Economic Development

Open for business?

March 07, 2016

Europe

March 07, 2016

Europe
Aengus Collins

Country Forecast Director; Lead Euro Zone Analyst

Aengus Collins has worked with The Economist Intelligence Unit since 2000, joining the Europe team as Lead Euro Zone Analyst in 2013. He is responsible for all EIU coverage and forecasts relating to the euro zone, with a particular focus on European Central Bank monetary policy and the evolution of political risk across the bloc. In addition, Aengus leads our political and economic coverage of the UK and France, and is a consultant editor for Germany, Spain, Turkey, Portugal and Ireland. As Country Forecast Director, he oversees the EIU's in-depth forecasts for investors of political, economic and business conditions in 82 of the world's largest economies.

Aengus Collins, Country Forecast Director of the Economist Intelligence Unit, assesses whether the UK's current position on exporting and immigration is having a negative impact on creating a vibrant economy.

As in medicine, so in public policy: First, do no harm. Why then are policymakers in the UK—one of the world's most ostensibly open economies—increasingly giving the impression of wanting to let the country turn in on itself? Exports continue to disappoint; immigration has become a poisonous topic; the governing Conservatives remain riven over Europe; and the Labour Party has just elected a leader who is ambivalent about the UK's position in both NATO and the EU. What is going on?

It is important to untangle the various ways in which the UK can open itself to the world, because the scope to tackle them with policy differs greatly. Immigration flows are very much determined by policymakers' decisions, but there is no public consensus as to whether those flows are to be encouraged or prevented. By contrast, there is near-universal acceptance of the idea that generating export growth is a good thing, but the problems affecting the UK's exporters stretch beyond the reach of simple policy responses.

The policy prognosis for anyone convinced of the benefits of an open economy should be relatively clear. Government should focus its efforts on where there are effective policy levers to pull.

  • It should take long-term steps to build an export-friendly business culture, but it should stop imagining that an export revolution is likely any time soon.
  • On immigration, where it enjoys much more power, it should have the political confidence to craft a more nuanced policy than the current framework, which tolerates absurd anomalies such as discouraging overseas students, despite the fact that public concerns about immigration have little or nothing to do with developments in the higher-education sector.

This may sound like a counsel of despair on exports, but look at the numbers. In 2012 the chancellor of the exchequer, George Osborne, announced that he wanted to see exports of goods and services double in nominal terms to £1trn (US$1.5trn at current exchange rates) by 2020. The progress by mid-2015? A rise of just 3%. Moreover, The Economist Intelligence Unit's long-term forecasts suggest that a marked shift in the UK's trading position is still decades away. The chart below shows the UK's net trade (exports minus imports) as a percentage of GDP. Only in the early 2040s does the figure move into positive territory. The contrast with Germany could hardly be starker.

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The roots of the UK's weak exports run deep, and as successive governments have discovered, they are stubbornly resistant to easy policy fixes. Problems run the gamut from logistical capacity constraints (in particular, ongoing problems in the aviation sector, where airport capacity is insufficient) to ineffective financial support. But as noted by the Confederation of British Industry (CBI), a UK business representative body, the country also faces the most basic of commercial shortcomings: it isn't tailoring its output to respond to changes in the profile of global demand. As a result, market share in key new markets is slipping.

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If you were looking for one area where policy might start to turn things around, I would suggest starting with an overhaul of the export credit guarantee scheme. The numbers are stark. In 2014 the German guarantee scheme processed applications for cover totalling £27.5bn. In the UK, on the other hand, UK Export Finance managed just £2.7bn. That's a tenfold difference in the two countries' official commitment to mitigating exporters' risks. Tackling this gap is unlikely to lead to an overnight transformation in the rate of UK export growth, but it would be an important step in building—over the medium to long term—a more favourable environment for exporters.

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Meanwhile, the political tenor of the UK's relationship with the world has soured since the onset of the global financial crisis. Politics is getting in the way of the country's economic self-interest, as voters look to retreat behind strengthened borders. This is most pronounced in the area of migration policy, where the government has repeatedly doubled down on a foolish promise to reduce net migration, despite the clear economic damage this is already causing: each month businesses bump up against government-set limits on the number of visas that can be issued to high-skilled immigrants. In the context of an acknowledged domestic skills gap that will take many years to remedy, keeping skilled foreign workers out is needlessly damaging.

So too, more broadly, is the inward-looking mood music that now pervades much of the UK's political debate, most notably over Europe. These are difficult times, and the UK is not the only country in which many voters are anxious and unsettled. But there are strong self-interested arguments in favour of maintaining an open economy. And there is potential long-term damage ahead if that openness is allowed to erode. Without a more confident political story to tell about the benefits of engagement with the wider world, this government and its successors are going to struggle to put the economy on a more stable footing, with growth more balanced between domestic and external demand than is currently the case.

 

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.

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