Hamish McRae: How Harry Potter can work magic on our trading deficit

Far from being a sideshow, the UK's creative industries are among our greatest assets
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How do we create a way out of what seems likely to become a worsening current account deficit? The idea that a cheap pound will power manufacturing exports has evaporated almost as quickly as it appeared. Now that Gordon Brown has made it clear that there will be no sudden rush to try to persuade the British people to give up the pound, sterling has regained half the loss of value it experienced against the euro since the election. Expect it to regain the rest in the coming weeks, in time to allow British holiday-makers on the Continent to enjoy their now-customary gloat about the low prices.

But what works for holiday-makers does not work for the balance of payments. Most of British industry has coped surprisingly well with the relatively strong pound, partly because companies have developed their products to compete on quality rather than price and partly because there are substantial offsets.

For example, energy is a dollar commodity and until recently the stability of sterling against the dollar gave UK companies rather cheaper energy than their Continental competitors. Most other raw materials are priced in dollars too.

Still, there is a widening current account gap, as we saw last week. If, as is beginning to look possible, the UK grows faster this year than either the eurozone or the US, the current account gap will widen. And the driver of British growth is the consumer and we are great at buying foreign products. Thanks to this enthusiasm the UK is the third largest importer in the world. And though a gap of 2 per cent of GDP, such as we were running last year, need not cause concern, were it to widen to 4 per cent, then it might be difficult to finance.

So how are we going to pay our way? By fostering creativity. In a world where manufacturing technology crosses national boundaries at the click of a mouse, one of the few ways in which a country can sustain a competitive advantage is by being more creative. Part of that creativity goes into products (a BMW is the work of talented designers and engineers), but looking at the UK, the particular advantage lies in our creativity in service industries. Only about half of foreign earnings are physical exports; the rest comes from services and income from investments.

Talk of services and many people think "McJobs" – yes, people assume, service industries create employment, but the jobs are mainly low-paid, low-skill ones. This simply is not true. On Friday the latest Employment Outlook from the OECD showed both that high-wage service industry jobs were increasing faster than low-wage ones and that service industry workers were more likely to receive training than those in manufacturing.

Services, however, is a catch-all term: it covers everything from an investment bank to a takeaway. The particular element of service industry where the UK seems to have the greatest advantage is in the creative services: publishing, advertising, music, entertainment and so on. These core creative industries are worth some $2,000bn, or 6-7 per cent of world GDP. In the UK the proportion is almost certainly higher. A new book, The Creative Economy, by John Howkins, outlines the scope of these industries and argues that many of the world's great trade tussles over the next 10 years will be over issues like the protection of intellectual property.

Trade in the creative industries plays strongly to UK strengths. Add up all the credits and debits in international trade in royalties and licence fees and you get the graph here – it is drawn from IMF data for 1999, the latest year available. As you can see, the US utterly dominates this trade, with a surplus of some $23bn. The UK is a poor second but the only other countries I can find that have a surplus at all are Sweden, Ireland and (surprisingly) Russia. Everyone else imports creativity.

You do have to be a bit careful when drawing conclusions from this data, which after all, includes everything from Hollywood to Microsoft, Madonna to Mozart. Creativity is not necessarily high-falutin' stuff. This column is an act of creativity, but Shakespeare it ain't. If entertainment plays a disproportionate part in the mix, so be it. If Harry Potter and Bridget Jones can help cover the UK's current account deficit, then all strength to them.

The question, surely, is what can we do to reinforce the success of our creative industries? The first thing, obviously, is to recognise their importance, which to its credit this Government does. It is perfectly plausible that in another 10 or 15 years' time, these creative industries will be larger than manufacturing. A second general imperative is to be aware of the importance of these industries in trade negotiations. We need to protect intellectual property and make sure that trade in the creative industries continues to be liberalised.

When you come down to specifics, however, it is hard to frame any single set of policies that will help much. The industries are too different. Instead, the sensible way forward is to remove roadblocks on an industry-by-industry basis. For example, I am told it is a nightmare filming in London because of petty restrictions imposed by the various authorities. So it is much easier to film in a city that can be made to look more or less like London – for example, Dublin.

Another well-known example would be film finance. At the moment many films we think of as British are actually financed in the US. That is partly because finance links with distribution, and to make a film fly, it has to succeed in the US market. Still, it ought to be possible to create a level playing field so that UK money hunting for outlets in the entertainment industries fights on equal terms with US funds.

So what is mostly needed is a piecemeal approach, looking at each of our many creative industries and asking how government might help it, even if this is simply by getting out of the way. There is, however, one other general area where we need a call to arms. It is in fostering creativity among our young. Asking schools to encourage creativity is not to urge them to dump the three Rs – rather the reverse. But it is to say that at every level of the education system we need to respect and foster one of the rarest of human qualities, and one we are lucky to have in stock. If it helps us balance the current account and buy more BMWs, then all the better.

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