We are currently in the worst economic downturn since the Great Depression. This demands a response on a par with that of Keynes’s in the 1930s in terms of scale and imagination. Yet, the state of our nation’s finances means that we cannot spend or borrow our way to growth. Rather than being dependent on a financial industry that stretches no further than the boundaries of the City of London, we should look for new sources of growth in the industries of the future to secure a strong and sustainable recovery that brings the whole country with it.
In the wake of the financial crisis, it has become apparent that much of the economic growth we have enjoyed over the previous two decades was underwritten by an unsustainable credit bubble. The health of the whole economy became far too dependent upon the health of the financial services industry. Banking boomed, while the real economy, those in the business of making and selling products and services that the world actually needs, was ignored. The collapse of this arrangement has left us with a national debt of over £1 trillion, and an unsustainable deficit.
The regions were also neglected during the boom years. Between 1997 and 2010, Gross Value Added, a measure of output similar to GDP, rose by 61% across England’s northernmost regions, the North West, the North East and Yorkshire & Humberside. By contrast, in the South East and London, the centre of the financial services industry, Gross Value Added expanded by 92%. Moreover, whereas job creation in the South was spurred by a growing private service sector, the north has been heavily dependent upon government spending. Between 1998 and 2007, the state was directly or indirectly responsible for 64% of jobs created in the North, compared to only 38% in the South.
At the recent Labour Party Conference, Ed Miliband attempted to take on the mantle of One Nation Conservatism. However, Labour’s legacy speaks for itself. The direct consequence of Labour’s prawn cocktail offensive is that regions outside the South East of England were ignored and neglected by a party in government more interested in wooing financiers in the City. A truly One Nation response to the financial crisis would rebalance our economy away from London-centric banking and finance.
To do this, the government needs to support growth in new businesses and the industries of the future. Unlocking our innovation economy, and finding new engines for prosperity is vital for a sustainable recovery that is driven by growth in all parts of the country, not just central London. This means encouraging industries such as pharmaceuticals, energy, agricultural science and aerospace, which technology is reshaping into the building blocks of tomorrow’s knowledge economy, and where we already have a head start.
Although, Britain does not have the cheap labour of China, or India, it does have some of the finest universities and research establishments in the world, and a historically deep seated entrepreneurial spirit that saw our small island become the workshop of the world in the 19th century, exporting more goods across the globe than any other nation. Today, we should be using our know-how and passion for creativity and innovation to get strong foothold in emerging markets. With some emerging economies almost doubling in size every decade, our economic fortunes depend on developing strong trade links with them.
Take pharmaceuticals, for example. Having recently implemented better protection for intellectual property, India’s market for pharmaceuticals is expected to grow to $74 billion by 2020, and other developing countries are in a similar position. Even a small slice of this market represents a huge opportunity for growth for UK firms. Similar opportunities present themselves to our agricultural science sector. With the world’s population expected to rise to 9 billion over the next 30 years, agriculture around the world must use advances in technology to increase agricultural productivity. In these areas and others, the government must support British business in entering these markets, for example, through diplomacy and foreign policy, and making a commercial success out of British research.
Our lead in innovation is not just important in giving us an edge in emerging markets – it can even be harnessed to bring new, unforeseen markets into existence, and displace existing ones. Henry Ford said, “If I had asked people what they wanted, they would have said faster horses.” Yet, by developing the methods to mass-produce automobiles, Ford not only transformed people’s conceptions of what was possible, he also made the market for horse-drawn vehicles practically redundant.
Government cannot plan for innovation of this kind. To a large extent it is spontaneous and depends upon the genius and foresight of particular individuals. However, what government can do is create an environment that encourages innovation. First of all, the government should cut regulation to make it easier for entrepreneurs to start and operate businesses. Initiatives such as start up incubators, and hubs such as Tech City in East London, where entrepreneurs can collaborate and share ideas, should also be encouraged.
Our competitors, such as the US and Germany, are also investing in science, research and innovation. However, if we act now we can still unlock the full potential of our innovation economy, and make our advantages count. A focus on the knowledge-based economy, emerging markets and innovation will ensure growth is sustainable, and prepare Britain for the 21st century. Without it, any recovery we see in the next few years will be nothing but a false start on a broader path of long-term decline.