The Financial Sector
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.