By Professor Nick Bosanquet and Dr Patrick Nolan
Some commentators claim to have seen the “green shoots of recovery” in the UK economy. Yet the worst is unlikely to be over. Based on past experience, the economy has only been in recession for a short time so far: the last two recessions in the UK each lasted for five quarters. Further, even when the recession is technically over effects like unemployment will continue to worsen, as they lag economic growth.
While there are prospects for recovery, actually achieving balanced economic growth needs an environment supportive of innovation. This requires harnessing the dynamic nature of the market. As the private sector generates 80 per cent of productive activity, economic recovery cannot only come from the state.
International evidence strongly supports the key role of innovation and competition in promoting recovery and growth. The current crisis is in many ways a globalised version of the East Asian crisis of 1997-99. The recovery by South Korea from this was remarkably rapid. This was achieved by a combination of direct action to deal with toxic loans and opening up the economy to competition:
“Beginning in 1999, South Korea set aside an amount equal to 15 per cent of its GDP to buy bad loans and close bad banks. In addition it merged some strong banks and sold others to foreigners, opening up South Korean financial markets to international competition … South Korea worked to shore up its Chaebols, while at the same time opening up domestic markets to international firms in an effort to increase competition.” (Todd A. Knoop, Recessions and Depressions. Praeger, 2004.)
The result was a rapid return to 5-6 per cent annual growth by 2002.
Similar lessons can be drawn from past experience in the UK. In the 1930s the car and radio industries were crucial in promoting recovery. From the 1980s there was a massive development of activity from mobile phones and low cost airlines. Vodafone in 1985 employed fewer than 3,000 people; it now employs 70,000 worldwide and serves 289 million customers. Ryanair and Easyjet are planning a net expansion of their activities even while British Airways is abandoning routes and reporting increased losses. The bet on corporate oligopoly in business class seats has failed – while the competitive business for the mass public is succeeding.
These cases highlight the ability of competitive markets to reallocate resources following changes in prices. These cases also highlight the choice facing the UK: encourage competition or face long term stagnation. Failing to encourage competition would lead to a domestic economy dominated by retirees and renters while the dynamic corporate economy faces pressure to move offshore.
Innovation in successful products and services is even more important in a globalised economy.
Without encouraging competition there is a real risk that, when world growth returns, the UK will be unable to keep pace with the countries with which we compete for trade, investment and skills. Economies with competitive and flexible markets will be the first to bounce back when world growth returns.
Nick Bosanquet is Professor of Health Policy at Imperial College London and Consultant Director of the independent think tank Reform. Patrick Nolan is Senior Economist at Reform.