Time to Stop Toeing the Party Line on Economic Policy

Article excerpt

Since the economic humiliation of Great Britain Ltd in the autumn of 1992, British management has been spared in the fumbling search for scapegoats. Obviously a close connection exists between manufacturing's performance and the current account deficits that underlay sterling's collapse. But manufacturers can't be blamed for the years of economic mismanagement that preceded, followed and embraced entry into the ERM.

Industry and its spokemen can be blamed, though, for toeing the party line. Before the deluge, even Peter Bonfield, whose brilliant management of ICL has been a textbook example to his peers, argued for toughing it out at DM2.95. True, macroeconomics is seldom a manager's strongest point, but you don't need an economics degree to see that nothing alleviates price competition so swiftly and painlessly as devaluation.

By the same token, nothing cripples competition more generally than an over-valued currency. In fact history has thrown up examples of how the embarassing strength of a currency can be accompanied by marked success in world markets. Japan demonstrated this most recently when the yen took off against the dollar. But that was against a background of vigorous domestic growth, not against the British conditions of deepening domestic recession.

As business economists, British managers know that cost falls as output rises. But from 1979 to 1989, the peak-to-peak growth in manufacturing output was a mere 12.3%. The 4.8% average annual rise in labour productivity over that same period, the best in postwar history, thrashed Germany's 1.8%. That unprecedented managerial success flowed mostly into higher unemployment, not into raising exports and ousting imports with innovatory products.

High exchange rates from 1985 onwards played their part. But essentially this was a replay of the same old farce. The efforts of Britain's better managers have been vitiated time and again by central economic policies which have focused on the external value of the pound.

By and large, major companies have gone along for the ride to their own perdition. Under Conservative governments this can partly be explained by management's prevailing political hue, but even under Labour the consensus behind economic management policies was generally supportive.

In addition, managements have a legitimate and strong interest in stability. That has meant, however, backing policies which were violently destabilising - never more so than in the latest episode. As the leaking boat rocked, even managers whose companies were suffering from the parity claimed to fear inflation more than lost markets, more even than deflation. Given that so many were struggling with barely supportable debt, that was wildly quixotic.

There's a paradox between the awful performance of sterling externally and internally (where the purchasing power of the pound fell by 90% in 30 years) and the rising prosperity of UK citizens. Until the Lawson boom boiled over in 1989, for all the macroeconomic policy failures, the majority of people significantly improved their consumption and augmented their capital assets year after year -- including managers.

Inflation played its part by devaluing debt and encouraging wage rises; governments played theirs in allowing consumption to grow faster than underlying output, especially when elections were imminent. …

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