Duncan’s Economic Blog

The Financial Sector

Posted in Uncategorized by duncanseconomicblog on September 4, 2009

On the front page of today’s FT:

The UK’s recovery was slower than the global recovery partly because of its heavy specialisation in financial services, said Jorgen Elmeskov, acting head of the OECD’s economics department. The global recovery was being led by the manufacturing sector.

Mr Elmeskov said the UK’s ability to stimulate demand had been constrained compared with other countries.

Also on the front page of today’s FT, a report of a speech given by the Chancellor:

In the speech he also gave a thinly veiled put-down of Lord Turner when he said: “Some say we should cut [the City] down to size . . . to me that is the wrong approach.” The Financial Services Authority chairman caused consternation in the City last week by saying its institutions were “swollen”.

Here Alistair Darling is lining up with the Times’ Anatole Kaletsky, in arguing that any shrinking of the city would be bad for the UK.

I’m quite taken with Vino’s point that:  

Kaletsky argues that Britain has a ‘comparative advantage’ in financial services. He does not consider whether this has contributed to us having a comparative _disadvantage_ in other sectors – if, for example, capital has been attracted to speculation in shares and derivatives rather than in new factories or offices in the ‘real’ economy. He also assumes that comparative advantage is something immutable. This is clearly not the case. In the 1940s, people would not have said that Japan or South Korea had a comparative advantage in manufacturing. However, over decades of hard work they developed one. They didn’t listen to economists who had drunk too deeply of Ricardo’s theory of comparative advantage. They had state intervention in their economy to change what they had a comparative advantage in.

The government seems determined, through an active industrial policy, to start rebuilding Britain’s manufacturing base – a policy I whole heartedly support.

But is this consistent with a financial sector as large as the UK’s? Rebuilding manufacturing will require low interest rates for the next few years, but this can easily lead to renewed asset bubbles.

There are trade offs in any policy decision. I worry that the Government is not facing up to this.

To be clear – a large financial sector can produce very strong economic growth – but it can also blow up spectacularly. I’m not advocating that we close down the Square Mile and cordon off Canary Wharf, I’m just pointing out that any re-balancing of the British economy will have to recognise that this means some shrinkage in financial services.

5 Responses

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  1. CharlieMcMenamin said, on September 4, 2009 at 8:45 pm

    A ‘re-balancing’ of the British economy is the key issue in determining our future for the next generation.

    So, to show our utter national seriousness we’ll have a general election next year in which the subject isn’t mentioned at all.

  2. Quietzapple said, on September 5, 2009 at 7:45 am

    Germany’s reliance on exported manufactures seems to have led to a still more precipitous contraction as the world recession bit.

    If, like France, you have an economy in which the public sector is bloated by, for example, quite moderately sized buildings having their own dedicated fireman, you have a degree of extra insulation.

    While financial institutions function adequately surely the point about competition for investment might better be aimed at the housing market? Demand for owning houses was inflated from 1962 or so onwards, by cutting back on schedule B ( I think it was, Maudling responsible) income tax. If house prices rise then tax the increase in value, which would encourage people to invest in other areas rather than in a housing boom.

  3. Tim Worstall said, on September 5, 2009 at 10:47 am

    “The government seems determined, through an active industrial policy, to start rebuilding Britain’s manufacturing base – a policy I whole heartedly support.”

    Why for the Lord’s sake?

    What on earth gives you any confidence that a combination of, say, John Prescott (let’s solve the housing shortage by knocking down houses a la Pathfinder), Ed Balls (absolutely anything) and Peter Mandelson (let’s increase the availability of engineering skills for the renewables industry by propping up car making and making engineering skills for renewables scarce and expensive) is going to do anything at all other than entirely cock up any manufacturing we might actually have?

    That the government (of any stripe at all) might want to do something is one thing: but given the knobheads (of any stripe at all) who actually end up in government we know that the results are not going to be what any of us want, don’t we?

    This is what I don’t understand about your political and economic views. You’re obviously intelligent but you seem to lust after rule of more of our lives by idiots facing the wrong incentives.

  4. Quietzapple said, on September 5, 2009 at 5:57 pm

    Ah, one should respect the views of someone who claims intelligence, posts solely abuse, and uses a metaphor obviously the center of his oeuvre, which I last recall expressed by a teenage National Front member in a letter abusing a Young Socialist of my acquaintance in 1985.

  5. charliemarks said, on September 6, 2009 at 8:14 am

    Tim, there was previously a policy of managed decline of manufacturing. However fucked up the intervention may be – it is at least some kind of support.

    We either have the idiots we can’t throw out – the bankers and big businessmen – or the idiots we can throw out. Oh wait, Mandelson’s a Lord….

    You get my point, though.


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