The Economy of Great Britain


         The Economy of Great Britain

            Little more than a century ago, Britain was 'the workshop of
      the world'. It had as many merchant ships as the rest of the world
      put  together  and  it  led  the  world  in   most   manufacturing
      industries.  This  did  not  last  long.  By  1885  one   analysis
      reported, "We have come to occupy a position In which  we  are  no
      longer progressing,  but  even  falling  bock....  We  find  other
      nations able to compete with us to such an extent as we have never
      before experienced." Early in the twentieth  century  Britain  was
      overtaken economically by the United States and Germany. After two
      world. wars and the rapid loss of its  empire,  Britain  found  it
      increasingly difficult to maintain its position even in Europe.
            Britain struggled  to  find  a  balance  between  government
      intervention in the economy and an almost  completely  free-market
      economy such as existed  in  the  United  States.  Neither  system
      seemed to fit  Britain's  needs.  The  former  seemed  compromised
      between two different objectives: planned economic prosperity  and
      the means of ensuring full employment, while the  latter  promised
      greater  economic  prosperity  at  the   cost   of   poverty   and
      unemployment for the less able in society. Neither Labour nor  the
      Conservatives doubted the  need  to  find  a  system  that  suited
      Britain's needs,  but  neither  seemed  able  to  break  from  the
      consensus based on Keynesian economics .
            People seemed complacent about Britain's decline,  reluctant
      to make the painful adjustments that might be necessary to reverse
      it. Prosperity Increased during the late 1950s and in  the  1960s,
      diverting attention from Britain's decline relative  to  its  main
      competitors. In 1973" the Conservative Prime Minister Edward Heath
      warned, "The alternative to expansion is not, as some occasionally
      seem to suppose, an England of quiet market towns linked  only  by
      steam trains puffing slowly and peacefully through green  meadows.
      The alternative is slums, dangerous roads, old factories,  cramped
      schools, stunted lives." But in the years of world-wide recession,
      1974-79, Britain seemed unable to improve its performance.
            By the mid 1970s both  Labour  and  Conservative  economists
      were beginning to recognise the need to move away  from  Keynesian
      economics, based upon stimulating demand by Injecting  money  into
      the economy. But, as described in the  Introduction,  it  was  the
      Conservatives who decided to break with the old  economic  formula
      completely. Returning to power in 1979, they  were  determined  to
      lower taxes as an  incentive  to  individuals  and  businesses  to
      Increase productivity; to  leave  the  labour  force  to  regulate
      itself either by pricing itself out of employment  or  by  working
      within the amount of money employers could afford;  and,  finally,
      to limit government spending levels  and  use  money  supply  (the
      amount of money in circulation at  any  one  time)  as  a  way  of
      controlling inflation. As Prime Minister Margaret Thatcher  argued
      in the Commons, "If our objective is  to  have  a  prosperous  and
      expanding economy, we must recognise that high public spending, as
      a proportion of GNP gross national product;,  very  quickly  kills
      growth.... We have to remember that governments have no  money  at
      all. Every penny they take is from the productive  sector  of  the
      economy in order to transfer it to the unproductive part  of  it."
      She had a point: between 1961 and 1975 employment outside Industry
      increased by over 40 per cent relative to employment in industry.
                       During the 1980s the Conservatives put their  new
      ideas into practice, income tax was reduced from a basic  rate  of
      33 pet cent  to  25  per  cent.  (For  higher  income  groups  the
      reduction was greater, at the top rate from S3 per cent to 40  per
      cent.) This did not lead to any loss  in  revenue,  since  at  the
      lower rates fewer people tried to avoid tax.  At  the  same  time,
      however, the government doubled Value Added Tax (VAT) on goods and
      services to 15 per cent.
              The  most  notable  success  of  'Thatcherism'   was   the
      privatisation of  previously  wholly  or  partly  government-owned
      enterprises. Indeed, other countries, for example Canada,  France,
      Italy, Japan, Malaysia and  West  Germany,  followed  the  British
      example. The government believed that privatisation would increase
      efficiency,  reduce  government   borrowing,   increase   economic
      freedom, and encourage wide share ownership. By 1990 20  per  cent
      of the adult population were share  owners,  a  higher  proportion
      than in any other Western industrialised  country.  There  was  no
      question of taking these enterprises back into  public  ownership,
      even by a Labour government.
            Despite such changes, however, by  1990  Britain's  economic
      problems seemed as difficult as ever. The  government  found  that
      reducing public expenditure was far harder than expected and  that
      by 1990 it still consumed about the same proportion of the GNP  as
      it had ten years earlier. Inflation, temporarily controlled,  rose
      to over 10 per cent and was only checked from  rising  further  by
      high interest rotes which also had the side effect of discouraging
      economic growth. In spite of  reducing  the  power  or  the  trade
      unions, wage demands (most  notably  senior  management  salaries)
      rose faster than prices, indicating that a free labour market  did
      not necessarily solve the wages problem. By 1990 the manufacturing
      Industry had barely recovered from  the  major  shrinkage  in  the
      early 1980s. It was more efficient. but in the meantime  Britain's
      share of world trade In manufactured goods had shrunk from  8  per
      cent in 1979 to 6.5 per cent ten years later. Britain's balance of
      payments was unhealthy too. In 1985 it had enjoyed a small surplus
      of Ј3.5 billion, but in 1990 this had  changed  to  a  deficit  of
      Ј20.4 billion.
             Many small businesses fail to survive, mainly as  a  result
      of poor management, but also because, compared with  almost  every
      other  European  Community  member,  Britain  offers   the   least
      encouraging conditions. But such small  businesses  are  important
      not only because large businesses grow from small ones,  hut  also
      because over half the new jobs in Britain  are  created  by  firms
      employing fewer than 100 staff.
            It is not as if Britain is without industrial  strength.  It
      is one of the world leaders in the production of  microprocessors.
      Without greater investment  and  government  encouragement  it  is
      doubtful whether Britain will hold on to its lead  in  this  area.
      However,  it  has  already  led  to  the  creation  of   'hi-tech'
      industries in three main  areas,  west  of  London  along  the  M4
      motorway or 'Golden Corridor', the lowlands between Edinburgh  and
      Dundee, nicknamed 'Silicon Glen', and the area between London  and
      Cambridge. In the mid 1980s Silicon Glen was producing 70 per cent
      of British silicon wafers containing the microchips essential  for
      the  new  information  technology-  The  Cambridge  Science  Park,
      symbolised by its Modernist Schlumberger Building, is the flagship
      of hi-tech Britain. Beginning in 1969, by 1986 the Park  contained
      322  hi-tech  companies.  In  the  words  of  a  consultant,  "The
      Cambridge phenomenon... represents one of the very few spontaneous
      growth centres in a national economy that has been  depressed  for
      all of a decade."