Murari Sharma: Whither Britain Goes from Here?

Britain is in a long-term decline and the current politics is helping the process, rather than arresting it.

Once Britain was the foremost economic and military power in the world. At least from 1830 to 1890, it had the highest per capita income; and in the 1880s and 1890s, it had the largest gross national products. Being a maritime nation, it never had the largest army even when it ruled much of the world, but it had the largest number of navy ships from 1730s to 1810s.

Now Britain is far from those glorious days. It is 28th and 24th from the top in per capita income in the world, according to the IMF and the World Bank respectively. Several of its former colonies like Singapore, Hong Kong, the United States, etc. have edged past it in per capita income. Britain is the sixth largest in total gross domestic products. It is 5th in military strength, according to the globalfirepower.com.

How did this happen?

Britain lost its supremacy due to two reasons. First, the economic and technological growth of other countries. The United States propelled ahead of Britain from the 1900s. It invested more in research and development, its scientists made more inventions, and its firms commercialized new inventions more successfully.  China rapidly moved forward since the 1980s to become the second largest economy in the early 2010s. Japan and Germany galloped forward after since 1950s. France, comparable in growth, is ahead of Britain because of its larger population.

The decline in military strength followed due to defense and economic reasons. The defense needs shrank as British colonies became independent and as Britain joined the North Atlantic Treaty Organization for collective security during the Cold War. With the decline in its economic growth and prosperity, Britain’s capacity to finance a large military vanished as well. The United States and Russia, both much larger countries, were already spending more on defense than the British Isles. China and India invested in their militaries as they began to grow spectacularly over the last couple of decades.

Second, Britain lost its supremacy due to its internal decay. World War I and World War II exhausted Britain. With the loss of its colonies, Britain suffered decline in income and wealth from them and lost monopoly access to their raw materials and markets. As the United States, Australia, Canada etc. began to flourish, they attracted many British scientists, academics, and businesspersons. The only sector that is mainly keeping Britain afloat is banking and financial services.

Most of these developments were inevitable. For instance, Britain could not prevent its colonies from becoming independent or its rivals from growing economically and militarily. Many decisions British politicians made were smart. For example, they involved the United States in the great wars, joined the United Nations to promote peace and security, and took membership of NATO. They promoted globalization working with their American counterparts that gave a fillip to global trade and growth.

However, British politicians also made many mistakes that contributed to Britain’s decline. First, they have taken Britain to several wars of choice – for instance in Iraq, Libya and Syria –, wasted billions of pounds in them, left those countries permanently volatile, and created favorable conditions for the rise of terror groups like the Islamic State of Iraq and Levant. They provoked the sleeping bear by expanding NATO east, which has caused destabilization of Ukraine, Georgia, Moldova, etc.

British politicians could invest the billions spent on those wars to repair the aging infrastructure and revive growth at home. They could, through incentives, have motivated British scientists, academics and businesspeople to stay in their country.  They could have opened Britain’s door to immigrants based on its skill needs, rather than party ideology and politics. Britain needs high-skilled people, investors, and even semi-skilled immigrants like masons and carpenters to grow, because of its aging population and declining fertility rate.

Too much austerity is another mistake that is being made. Although no country can live beyond its means forever, British politicians are paranoid about debt so much that they have prevented growth that would have created jobs, increased revenue and mitigated the debt burden. Britain is now recovering from the 2007 financial crash, after so many years. Let us not forget, the recovery was already picking momentum by 2010, but the new government killed it through austerity. That the British economy is showing signs of life again is not a matter to cheer, according to the Economics Nobel laureate Paul Krugman.

Krugman wrote recently in The New York Times that the United Kingdom is feeling better now, because it has stopped hitting itself with the baseball bat of austerity. He suggested, rather sarcastically, if you close the economy for half a year, the remaining half year would show tremendous surge in it. He has a point. The US economy, helped by the Obama stimulus and Fed’s Quantitative Easing, has been recovering more robustly than the British economy. Other austerian countries in Europe have been suffering deflation.

While all economists agree that rising demand is essential to end recession and sustains growth, they disagree on their policy prescriptions for it. The Keynesians support increase in public investment through borrowing and in welfare payments to the poor to stimulate demand and oppose tax cuts for the rich, which widen inequality. The supply-siders want to cut taxes across the board, slash welfare payments for the poor, and oppose increased public expenses. They say welfare payments make people lazy and increased public spending results in profligacy, in increase in debt, and in inflation.

Evidence from, among others, the United States since 2008 and Japan under Prime Minister Abe proves that increased public expenses, particularly investment, and quantitative easing increase demand and help economic recovery without triggering inflation. While tax cut for the poor helps demand, the same for the rich does not (you do not eat five hamburgers because your income has increased five times). Studies carried out in America also show that big welfare payouts do work as disincentives for work if they are big.

In other words, the Keynesians and supply-siders are partly right and partly wrong.  Nonetheless, they stick to their guns, disregarding the overwhelming evidence that some of their prescriptions are clearly wrong. Why? Because they have a hidden agenda of helping their bedfellows in politics to create and sustain their vote banks. The Keynes-inspired liberals want to win the poor and labor unions to their side and the supply-side-inspired conservatives want to win the votes and cash from rich entrepreneurs and City and Wall Street denizens.

In the United Kingdom, the Tories want to shrink government to the 1930s levels, cut welfare spending for the poor, preserve military expenditures as much as possible, but increase tax cuts from which the rich — job creators in their parlance — benefit most. However, there is no evidence that tax cuts for the rich generate growth. Growth was higher in Britain in the 1950 through 1980s when the taxes on the rich were higher than after 1990s when they were lower. On the other hand, Labor want to minimize welfare cuts, if they have to do them at all, increase borrowing and public investment, and slash military spending.

The United Kingdom is at a crossroads. Scotland, whose referendum for independence was narrowly defeated last year, could separate. The North Sea oil is depleting; UK manufacturing is declining; the country is likely to pull out of the European Union, which will decimate the City of London and damage British commerce. Austerity is holding the economy back. Any mistake made now by politicians could be a severe blow to this great country for a long time to come. The British people will have to decide in the May election this year as to what kind of future they want for themselves.   

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