Deindustrialisation on a huge scaleby John Mills / December 21, 2016 / Leave a comment
No-one can deny that liberal democracy is under serious threat from populist nationalism. The moderate left, in particular, is in the firing line. What is the single most important reason this is happening? It is that western politicians, commentators, the academic establishment and public opinion have—as a result of a combination of thoughtlessness and carelessness—pursued policies which have allowed the east comprehensively to out-compete the west where it really matters, which is in building up industrial strength.
It started in the 1970s when the Keynesian consensus broke down. The discipline provided by Bretton Woods then disappeared and there was a huge credit-driven boom—exacerbated by the Arab-Israeli Yom Kippur War and the OPEC oil price hike—all of which drove western opinion into the arms of monetarism. As the battle against inflation took centre-stage, interest rates peaked at 15 per cent in the UK—and 20 per cent in the USA—and western currencies massively revalued. The UK’s trade weighted real effective exchange rate rose by about 60 per cent between 1977 and 1981.
Meanwhile in the east the opposite was happening. China, in particular, joined the world trading system around 1980. A combination of improved efficiency, as market forces were introduced, and massive nominal devaluation, brought the real Chinese real exchange rate down by about 75 per cent by the early 1990s. As a result, China became extraordinarily competitive. It suddenly became cheaper to manufacture almost anything in the east than the west. British industry reeled under the strain. While in 1970 32 per cent of our GDP came from manufacturing, by 1990 only 20 per cent was left.
But worse was to come. Capital liberalisation, led by the Labour government abolishing the Monopolies and Mergers Commission in 1999, left the UK wide open for take-overs. Over the next decade we sold everything—our rail franchises, power companies, ports, airports, manufacturing companies and much else—to foreign interests. Between 2000 and 2010 net sales of UK portfolio assets, excluding direct investment in new assets such as machinery and buildings, came to £615bn. As a result, the exchange rate went up another 40 per cent to the dizzy $2.00-to-the-pound heights of the 2000s. By the early 2010s, UK manufacturing was down to barely 10 per cent of GDP.