James Vitali is Head of Political Economy at Policy Exchange
“Unlike the future, the past is at least in principle knowable; yet the greatest source of error in addressing the economic situation has in practice been a misperception about the recent past.”
Nigel Lawson was referring specifically to the way the Treasury makes forecasts when he wrote these words in the 1990s. But his point might have a more general relevance. In approaching the dilemma of economic growth, think tanks, academics, and commentators expend a great deal of time on abstract theories and models, and rather less time on history. Yet the historical record offers great insights into how people have actually achieved growth in the past.
Indeed, if one consults the historical record, moments of profound economic transformation do happen, even in dire circumstances. Germany and France went from exhausted postwar nations to European heavyweights. Singapore went from a post-colonial minnow to one of Asia’s most dynamic economies. Poland shook off the shackles of central planning and has grown more, barring Ireland, than any other European country since 1990.
How should we understand these miracle-like changes in fortune? And can we take any lessons from them for the present?
These questions are the focus of my latest Policy Exchange paper, written with Roger Bootle and Ben Sweetman. In it, we studied eight such cases of economic transformation: postwar France and Germany, Thatcher’s Britain, post-communist Poland, Ireland, and the Asian economies of Singapore, Hong Kong, and South Korea.
Each of these cases of economic transformation was different. Some were driven by tax cuts. Others took place with high levels of taxation and government spending. Some were directed by a plan, and others were achieved by doing away with planning altogether. Some bore fruits immediately, whereas in others the results came later.
Such variety should be unsurprising, given how different every national economy is. A genuine strategy for economic growth does not involve searching for the ideal rate of corporate tax, the ideal sectoral distribution of labour, or the ideal rate of social security. Searching around for an economic blueprint that can be copied and pasted into any country is likely a fool’s errand.
Nevertheless, several features were common to all the cases we studied, and they concern the politics of achieving transformation. In almost every example, change came out of a moment of national trauma or upheaval, and a charismatic leader with strong convictions and a motivated team was required to exploit such a moment for an economic agenda.
Lee Kuan Yew offered the Singaporean people a stark choice between economic prosperity or internal strife and communist rebellion. Margaret Thatcher rallied a demoralised Britain after the humiliations of the 1970s. Leszek Balcerowicz seized the opportunity after the fall of communism in Poland to grip the currency and replace a centrally-planned economy with a free market one.
In each case, there was also a strategy for maintaining political support, and a tactical plan for addressing opposition to vital but potentially painful measures. Generally speaking, macro policy set the framework for transformation, but it was micro reforms that drove growth. In delivering those reforms, political leaders usually had a clear understanding of what battles they needed to have in particular sectors, and how to win them.
In the last two decades – the period of Britain’s economic stagnation – Britain has experienced many moments of crisis. such as the Great Recession, Brexit, and the Coronavirus pandemic. These moments presented an opportunity to fundamentally re-imagine the state, rebalance the tax burden between the working age and pensioners, and instigate serious reforms to our planning or immigration systems. In decades past, these would have been the junctures that skillful leaders leveraged to instigate change.
Yet none of these occasions has precipitated a transformation in Britain’s economic fortunes. Instead, each crisis has simply sped the UK further down its path to lower productivity, flat-lining living standards, and a politics increasingly riven by distributional tensions. Repeatedly, the wheel of history has failed to turn when we most needed it to.
The principal lesson we derived from our historical inquiry, however, is a profoundly optimistic one: that individuals and their decisions matter; and that a country’s economic fate is not predetermined, but lies with those we elect to be responsible for it. With strong leadership, a clear strategy for sustaining support, and a good dose of political bravery, nations can radically alter their economic prospects. Such a message is an important rejoinder to the fatalism that increasingly permeates our political culture.
Growth is as much a political problem as it is an economic one. We need to spend vastly more time thinking about the trade-offs and compromises required to achieve it, how to sequence reforms, and which battles to pick and when. That thinking needs to be done early. Taking such a strategic view once you are in government and responding to contingencies and emergencies in real-time is difficult. We hope that Policy Exchange’s Policy Programme for Prosperity will contribute to that vital intellectual work.
The post James Vitali: History shows that economic transformation is an inherently political enterprise appeared first on Conservative Home.
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Author: James Vitali
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