Britain: Where Now? Can Britain make it?: Suddenly, Britain has ditched its old economic policy. Nobody quite knows what the new one will be or whether it will work. Neal Ascherson seeks answers to the question: can we halt our long-term national decline?

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The Independent Online
THE ECONOMIC programme called 'Thatcherism' died this month, in October 1992. On that, bankers, industrialists and even politicians seem to agree. Yes, this is the end of a road. Where they disagree is about what comes next.

Does John Major's 'new economic policy' mean a historic swing away from laissez-faire 'casino capitalism', and over to active government support for manufacturing industry? Or is it just a handful of temporary panic measures - yet another election boom without even an election?

Thatcherism had lingered weakly on, masked by the 'human face' of Mr Major, for almost two years since its patroness left Downing Street.

Then the storm burst. Within less than six weeks Britain was beaten out of the exchange rate mechanism, the barometer needles of recession swung towards a fresh plunge, foreign and domestic confidence in the Major government fell apart, and finally an eruption of popular anger against the summary destruction of the coal mining industry brought the Government to the brink of parliamentary defeat.

On Tuesday night, Mr Major went on television and began talking about 'a strategy for growth'. Honestly enough, he did not say that he had one. He said only that he was going to get one.

FOR most people, growth means two things: industrial revival and more jobs. Britain's industrial decline, since the mid-Victorian peak when British exports dominated the world, has been more or less continuous. But over the past century that decline has been to some extent masked by alternative sources of prosperity.

By the First World War, Britain was only the third-biggest industrial producer in the world , but Britain alone had no less than 44 per cent of world overseas investment - and the merchant fleet was 12 per cent bigger than those of all other European nations put together. Although these advantages soon dwindled, they help to explain the amazing fact that it was not until about 1960 that the phrase 'relative decline' was accepted as a description of Britain's economic situation.

Even after the Second World War, which cost the United Kingdom much of its overseas wealth, the decline was not recognised. For nearly 20 years after the war, far higher growth rates and productivity on the Continent were explained as transient effects of post-war reconstruction.

A strange paradox lay at the heart of Thatcherism. The Bolsheviks had ruled in the name of the proletariat, but in fact had suppressed the independence and rights of the workers. In a not dissimilar way, the Thatcherites ruled in the name of the hungry, untamed, unfettered entrepreneurs ('those wonderful people', as Margaret Thatcher called them), but in fact the manufacturing interest suffered devastating damage during the 13 years following 1979.

The huge fall in manufacturing employment (28.4 per cent of total employment in 1980, but only 20 per cent today) was defended on the grounds that it had increased productivity. This seems to have been only partly true. More important was the slaughter of industrial firms in the two recessions: the short, deep one of 1981-83, and the agonisingly prolonged recession that has already lasted for three years. These have left manufacturing not so much lean as emaciated.

The collapse of firms meant the loss of overseas markets and the entry of foreign competitors to occupy British ones. The question is whether even a new 'growth strategy' to support industry can bring about a real recovery - or whether it is too late.

'The Thatcherites were like a general ordering a cavalry charge just after he had shot his horses. And not only did the Thatcherites shoot their horses, they also refused to do anything to breed new ones.' So writes Sir Ian Gilmour about the plight of industry, in his new book, Dancing with Dogma.

The chief economic adviser to the Confederation of British Industries, Professor Douglas McWilliams, is more considered but in the end almost equally damning. 'It was investment in the 1970s which carried industry on through part of the 1980s, so the rise in productivity was on the way in any case. If we had gone on like that, we would really have picked up by the end of the 1980s. But then came macro-economic mistakes which smashed the process.'

What were these mistakes? 'They came from the combination of Lawson and Thatcher. Either alone might have been tolerable. She would have followed some kind of monetarist policy in the later 1980s, squeezing out excess growth and borrowing. Lawson would have got us into the ERM in 1985 at a sustainable rate. As it was, we got the worst outcome.'

