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More quantitative easing is not the answer to stagnation More quantitative easing is not the answer to stagnation
(7 months later)
It may be too little and too late, but the Bank of England governor Mervyn King is trying to pull any levers he can in order not to hand over a stagnant economy to his successor Mark Carney. King is pushing for more quantitative easing, with the hope that this will continue to put downward pressure on sterling and generate an export-led recovery. But will it work? All the evidence suggests that it won't.It may be too little and too late, but the Bank of England governor Mervyn King is trying to pull any levers he can in order not to hand over a stagnant economy to his successor Mark Carney. King is pushing for more quantitative easing, with the hope that this will continue to put downward pressure on sterling and generate an export-led recovery. But will it work? All the evidence suggests that it won't.
Sterling has been falling since mid-2007, but this has done little to boost exports. On many measures UK exports are very price-competitive, but the rest of the world is reluctant to buy them.Sterling has been falling since mid-2007, but this has done little to boost exports. On many measures UK exports are very price-competitive, but the rest of the world is reluctant to buy them.
According to Mark Carney, the problem is that we are exporting to the wrong markets. In his evidence to the House of Commons Treasury committee, he argued that "currently, British exports are concentrated in slow-growing advanced economies, particularly in Europe, rather than fast-growing emerging markets". But the bank subsequently contradicted the next governor in its most recent inflation report, which showed that the relative weakness of UK exports does not reflect weakness in its major trading partners.According to Mark Carney, the problem is that we are exporting to the wrong markets. In his evidence to the House of Commons Treasury committee, he argued that "currently, British exports are concentrated in slow-growing advanced economies, particularly in Europe, rather than fast-growing emerging markets". But the bank subsequently contradicted the next governor in its most recent inflation report, which showed that the relative weakness of UK exports does not reflect weakness in its major trading partners.
So if exports are relatively cheap and we are not selling to stagnant markets, why is export performance so poor? There are two explanations. First, we do not produce the goods and services that the rest of the world wants. In the past, we relied on the exports of financial services to make up for a lack of manufactured exports. This has left a legacy of a lack of exporting capacity. Second, many of our exports lack non-price competitiveness – such as quality, design and speed of service – and this is not helped by a falling exchange rate.So if exports are relatively cheap and we are not selling to stagnant markets, why is export performance so poor? There are two explanations. First, we do not produce the goods and services that the rest of the world wants. In the past, we relied on the exports of financial services to make up for a lack of manufactured exports. This has left a legacy of a lack of exporting capacity. Second, many of our exports lack non-price competitiveness – such as quality, design and speed of service – and this is not helped by a falling exchange rate.
The problem for UK exports is a lack of investment in new products, processes and innovation. Although the recent evidence on employment may be one of the few positive signs in the economy, it also points to our poor productivity performance. Some companies may be employing more workers but often this is a substitute for investing in new machinery and technologies. This leads to a low productivity economy producing low value-added products and services. And these are sold in markets where British exporters cannot compete effectively against the newly industrialising countries, such as China, India and Brazil.The problem for UK exports is a lack of investment in new products, processes and innovation. Although the recent evidence on employment may be one of the few positive signs in the economy, it also points to our poor productivity performance. Some companies may be employing more workers but often this is a substitute for investing in new machinery and technologies. This leads to a low productivity economy producing low value-added products and services. And these are sold in markets where British exporters cannot compete effectively against the newly industrialising countries, such as China, India and Brazil.
Of course, the UK is not the only country resorting to mercantilism to try to get its economy moving. And this may lead to a currency war in which countries engage in "beggar thy neighbour" depreciations of their exchange rates. These policies can only have short-run benefits for an individual country as any competitive gain is soon lost when other countries retaliate. Such policies did work for some countries in the 1930s – but only because they helped bring down the deflationary gold standard and ushered in low interest rates. But this time is different, as the world economy is already awash with cheap money.Of course, the UK is not the only country resorting to mercantilism to try to get its economy moving. And this may lead to a currency war in which countries engage in "beggar thy neighbour" depreciations of their exchange rates. These policies can only have short-run benefits for an individual country as any competitive gain is soon lost when other countries retaliate. Such policies did work for some countries in the 1930s – but only because they helped bring down the deflationary gold standard and ushered in low interest rates. But this time is different, as the world economy is already awash with cheap money.
The most important lesson of the 1930s is that the best way to deal with a global economic crisis is international coordination. The problem in the interwar period is that such coordination did not emerge until after the second world war, with the Bretton Woods system of global monetary management. This system of financial regulation and Keynesian demand management helped to promote rapid growth of the world economy until the early 1970s.The most important lesson of the 1930s is that the best way to deal with a global economic crisis is international coordination. The problem in the interwar period is that such coordination did not emerge until after the second world war, with the Bretton Woods system of global monetary management. This system of financial regulation and Keynesian demand management helped to promote rapid growth of the world economy until the early 1970s.
The prospect of effective international cooperation today is remote as there is a lack of political will and intellectual vision. The likelihood is that countries will continue with go-it-alone policies. In the UK, fiscal conservatism means that this will continue to be cheap money – but the impact of this has probably reached its limits. And it is a forlorn hope that we can export our way out of the mess by relying on the rest of the world to come to our rescue by buying our goods.The prospect of effective international cooperation today is remote as there is a lack of political will and intellectual vision. The likelihood is that countries will continue with go-it-alone policies. In the UK, fiscal conservatism means that this will continue to be cheap money – but the impact of this has probably reached its limits. And it is a forlorn hope that we can export our way out of the mess by relying on the rest of the world to come to our rescue by buying our goods.
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