Thursday 4 July 2013

Why David Cameron's Foreign Trade Claims are Flawed

I don’t tend to pick on individual politicians to criticize, but David Cameron’s piece in today’s London Evening Standard newspaper is worthy of some commentary. You can find the article here.

Let’s analyze what he says:

“This country is in a tough global race to succeed… the world does not owe us a living, we have to earn it.” – this much I agree with. We are, indeed, part of a global economy in which countries compete for economic activity.

But the message of Mr. Cameron’s piece is that we are being successful at attracting foreign investment. He trumpets major capital investments from abroad in the UK telecoms and energy industries and in real estate development. He seems to entirely miss the point that the kind of economic competitiveness that matters most is the ability to produce exports.

As a nation, the UK consumes vast amounts of imported goods, mostly paid for on credit, and as long as the country fails to increase its own exports, it will be increasingly indebted to the countries that supply these goods. Imports help people live wealthy-seeming lifestyles today, but then the debts are left over for future generations to pay off.

The three industries mentioned above, telecoms, energy and real estate, are all services sold back to the people within the country. No exports there, I’m afraid. Just highly inflated housing prices in London, as a direct result of foreign investment in the capital’s real estate. Well done, Mr. Cameron, for attracting all of that investment. Kudos.

Something that might benefit the country, and lead to products and services we can export, is innovation activity. And a good way to stimulate innovation is by supporting entrepreneurship.

Maybe Mr. Cameron realizes this, as he says, “the red carpet is rolled out for entrepreneurs.” But for some reason that doesn’t ring true, for example if the would-be entrepreneurs are from outside the EEA and have to jump through laborious hurdles just to get a visa. Last week Theresa May announced a new policy clearly tailor-made to attract thousands of foreign entrepreneurs: a £3,000 bond that must be deposited before visitors from some select countries are even allowed in the country. Cameron, to his credit, had the good sense to quash this one, but in generating so much uncertainty and confusion much damage has already been done. The sudden and arbitrary changes that are regularly being made to the Byzantine student visa and post-study work visa regulations also exemplify the country’s enthusiasm for attracting talented foreigners.

The third thing that irritated me in the article is Cameron’s joke about his most recent trade mission, “Just last weekend I was in Kazakhstan (but I missed out on the camel’s milk).”

I will leave critiques of his sense of humour for another time. Why, I ask, is our Prime Minister visiting Kazakhstan to attract investment, a country that ranks 133rd out of 176 in Transparency International’s corruption perceptions index, and in the bottom 15% of the World Bank’s control of corruption measure? A country that shoots dead protesters who dare to oppose the oil and gas industry? Is it because these unstable, autocratic, petrodollar-backed regimes are the only ones who both need and can afford one of our biggest actual exports, namely weapons?

Cameron has the gall, two paragraphs later, to trumpet the UK’s “stable democracy, where there are property rights and the rule of law.” He clearly cares very dearly about these things. We may as well put out a sign saying, “Billionaire oligarchs from despotic backwaters welcome here!”

Then, finally, comes the Battersea Power Station project, the “jewel in the crown” of the infrastructure investments Cameron cites. This will be backed by an £8bn investment and will “create 15,000 jobs.” Never mind the fact that jobs created on building projects are only ever temporary, and no substitute for sustainable job-creation. The thing that struck me here was the irony of it. The source of the funding – Malaysia.

Maybe Mr. Cameron is not familiar with the history of economic crises, but if he were he would surely stop boasting about foreign investment being the route to riches. Malaysia, Thailand, Indonesia and their neighbours know this well, from their experience of a financial crisis in 1997. Long before the credit crunch showed the Western world that laissez-faire capitalism has its risks, South East Asia experienced a severe currency crisis and long recession due to the aggressive inflow and then flight of foreign capital. Foreign investment is neither a stable nor a sustainable route to economic growth.

Whether the Battersea project will come to fruition remains to be seen, and I don’t have strong opinions either way (I give its odds of success maybe 1 in 3). But its use by Mr. Cameron as a piece of propaganda is entirely disappointing. Economic growth is important (though not nearly as important as most politicians think) and if the UK wants to pursue it the country needs to look for competitive industries inside its borders that create value for customers elsewhere. There is, perhaps, one investment referenced in the article that involves exports: the Tata group’s purchase and expansion of Jaguar-Land Rover. This investment has helped re-juvenate British manufacturing and create long-term jobs. When Mr. Cameron comes back with more of these type of investments to shout about, it might be worth getting excited about.

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