Economic Sovereignty: A Delusion

It has been Conservative policy in Britain since Mrs Thatcher to reduce the size of the state in pursuit of some golden age where private ownership and management would dominate (see Meek). The scale of the dismantling of the state and the destruction of what Meek calls ‘universal networks’ (the social and technological system deemed essential to all citizens) has been extraordinary. As Meek concludes:

The most absurd paradox of Britain’s privatisation is that it has actually led to the nationalisation of British infrastructure by foreign governments with parts of former British state firms becoming the property of the governments of France, the Netherlands, Sweden, China, Singapore and Abu Dhabi.

Even the most basic services such as water, electricity, gas and public transport have been transferred into private ownership, and since in most cases these are natural monopolies and/or behave as collusive oligopolists they have been able to function as tax farmers. They have substituted for Government and their pricing activities are analogous to levying taxes on consumers who have little or no alternative.

The most egregious example of this is water and sanitation where the privatised owners (mostly foreign) have fully exploited their economic power through their pricing policies. They are moreover in many cases now private firms owned by pension funds in Canada, Australia and the Netherlands. These are managed through subsidiaries located in tax havens where they pay themselves huge management fees. Whereas a major aim of all of these privatisations was said to be to maximise individual share ownership in the UK in practice this fell from 40% before Thatcher came to office in 1979 to under 12% now.

British Governments since Thatcher have been totally disinterested in who owns what unlike most other countries which have had strategic objectives concerning ownership and control. The result is that most major industries are partially or wholly owned by foreign enterprises – including automobiles, pharmaceuticals, ports and airports, banking and finance and electronics.

The sovereignty chimera

It is not that foreign ownership is in itself a bad thing but to argue that Brexit will permit the UK to re-establish economic sovereignty is simply a chimera. The UK is a very open economy with a ratio of Imports and exports to GDP of 61% and rising (51% in 2003). This is one of the highest ratios of any of the G8 countries. How is it possible for an economy so dependent on trade in goods and services to recover its economic sovereignty given this extremely high dependence on imports both for consumption and for production?

One result of joining the EU has been greater specialisation in production and further integration in industry with obvious benefits in terms of efficiency (and in prices and quality). The import content of UK exports is extremely high (23%) – a further indicator of dependence on trade for both output and employment. EU membership gives the UK greater control in these circumstances over imports since it participates in all regulatory bodies.

The UK may be a highly open economy but the price at which trade takes place is only tenuously in the control of the British monetary authorities. The exchange rate of sterling against both the $ and the Euro has tumbled since the referendum (by more than 15%) and there is more or less nothing the Government can do about it. Notionally the Bank of England could raise interest rates to reverse the fall in the level of sterling but this would have adverse effects on the domestic economy which is now severely leveraged with debt once again.

The Bank faces a dilemma and clearly doesn’t know what to do. Yet surely economic sovereignty means having the instruments of policy available so as to be able to establish an exchange rate that secures both internal and external balance? The current account of the balance of payments remains in large deficit as it has been over many years and is largely out of policy control.

At the core of the claim for economic sovereignty (and Brexit) is the claim that it is possible to control immigration. But this is another chimera since cutting immigration would mean immense damage across the board to the output of economic and social goods and services. The scale of dependence on skills and experience is such that there is no way that the UK could dispense with EU and other sources of immigrant labour, There is simply not the capacity to train those needed to substitute for the labour that would be lost through any set of autarchic labour control policies, and it would take many years to create this capacity and train British workers.

The scale of dependence on immigrant labour is immense – in higher education and research, in agriculture, in construction, in tourism, in transport, in health and social care (in some cases well above 20%). In the case of food manufacturing, the largest manufacturing sector in the UK, no less than one-third is migrant labour.

New EU policies on company takeovers in the pipeline

While the British Government seems totally unconcerned about who owns what other European states have finally begun to get their act together. Germany announced changes to their regulatory system in July which will extend the time available to Government for review of proposed takeovers of national enterprises. This follows the takeover of a key German firm in 2016 (the robotics firm Kuka) by a Chinese company (Midea) and a more general concern that changes of ownership could become a vehicle for the transfer of technical information and expertise. Government would now have additional powers to block foreign takeovers where these threatened critical infrastructure and especially in areas such as telecommunications, energy, airports, banks and hospitals. In practice the new powers gave the Government double the current time allowed for the review of proposed takeovers.

The three biggest Eurozone economies (Germany, France and Italy) have jointly presented a paper to the EU Commission calling for a strengthening of powers to control overt political takeovers – especially where these threaten areas of key national interest and security. The Commission would be given the power to review key business takeovers although the ultimate decision making authority would remain at national level.

What is driving these proposals is concerns about China and a belief that business takeovers have political aims as well as economic objectives. The UK has not been party to these discussions and has been perfectly happy to have China as a key player in the construction and financing of the Hinckley Point nuclear power plant – despite the clear security implications.

Conclusions: the options for UK

In today’s integrated world it is a chimera to believe that one can establish some presumed long-lost economic sovereignty. Economic and other systems have become too integrated to believe that one could dismantle existing structures without immense costs – social, economic and political, The UK is deluding itself if it believes that economic sovereignty can be re-established.

It would be more realistic to re-examine areas of domestic economic and social policy and to seek solutions to problems of under-performance and economic exploitation which are largely the result of previous policies such as privatisation of essential public services. Alternative, better, structures for the delivery of goods and services are feasible and worth pursuing. These would include taking key sectors such as water, energy and railways back into public ownership together with much more effective systems of regulation.