Inflation returned; the interest rate brakes went on; the fall of demand hit not only manufacturing but (unlike the first Thatcher recession) retailing as well. There followed a collapse of investment, which withered the supply side of industry.

'We are close to being back where we started 10 years ago. We have to climb the whole mountain again, and this one will get worse before it gets better. The base of manufacturing has been cut back to the point at which it is hard to expand from.'

Most commentators, all the same, concede that there were some areas of success in the 1980s. Bankers and industralists agree that the campaign to attract 'inward investment' - by which they mostly seem to mean Japanese car factories - has been fruitful.

The Japanese industrial culture is considered to have taken root, and to have spread its insistence on quality to its British suppliers (Mercedes now puts a high value on British-made components). The drive to encourage the growth of small business has also produced impressive results, in spite of the terrifying death rate of small firms in their first few years.

Professor McWilliams says: 'The UK has traditionally been a big-firm economy, and the shortage of small and medium firms has been acute. The small-firm revolution was real, even though it still lags behind the Continent: Italy has twice as many.'

But the medium-sized industrial enterprise, the backbone of German industrial excellence, is still a rarity in Britain. At between 300 and 1,000 employees, it is infinitely more difficult to create than a small business. The medium firm, to be seen flourishing at its best in semi-rural regions like Baden-Wurttemberg, seems to grow out of a special kind of culture in which economic and political authority are highly decentralised. That is an un-British environment.

The industrialist Sir John Harvey-Jones, television's Troubleshooter, says that 'either our standard of living is allowed to fall still further, or we do something about the revival of manufacturing industry'. He adds, violently, that 'industry's influence on the Tory party has been zilch'. This, of course, raises the question of what exactly a Major strategy of growth is supposed to do in order to support a manufacturing revival. But answers to that question are curiously vague.

On the one hand, nobody wants a return to some 'corporate' pattern of economic management in which central government plans and steers industrial expansion. On the other, there is a hankering for state support and 'leadership'. The great cliche is the call for 'a level playing field' - which in fact means a field tilted in favour of British exporters to the degree that the Japanese or German playing fields are held to be tilted. But tilting can mean many different things.

Patrick Foley, chief economist at Lloyd's Bank, who feels that financial deregulation went much too far in the boom of the 1980s, remarks that 'in some of the most successful economies, governments have intervened quite strongly on behalf of industry'. All the same, he is cautious about direct pump-priming and support; devaluation of the pound will in his view do more for exports than lower interest rates, 'which won't have much effect'.

He thinks the recession is due less to the fall in demand than to 'a collapse of supply - cutbacks in stocks, labour, investment'. Retail sales have actually fallen rather slightly, at their lowest only 2 per cent less than pre-recession figures, which means that the British are now buying imported rather than home-grown goods. 'That is why the trade deficit is so deep.'

The industrialists' own menu of things they would like government to do for them is different. In contrast to a banker like Mr Foley, they put great hopes in the effect of lower interest rates.

They want the fiscal burden shifted off them: they want a tax system that allows for depreciation of equipment and encourages research and development. They want more support for exports: not just in credit insurance and so on, but in official backing when they compete for an overseas contract - the kind of informal guarantee that makes a foreign government feel that a tender has the full endorsement of the British government.

And manufacturers want to feel that their needs are the centre of the financial world's attention. Neglect by the money men, apart from the City's blind insistence on high company dividends, was one of the wounds inflicted by deregulation - the credit boom of the 1980s. Lending to business made up almost 70 per cent of bank loans in 1980, but only 52 per cent in 1989. The rest, as embittered captains of industry see it, blew away in candyfloss and overpriced housing.

