There is, we are told, no alternative. Globalisation is inescapable. If Britain fails to keep up with a rapidly integrating world economy, it will fall behind. International competitive pressures must dictate every area of public policy, from industrial efficiency through education to social welfare.
This view, propagated by nearly every mainstream politician and media commentator, assumes that Britain is somehow struggling to keep up with globalisation. Yet the truth is that Britain is an exception: we are the only truly globalised, large industrial economy. Most countries still have distinctive national capital markets and source the vast bulk of their investment domestically. Most of their major companies still have most of their assets in their home country, and make the bulk of their sales in their home region.
The UK’s manufacturing sector, by contrast, is increasingly dominated by foreign-owned firms. And our banks, pension funds and investment houses invest a far larger proportion of domestic capital abroad than their G7 equivalents.
The conventional reaction to this is to celebrate: we are ahead of the game, leading the world in riding the wave of globalisation. But there is another way of looking at it: we may risk exposing ourselves, more than other countries, to externally generated economic shocks. We may also turn British manufacturing into a branch plant economy, dependent on the decisions of foreign owners.
According to this latter argument, globalisation is a dangerous illusion. We should try to retain and reinforce distinctively British features of the economy. This is not a protectionist point; it is a condition of success as a trading nation, because the evidence suggests that those with distinctive national systems of production and innovation do best in international markets.
Britain’s economy is now at something like the level of internationalisation that existed before 1914. But Britain was then the pivot of the world trading system; now it is just another medium-sized industrial economy. In 1913, the UK’s ratio of exports and imports to GDP (44.7 per cent) was the highest in the world, way ahead of its main competitors. The UK was also the biggest exporter of capital: between 1890 and 1914, it exported on average 4.6 per cent of GDP a year, more than three times the level of France or Germany.
The First World War, however, destroyed Britain’s portfolio of overseas investments and undermined its traditional export markets. The economic crisis of the 1930s then forced the abandonment of free trade. Until the 1960s, British industry enjoyed a period of renewal and growth in an environment sheltered by tariffs and the effects of the Second World War on her competitors. Then the return of free trade and intensified competition led to a growing crisis of manufacturing in the 1960s and 1970s.
This was where the Conservatives came in. As they saw it, British firms were bad at manufacturing, so it was right to encourage foreign firms to invest here. At the same time, the removal of exchange controls would allow UK financial institutions to export capital to the places where it could be most profitably invested.
The result was that, by 1995, Britain once again had the highest ratio of trade to GDP (at 42.6 per cent). The next highest was Germany (at 38.7 per cent). The UK’s export of capital in the period 1990-96 (2.6 per cent of GDP a year) was exceeded only by Germany’s (at 2.7 per cent). By 1997, we had the second-largest inward stock of foreign direct investment in the G7 (22.5 per cent of GDP), surpassed only by Canada. UK pension funds, in 1993, held 27 per cent of their assets abroad, compared to 3 per cent in Germany, 4 per cent in the US and 14 per cent in Japan. Our commercial banks, in 1996, had nearly half their assets invested abroad; French banks had fewer than a third, and the banks of most other G7 countries were around half the French level.
The effect is to make Britain unusually vulnerable to external economic shocks on two counts. First, its financial institutions seek the highest short-term returns abroad and inevitably make risky investments in emerging markets. This could have a particularly serious effect on British pensioners’ incomes because, thanks to the erosion of the state pension, Britain is so heavily dependent on private pensions. Continental public pensions systems have serious funding problems, but our own may look much less attractive in the aftermath of a world financial crisis.
Second, high levels of investment abroad mean relatively low levels of investment in UK manufacturing. Foreign multinationals tend to keep their core research, development and production assets in their home bases. In times of difficulty, they tend to withdraw home, as LG Electronics and Siemens did during the crisis in microchip prices. UK law and corporate governance make the acquisition of British firms relatively easy. The manufacturing base is thus extremely vulnerable during a major international downturn.
Manufacturing benefits from a strong population of locally controlled firms across a wide range of industries. Firms prosper in dense clusters rather than in isolation, because the clusters give them strong bases of supplier firms and labour-force skills. Britain lacks these advantages. The management theorist Michael Porter makes this point strongly, and the UK-based German industrialist Bob Bischoff argues that the UK is vulnerable because it has fewer domestically owned and controlled firms.
Most countries that are as highly internationalised as the UK, such as the Netherlands, are much smaller. Typically, such states have strong populations of local firms. And to guard against internationally generated shocks, they have built strong welfare systems and a strong relationship between industry, labour and the state, in order to be able to co-ordinate their responses as the world changes.
Britain, by contrast, has tried to reduce its level of welfare and infrastructure spending, and has dismantled its institutions of economic co-operation.
There is no “natural” level of integration into the international economy, but on several counts Britain is the exception in the G7. Its economic performance is by no means so spectacular that this difference can be counted as an obvious advantage. Far from being ahead, we are just more exposed. The policy responses to this situation are difficult and will only act in the long term. They include joining the euro at a sustainable rate for manufacturing, changing corporate governance to favour domestic control, and putting a new emphasis on investment in manufacturing.
Meanwhile, it would help if the media and politicians actually recognised that there is a problem, instead of continuing with their globalist rhetoric.
The writer is professor of social theory at Birkbeck College, University of London, and author, with Grahame Thompson, of a new edition of Globalisation in Question (Polity Press)
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