Competition is ideological

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Economists can face difficulties in analysing what happened in the past before records became as detailed as they are today, and often depend on extrapolation from other data.  Despite that, there is a general agreement that India was responsible for around 25% of the world’s industrial output in 1750 and that the proportion fell to around 2% by 1900.  If the detail of the figures is inevitably subject to debate, the cause of the fall is even more so (there’s an interesting analysis of both the figures and the causes here).

But as the history of the British Empire shows, globalisation of trade is not as new as it sometimes appears, and the balance can swing from one country or region to another over time.  For India, the imposition of Imperial rule, at the same time as the Industrial Revolution in Britain, coincided with a switch of manufacturing from India to Britain as the Indian economy became one supplying raw materials rather than finished goods.  It's not hard to see a causal relationship there.

In short, India lost much of its industry and the key economic decisions leading to that were taken elsewhere.  It’s tempting to see last week’s announcement on the future of steel-making in the UK as a sort of mirror image of that process – de-industrialization of the UK as a result of decisions taken in India.  That’s a bit over-simplistic, of course, but there is a more general parallel.  In the 18^th and 19^th centuries, there was a flow of economic power from places such as India and China to Western Europe in particular – and that flow is now increasingly moving in the opposite direction.  And just as others seemed to be powerless to prevent the flow in the past, governments here seem to believe themselves largely impotent in the face of the reverse threat today.

Does it have to be so?  The rebalancing of the world’s economy, with wealth shared more equally, which is underway is certainly long overdue, and those of us supporting such a move have to recognise that any such readjustment is likely to involve a certain amount of pain.  But that pain is exaggerated by the insistence – shared by all parties – that the size of the respective shares must be decided by competition rather than by co-operation.  Our politicians seem mostly unable to conceive of a world where countries and peoples work together for a fair distribution of the world’s finite resources rather than a world full of cut-throat competition in which all participants seek to maximise their own share.  But that’s an ideological driver, not an economic one.

Ignoring difficult questions

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Instinctively, it seems to me that anyone who took to any part of the Welsh media to argue against government intervention in the steel industry in the light of the Tata announcement would be a very brave person indeed.  But someone actually has, and in fairness, some of the points he makes deserve consideration rather than outright rejection (which is not the same as saying that I concur with his conclusions).

Much of the reaction to Tata’s decision looks like knee-jerk stuff – ‘the government must do something’ – rather than a thought-out strategy for responding to the underlying problem of a globalised economy in which an outdated industry in Wales is struggling to compete.  Paul Swinney’s point about it not being clear how any government bail-out “would help turn around the plant’s fortunes” is an entirely valid point to raise, and one which cannot and should not be dismissed lightly.

He also questions whether we should even be trying to compete with lower wage economies elsewhere for such basic industries as steel, or whether we should accept that our future lies elsewhere.  That’s not an easy question to be asking either, but it is another brave one.  For various reasons which I won’t go into here, I don’t think that it’s the right approach, but merely asking the question raises doubts in my own mind as to whether either the Welsh or the UK governments have any sort of coherent strategy either way.  Sometimes they seem to be paying lip-service to the idea of maintaining a heavy industry element in the economy; at other times their actions seem to suggest that they’ve already written off that approach and are only interested in the new.  But committing to a coherent strategy, one way or the other, would surely be better than merely reacting to events.

Many of those suggesting some form of nationalisation seem to see it as a purely temporary situation, pending the onward sale of some or all assets.  It’s an approach which meets the requirement of ‘being seen to do something’ in the short term, but could all too easily lead to a cherry-picking of assets with the biggest loss-makers simply ending up as the responsibility of Government.  It doesn’t look much like a long term strategy – nationalisation is being regarded here as a response to market failure rather than as an option for a sound long-term economy.

Adam Price’s article in today’s Western Mail offers a glimpse of a more forward-looking strategy in which we would have a Welsh steel company with an entire portfolio from steel production to high-end value-added products.  If the steel industry is to be a viable part of the Welsh economy for the long term, that ‘entire portfolio’ is surely one of the most important factors; the more conventional approach of insisting that each individual component turns a decent profit is a recipe for ending up with nothing. 

It’s not a problem-free solution, however, and I’m far from certain that it isn’t glossing over some of the issues.  One of the problems causing the industry in Wales to lose out to competitors elsewhere is precisely the fragmented and dispersed nature of the industry here compared to more integrated plants elsewhere.  Steel travelling by road or rail from one plant to another to be processed is a factor in the production process which places us at a disadvantage and one whose rational resolution in order to make the industry more viable would itself be far from painless.

And that issue of competition with other plants elsewhere brings us to the central economic question which we need to be asking.  The intensity of that competition itself varies over time.  That’s partly a result of the economic cycle; the demand for steel is closely related to the health of the economy at a point in time.  It’s also partly a result of developing economies not wanting to be dependent on others for basic materials.

Nationalisation in itself, whether in full or in part, addresses neither of those issues and that makes it very much a short term response, because neither issue is going to disappear.  Given the immediacy of the requirement to respond and the failure of governments to have an industrial strategy in place, it may well be the most realistic option, but unless there is a longer term industrial strategy to underpin it, it’s unlikely to offer much for the long term.

Capitalism has, over the past half-century or so, become increasingly short-term in its outlook, but there are parts of the economy which require a longer term view to be taken.  Non-interventionism has become almost a creed, for Tory and Labour alike, who prefer to let ‘the market’ decide.  But what if ‘the market’ is unable or unwilling to take the longer term view required?  If government won’t do so either, then we are at the mercy of short-termism.  What is being presented and treated as a short term crisis in one industry is actually drawing attention to a wider economic failure – a failure of vision, strategy, and direction.