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Johnson spots an opportunity over state aid – and it may work

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Via Yahoo Finance

Hugely disturbing, said the Adam Smith Institute. A recipe for cronyism and pure protectionism, said the Institute for Economic Affairs. A bad solution in search of the wrong problem, according to the Institute of Directors.

No, this was not the verdict on Labour’s manifesto from three organisations that played a pivotal role in Margaret Thatcher’s revolution after 1979 but their horrified reaction at Boris Johnson’s betrayal of free-market principles.

The IEA and the ASI have a vision of the sort of Britain that might emerge after Brexit. It does not include a state aid regime that makes it quicker and easier to help struggling companies or a buy-British procurement policy.

The backlash from the free-market thinktanks suits Johnson just fine because he wants to dispel the idea that departure from the EU means a fresh wave of deregulation and privatisation. If your strategy is to win Labour seats in the Midlands, Wales and the north of England that have been scarred by de-industrialisation and voted Leave in the 2016 referendum, it is best to steer clear of any notion that the UK will become Singapore on Thames.

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Johnson’s entire campaign has been based on the notion that these seats – despite suffering disproportionately from the austerity and the welfare cuts of the past nine years – are there for the taking, because they know what they want: Brexit; and they know what they don’t want: Jeremy Corbyn.

The Conservative thinking is that Labour is now two parties joined by the slenderest of threads: a middle-class, white-collar, socially liberal, Remain-supporting party of London, the metropolitan cities and the university towns; and a blue-collar, working class, socially conservative, Leave-supporting party of the towns and smaller cities in the regions distant from the south-east.

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As a result, there is little mileage in Johnson going to seats in the east Midlands or Lancashire armed with a bunch of IEA pamphlets calling for a bigger role for the market in the provision of healthcare or explaining why the gig economy is a good thing.

Instead, the calculation has been that the swing voters in marginal seats are, when it comes to the economy, to the left of where the Conservative party was under David Cameron and George Osborne but not as far left as the Labour party is under Corbyn. Hence, the decision to steal a few of Labour’s clothes: a higher minimum wage; extra money for the NHS; modest increases in infrastructure spending.

None of which was necessarily inconsistent with the idea that the Singapore-on-Thames model would emerge from the shadows once the UK had actually left the EU. The state aid and procurement commitments are different: they suggest a willingness to intervene that is at odds with leaving the economy to the tender mercies of the free market.

As Corbyn knows full well, since he used to make precisely these points in the days when he was on the backbenches railing against the EU’s neo-liberal tendencies, and even since the referendum. The Labour leader accepts the case for more generous state aid and a change to procurement policy but would struggle to offer them under the sort of deal he would negotiate with the EU if he became prime minister.

With an election less than two weeks away, it is possible that the Conservative pledges are just for show, and that they have no real intention of putting in place state aid or procurement rules that would antagonise Brussels. There is already justifiable scepticism about whether the UK can agree a free-trade deal with the EU during 2020: a more protectionist state aid and procurement regime would complicate matters.

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If Johnson is serious, he would be challenging economic orthodoxy, which says that state aid and preferential procurement policies feather bed inefficient companies, stifle competition and lead to higher prices for consumers. In the UK’s case, the IEA or the ASI would say eschewing protectionism has allowed the economy to specialise in things it does best – financial and business services – rather than things it does less well – manufacturing. Better to have tech start-ups in London’s Shoreditch than prop up companies that can’t hack global competition.

All of which sounds fine. It assumes, though, all state intervention in the economy, any sort of industrial policy, distorts the market and therefore a bad thing.

But historically, as the economist Ha-Joon Chang has said, all countries have used protectionism as a means of building up their industrial strength, with Britain the first.

The experience of East Asia shows that it is a fallacy to assume that state aid is only about providing support for lame ducks: Japan and South Korea are examples of countries that identified sectors where they wanted to be competitive and used financial support and trade policy to give them infant-industry support.

Nor is it the case that there has been no state aid for the financial sector, just that it has been delivered in a less overt way. The Docklands Light Railway and the Jubilee Line extension that link Canary Wharf to central London is either an infrastructure project or state aid, depending on your point of view.

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The final point is this. It is now almost 40 years since the heart was ripped out of Britain’s industrial regions, 40 years of waiting for the free market to deliver its promised renaissance. Instead, the well-paid secure jobs in manufacturing have been replaced by low-paid jobs in call centres and warehouses.

So, yes, Johnson may simply be playing politics. It would not be the first time he has been guilty of opportunism. But his argument that the status quo has not worked in Labour’s heartlands is correct. Which is why it may strike a chord.

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