Hamish McRae: Education and financial services can give UK an edge over rivals

Economic view: The great brand names of Europe have a powerful lure throughout the emerging world
  • @TheIndyBusiness

At last, and it will be a bit of a relief, the debate about the state of the recovery is beginning to resolve itself, and we can start to think about something which is ultimately more important.

It is about our competitive advantage over the next 20 or more years. The old debate has been about our cyclical position: how do we and the rest of the developed world get the upswing going more strongly? That won't go away and there will be important developments this week in the first signs of the US Federal Reserve tapering down its monthly purchases of treasury securities.

But in the months ahead as growth picks up the focus will begin to shift from the cyclical to the structural, from the immediate to the longer-term. This new debate will also be about growth but from a different standpoint, and asking different questions. For example: what can we do to improve our long-term performance is a ferociously competitive world? Or to put it more sharply: what can we do that other countries cannot do as well or better?

These are question for us, but they also face every country in the developed world. They are massively important because the long-term performance of any so-called "advanced" economy, and hence its future living standards, depends on being able to sustain a competitive advantage. If you can't do things better, you are likely to become poorer. It is a simple as that.

So the French government has just launched a plan to develop 34 new technologies, ranging from electric planes to driverless cars. It is the classic Gallic approach, one that has made France a leader in nuclear-power generation and high-speed trains. The plan has been presented as a way of replacing the 750,000 jobs lost over the past decade, but it is really a return to the sort of industrial planning that France developed in the 1960s. As President François Hollande said at the launch: "We can all think of examples from the past of great industrial plans that came from the top."

Other countries will follow other courses. We have less self-confidence in our ability to pick industrial winners, understandable given our record, so we are not going to go down that route. The US does not feel it needs industrial direction and is more concerned about fostering entrepreneurs and clearing roadblocks. Twitter, now preparing for a public quotation, was not the result of some government edict to create more high-tech enterprises. Fracking, now transforming the US energy balance, was entirely driven by corporate initiative.

Should we worry that we are not very good at industrial policy, and face social and other barriers in introducing fracking, and, indeed, extending airports? Well, yes. But you have to work with what you have got and the UK mix of skills, brands and other advantages such as universities does not look at all bad by international standards.

Start from the other end and ask: what do the newly rich countries in the emerging world want to buy? There is a strong pattern of the changes in the shifts of demand that take place as countries grow richer. The chart, derived from some work by Goldman Sachs, seeks to explain this. Countries with a low GDP per head have the peak demand for commodities and energy in the sense that this is when the largest proportion of their income is spent on such items. Thus China at the moment uses much more energy than the US, relative to its much lower GDP. Why did the oil price not fall back as the recession hit the developed world? Because any decline in the developed world's oil consumption was more than offset by a rise in that of the emerging world.

Then, as people become richer, they spend proportionately less on feeding and heating themselves and more on consumer durables. First they buy basic ones such as washing-machines, then they buy their first cars, then dishwashers and rather better cars. The final stage, when people are rich enough to have all the stuff they want, is when they switch the balance of spending to services, such as foreign travel and higher education.

So what might this tell us about the future spending preferences of the new rich in China, India and elsewhere?

I think there are two broad patterns. The new mass middle class of the emerging world spends its money in pretty much the same way as our mass middle class did two generations ago. People want to buy homes and fill them with consumer durables. The most extreme example is in China, where a motoring boom taking place. It is by far the world's largest car market, on course for selling more than 16 million cars this year.

The other pattern is that the new rich of the emerging world spend their money rather more flamboyantly than the old rich of the developed world. It seems that the great brand names of Europe have a powerful lure throughout the emerging world. But if the UK like the rest of Europe can do top-end products, it can also do top-end services: in particular, the concierge services to the mega-rich in London, but more broadly financial services and education. In this latter area we have more appeal than continental Europe.

This raises great policy questions, such as whether we want our great universities filled with more foreign students. But if you are interested in competitive advantage, that is the sort of issue on which the next debates should focus.