?skilled\nEU immigrants) the best jobs. <\/p>\n\n\n\n

Likely effects on the British\neconomic model<\/strong><\/h4>\n\n\n\n

As for the form of Brexit, two\nthings matter in particular: the future trade relationship and how it will\nchange (or not) the productive structure of the UK economy and, to a lesser\nextent, the future of EU migration to and from Britain.<\/p>\n\n\n\n

There are roughly three\npossibilities for the Brexit negotations. There could be a soft Brexit which\nkeeps trade frictions (nearly) as minimal as they are today; this could be\nachieved by something like European Economic Area membership for the UK and a\nCustoms Union with the EU.<\/p>\n\n\n\n

Alternatively, there could be a\nhard Brexit\u2014a conventional free trade agreement (FTA) which would reintroduce\nboth customs checks and regulatory barriers to trade, but not tariffs. In\nthis case, the EU would insist on sufficient barriers to prevent the entrance\nof non?compliant goods circulating in the UK market.<\/p>\n\n\n\n

Finally, there is the semi?soft\nBrexit that has been official UK policy since the Chequers Cabinet meeting in\nearly July 2018. As set out in the Chequers White Paper, this model aims to\nmaintain frictionless trade in goods, but not single market trading rights in\nservices. Though still possible at the time of writing, some form of trade\nagreement would follow the scarier alternative the of \u2018no deal\u2019 in due course.<\/p>\n\n\n\n

In ascending order of hardness \u2013\nfrom a status quo Brexit through Chequers to an FTA Brexit \u2013 the services\nexport businesses are hit sooner than goods. <\/p>\n\n\n\n

The likely effects on the\nBritish economic model do not nicely align with the degree of Brexit\n\u2018hardness\u2019. While status quo Brexit will mildly challenge the productive\nstructure across the board, going one step harder to a Chequers?style deal will\nprotect manufacturing, but hurt services. Going harder still, to the more\ndistant FTA?type relationship with the EU, will hit manufacturing brutally and\nmake little further difference to services. And the independent trade policy\nthat is the rationale for such a relationship will tilt the economy further\ntowards services, since new trade deals will very probably seek market access\nfor UK service exports in return for greater import competition by manufactures.<\/p>\n\n\n\n

A politician who sees as her\nchief responsibility to put a disjointed society back together again after the\nBrexit referendum may well give priority to factory supply chains over the City\nof London. Here, then, is a persuasive political economy reason for Prime\nMinister Theresa May’s Chequers model, which does precisely that, seeking\nfrictionless trade in goods \u2013 essential for just?in?time manufacturing, not to\nmention the absence of border checks on the island of Ireland \u2013 while regaining\nregulatory autonomy in services at the accepted price of worsened access to EU\nservices markets. Perversely, this just could serve as a catalyst for a\nrebalancing of the economic structure to remedy the divisions that pain\nBritain’s political economy.<\/p>\n\n\n\n

To be clear, a Chequers?style\nBrexit will not by itself do anything positive for the high?value goods sector\nor the parts of the economy that depend on it. <\/p>\n\n\n\n

Until frictionless trade in\ngoods is secured for sure, these sectors will be hit by withheld investment and\nrelocation of production to continental Europe.<\/p>\n\n\n\n

Rebalancing the British model<\/strong><\/h4>\n\n\n\n

A concerted policy programme\nbased on the idea of favouring the UK’s high?value goods producing sectors \u2013 starting\nwith managing Brexit so as to protect those sectors above all \u2013may be the\ncountry’s best chance at a growth strategy that prioritises the neglected parts\nof the economy, even at the price of slower growth in the aggregate. <\/p>\n\n\n\n

It is possible to boost modern manufacturing in a country with the right conditions and policy makers set on the task. Read the extended version of my article<\/a> for ways in which UK policy could encourage investment and productivity growth in high?value manufacturing or alternative activities for the areas that currently rely on it. <\/p>\n\n\n\n

Few of the frustrations that\nprompted the British public to vote Leave were caused by the EU. And yet both\nthe political economy of Brexit, and its likely economic effects, point towards\na profound reform of the growth model that did in fact cause them. While Brexit\nwill result in a UK economy that is less prosperous overall, there is a\npossibility it will also start to redress some of the imbalances.<\/p>\n\n\n\n

To do this, we need a state that\nis much more comfortable with market?shaping interventions than has been the\ncase in the UK policy making class for a generation. They are also nigh?on\nimpossible without accepting a larger state imprint on the economy \u2013 simply\nput, higher levels of taxation and spending. On both dimensions, then, an\neconomic model closer to what is found elsewhere in Europe.<\/p>\n\n\n\n

The paradox of Britain’s EU membership is that has enabled the UK to fulfil its plausible destiny as a hybrid between a European and a US socio?economic model. The paradox of Brexit may well turn out to be that it forces Britain to become more European.<\/p>\n\n\n\n

This article is adapted from a\u00a0longer piece<\/a> in the <\/em>Political Quarterly journal.<\/em><\/p>\n<\/span>","protected":false},"excerpt":{"rendered":"

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