But there is also scepticism about how effective government intervention would be, even if Mr Major's new policies venture that far. Sir John Harvey-Jones complains: 'We are so inept at intervention by central government, or state guidance of industry] These pit closures show the absolute ineptitude of politicians and the total ineptitude of the Department of Trade and Industry. We would all like support on the French or German model, but until the central organs of government contain a few more people with the bloody ability to recognise a success when they see one, it's hard to be optimistic]'

Manufacturers, however, are now begging the Government for more than support. They implore it to be credible. It was easy to say, in the imperious Thatcher years, that industry should be immune to the moods of a Cabinet. Now it is plain that the awful failure of the Major government to recognise or cope with the crisis has knocked the stuffing out of business confidence.

From several businessmen I heard that the fiasco of Michael Heseltine's performance, in particular, was affecting their plans; this was the only politician who had 'seemed to have the right answers for manufacturing, who exuded confidence . . .' But Professor McWilliams added a more material explanation for this nervousness - deregulation, once more]

Thirty years ago, spending was fairly tightly anchored to income, which provided a crude guarantee of stability. But now, in spite of Mrs Thatcher's imagery of 'housewife budgeting', the credit boom of the 1980s meant that spending often soared far above what income might seem to justify. As a result, the invisible factor of 'confidence' had become crucial.

The upset on Black Wednesday (when Britain had to quit the ERM) would once have been absorbed with grief but without panic. Now, when everything hangs from fraying threads of credit, it has shattered business confidence throughout the economy. Last week's grim report from the British Chambers of Commerce, showing an accelerating fall in sales, orders, employment, investment and confidence, underlined the McWilliams argument.

IF THIS is a real turning-point, from laissez-faire towards state involvement in the economy, it also means a historic change of priorities between inflation and unemployment. As the economist Wilfred Beckerman points out, Britain used to regard unemployment as the supreme social evil, while Germans feared inflation more. In the 1970s, when severe inflation hit the UK economy, priorities changed.

Professor Beckerman's explanation is brutal: 'The ruling classes were fed up with full employment, and could only shift the balance of power in their favour by mass unemployment. The tax system means that income from capital, broadly, suffers more damage from inflation than income from labour. Meanwhile inflation persuaded the electorate to worry more about stable prices than jobs.'

Throughout the 1980s, huge unemployment levels were used as the bluntest of instruments to hold back inflation. But they were not even very successful. Patrick Foley comments that 'excess labour has not dragged wages down, but only depresses demand'. He senses that government may 'revert to an old outlook' on the relative priorities of inflation and unemployment, but he hazards no guess about what the lower exchange rates of the pound may now do to inflation.

And here is Mr Major's real dilemma. This is a dire moment at which to 'go for growth', however good his intentions. The trade deficit for this year has already reached a terrifying pounds 8.7bn (the Treasury forecast a deficit of pounds 6.5bn for the whole year). This has to be financed from abroad - which means pressure for higher, not lower, interest rates.

Meanwhile the fall of the pound has not been enough to compensate British exporters for the growing recession on the Continent, diminishing their markets. Inviting private firms to construct public works will create some jobs and give industry some orders (mostly, it seems, in the already pampered South-east of England). But economists - a melancholy lot - foresee a grisly combination of inflation and unemployment both increasing at once, little moderated by Mr Major's new policy, and even deeper recession for the months ahead.

Many governments have tried to reverse Britain's manufacturing decline. None has succeeded. Expectations are too high; rewards too low; politicians and civil servants too remote from industrial reality. The veteran economist Sir Alec Cairncross has spent a lifetime advising governments on economic planning. But he wrote the other day that 'in an industrial economy with free access to materials markets and finance and a diversified industrial structure, it is not at all clear that governments can do much to make industry more efficient and more innovative'.

That does not mean nothing can be done. Mistakes can be avoided, like the primitive assumption of the Thatcherites that modern manufacturing flourishes in an uncontrolled financial free-for-all. Policy on credit, taxing, company law and training can be shaped to suit the industrial interest - rather than the City of London. Government can still do much to select the best inward investments, and to press an exporter's case.

Last week, the best hopes being expressed about Mr Major's 'turn' by manufacturers were that decline might cease to be a rout. It could at least be slowed into an orderly and humane retreat.

(Photograph omitted)