What is the role of governments in promoting economic success? I have been led by the current political chaos to ponder this age-old question afresh. My answer is not straightforward; nor will it meet with universal agreement. But it bears critically upon Brexit.
Governments do not create wealth; individual men and women do. But they work within a system of institutions, laws, incentives and penalties. Establishing and maintaining these falls to government. Moreover, only governments can provide public goods.
It matters greatly whether governments perform these roles well or badly. Most of the time, they bumble along, not doing much to foster growth but also, if we are lucky, not doing much to hinder it. Yet at key moments they can play a decisive role.
I am struck by the Singapore example. It is often thought of as the epitome of free-market capitalism. But in fact it is a very effective hybrid. The state plays a major role in the economy, particularly with regard to land use and infrastructure. Its public policy has an avowedly long-term and global focus. But it operates low personal tax rates and virtually zero tariffs.
After its traumatic break with the Malaysian Federation in 1965, which seemed to threaten disaster, Singapore set out on this path thanks to the wisdom and foresight of its founder, Lee Kuan Yew. Not many observers then would have given it much chance of survival, never mind stellar economic growth.
In contrast to Singapore, but in common with many other countries, the EU is inherently protectionist. It imposes a complex web of tariffs. These give domestic producers a competitive advantage against foreign suppliers, at the expense of consumers. Yet this does not bring economic advantage to the economy overall; indeed, it drives economic activity into less efficient areas.
European protectionism is even greater with regard to regulations and standard setting. “Standard” is a value-laden word. It sounds unequivocally good. But by making the costs of complying with European standards high, EU regulators make it difficult for foreign suppliers to sell into their market.
What explains the EU’s policies on regulation and tariffs? Deluded and short-termist thinking and the power of vested interests. This is why the Chequers proposal to accept European regulations for goods was potentially so disastrous. Effectively it would tie us into whatever level of regulatory uncompetitiveness the EU chose.
Nor would the effects be confined to goods. For the Chequers proposal effectively included regulatory alignment on social and employment policy. This could hobble our competitiveness across the whole economy.
This is not accidental. It was thought necessary in order for the EU to take the Chequers proposal at all seriously. For within the EU there is a serious worry that if we left without being tied into EU regulatory systems then we would become a much more competitive economy, a sort of Atlantic version of Singapore. The evidence is plain that the EU is not good at economic governance. It stands in the way of markets when they know best and fails to do properly what necessarily falls within the competence of governments. Over-weening ambition in pursuit of political objectives regardless of the economic cost; obsession with integration and harmonisation; legislation and regulation interfering with the successful operation of business; this is the EU way.
So it is scarcely surprising that over recent decades the EU’s economic performance has been relatively poor. The greatest of its errors was the formation of the euro, which robbed the continent of the essential market mechanism to offset the effects of Germany’s export prowess and tendency to over-save, namely a rise in Germany’s exchange rate. But there are many more howlers where that came from. As a consequence, the EU faces continued relative decline as it fails to match the growth of the rest of the world. Some of this is inevitable and some of it is demographic. But a good deal of it is the result of self-inflicted wounds deriving from poor economic governance.
Sometimes countries need a jolt to shake up existing structures, institutions and attitudes. Ironically, many EU member countries, especially Germany, received exactly that as a result of the Second World War. We in the UK avoided this. Indeed, as a victor, we were confirmed in many of our bad ways. So we have had to make our own jolts.
At some key points in our history, when governments have made some disastrous economic decisions, we have been rescued by the jolting power of the financial markets. This was the story in 1931, when we were forced off the depression-inducing Gold Standard, despite our best efforts to stay on it. This was again the story with the European Exchange Rate Mechanism, from which we were ejected by market pressure in 1992, despite the government, supported by the whole establishment, doing its best to stay in.
But not all decisions can be forced by market pressure. Sometimes governments have to make decisions themselves. This is what happened with Mrs Thatcher’s governments in the Eighties. They transformed the economy by curbing trade union power, privatising state-owned industry and unleashing competition. In my view, not everything they did was right but the main thrust was. Often these policies brought short-term pain. But the benefits can be seen today in the amazing performance of the UK labour market, which continues to create jobs at an impressive pace.
On the key decisions about Brexit, again the markets cannot make this government do what it should, namely to embrace a clean Brexit, avoid being deflected by short-term difficulties and fix its sights firmly on our long-term global future. We are left with the deliciously ironic prospect that, by completely rejecting Mrs May’s overtures for what would be a disastrous deal for us, Michel Barnier and his merry men from the EU Commission might effectively stand in for the markets. But who is going to be our Lee Kuan Yew?
To read Roger Bootle’s piece for The Telegraph in full, click here.