Island or wasteland? That’s the choice facing Britain. Only industry can keep us alive…
Make it in Britain – or see Britain decline
WORKERS, MAY 2009 ISSUE
The single most important feature distinguishing rich countries from poor is their greater manufacturing capabilities: their productivity is generally higher and tends to grow faster. All the evidence shows that countries cannot develop without industry, and to do this they need trade protection, mainly tariffs, and subsidies.
In the 18th century, the British government gave bounties to firms both to increase exports and home production and to reduce imports of foreign goods, all to foster the growth of home industry. Laws were passed to enforce the consumption of British-made goods. Throughout the 18th century, the British state had the world’s highest tariffs on manufactured imports.
Between 1820 and 1945, the USA had one of the world’s highest average industrial tariffs, at about 40 per cent. Five of the six fastest-growing developed countries between 1950 and 1973 had high tariffs, including EU founder members Italy and France.
Tariffs mean growth
By contrast, in nine out of 13 Asian countries, income per head fell between 1913 and 1950, when they had no independence, no policy freedom (most notably, no control over tariffs). But after they won independence, all 13 grew. China has had average tariffs of over 30 per cent, and Vietnam has used state trading, import monopolies, import quotas and high tariffs to achieve annual growth rates of 8 per cent since the mid-1980s. But the World Trade Organisation’s Agreement on Agriculture allows the USA and the EU unlimited subsidies, while pressing everybody else to cut their tariffs.
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The old empires all banned industry in their colonies. Now the World Bank, the International Monetary Fund and the World Trade Organisation do the same. They lie to third world countries – you don’t need industry, open up to imports of goods and capital, be competitive, increase your exports, rely on natural resources and cheap unskilled labour, make your labour markets flexible - and you’ll grow. The European Central Bank tells EU members the same story. But increased exports are not the answer; for instance, Latin America raised its exports from $96 billion in 1981 to $752 billion in 2007, yet its numbers of poor rose from 136 million to 209 million.
Controlling capital
Nearly all industrialised countries also used capital controls to protect their infant industries. Continental European countries employed extensive capital controls to rebuild after World War II. Capital controls played vital roles during the high-growth eras of Japan and the ‘Asian tiger’ economies.
Capital controls promote financial stability and so prevent the devastation brought by financial crises. In the 1990s, Asia was vulnerable to crisis because most of its states had opened up their financial markets, but India and China had not done so and coped far better. Capital controls promote investment that creates jobs and raises living standards. Capital controls enhance democracy and sovereignty by reducing the power of speculators, domestic and foreign, over domestic decision-making and national resources.
Lifting controls causes crisis. It wasn’t Japan’s industry policies but its financial liberalisation in the late 1980s that caused its 1991 crash. It wasn’t South Korea’s industrial investment and policy, but its liberalisation in 1993 and the consequent real estate over-investment, which caused its 1997 crisis.
Again, the Soviet countries were better off before the 1990s counter-revolutions that deindustrialised and then depopulated them. As the UN Development Program’s report Transition 1999 noted, the transitions to capitalism had ‘literally been lethal for a great many people’. For example, in the 1990s, 90 per cent of Mongolia’s industrial production was destroyed and wages were halved, while finance, insurance and real estate grew. This was not because of global warming, as the Western press reported, but because the Mongolian government did what the World Bank ordered.
History shows that economies that have reduced absolute poverty have done so by employing a larger proportion of workers for wages, and in large enterprises. By contrast, the West’s aid policies promote self-employment, which means lower GDP and is no threat to the West’s economies.
Giving the poorest women training to make baskets and offering them micro-credit to start up enterprises in rural areas already over-supplied with similar enterprises only promotes poverty. Western governments and aid agencies stress ‘capacity-building’ in ineffective, small-scale and corrupt bodies, Non-Governmental Organisations, Community-Based Organisations, Group Credit, etc. But they oppose organisations that increase the living standards and bargaining power of the lowest-paid workers, like trade unions formed by seasonal agricultural labourers.
Independence matters
A financial system is supposed to channel capital to growth areas, but ours sucks value out of the economy. Life is showing that independent central banks like the European Central Bank and the Bank of England bring not financial stability but excess credit growth and inflated stock and real estate prices. Independent central banks, as products of financial liberalisation, of course oppose all controls on capital flows. Having price stability the sole aim of central banks prevents a pro-growth, pro-investment monetary policy.
Liberalisation, deregulation and privatisation, an anti-inflation macroeconomic policy, and a stock-market-based financial system, have brought us to disaster.
Independent developing countries use active trade and industry policies, a large-scale public sector, controls on luxury consumption and on inward and outward capital movements, a pro-investment macroeco-nomic policy and a bank-based financial system. They have special purpose banks, like Korea’s Housing Bank, its Korea Development Bank, and its Bank for Small and Medium-Sized Firms.
Industry policies include coordination of investment across competing firms, policies to attain economy of scale in key industries, directed and subsidised credit programmes, protection of infant industries, picking winners, promoting structural change by providing incentives for physical and mental retooling (equipment upgrades, retraining and relocation subsidies for workers), with specified performance targets.
These are good not just for developing countries but also for any country that wants to come through the present crisis. But they cannot be pursued within capitalism. The system is the cause of the crisis, a system in absolute decline.
President Sarkozy has called on the EU to protect its industry in the face of US protectionism: “If the United States defends its industry, as it does - and they are right - maybe in Europe we can do the same.” Where is the debate in Britain about the need to protect our industry? Protection can increase trade because industrialisation under protection needs raw materials, manufactured parts and machinery, and some of these inputs will need to be imported. Brown, on the other hand, says that protection is the road to ruin, unable to see that his policies have already brought us to that ruin.