 "brexit, UK, Britain, EU")
As someone who loves London and can tolerate the rest of the United Kingdom, I am riveted by its bumbling over Brexit. Bumbling may be too kind a word for the sort of lunacy that the UK seems to have embarked upon. While many nations are trying to get into the European Union, the UK is in the process of leaving it and, now it appears, will exit the EU in the next few months with no trade deal. But, of course, it is their country and they should have control over it. Indeed, they would look at the things that the Indian people are obsessed over — beef and divorce and citizens’ registers — and conclude that we are also lunatics to put aside our real problems and charge at other windmills.
Why I find Brexit fascinating is the seeming lack of consideration of what will happen once Britain leaves the most efficient and beneficial trade bloc in the world. A clean Brexit means that the country will have to go back to the World Trade Organization and then set up from zero its relationships with other nations and trading blocs. This will not be easy because such negotiations are very hard, as all countries have discovered, and self-interest is the most powerful motivator there is. The opponents of Britain leaving the EU are quite clear about this and all the financial institutions that have assessed the damage have also formed a consensus on it. This is something that will damage the UK's economy and it will contract. Not many of us will be surprised on hearing this.
However, it's interesting to examine what it is that the enthusiasts are depending on. It turns out that they believe that leaving the EU will actually be great for their economy. And all of this forecasting relies on the work of one man, Professor Patrick Minford of Cardiff. So what does he say? His belief is that after Brexit, the UK should remove all barriers to trade with the world. This will, he accepts, wipe out British manufacturing and perhaps even agriculture, but it will drive down prices for the consumer.
Giving evidence to the Foreign Affairs Select Committee in 2012, he said: “It is perfectly true that if you remove protection of the sort that has been given particularly to the car industry and other manufacturing industries inside the protective wall, you will have a change in the situation facing that industry, and you are going to have to run it down.
“It will be in your interests to do it, just as in the same way we ran down the coal and steel industries. These things happen as evolution takes place in your economy.”
He wrote in a newspaper column later that “over time, if we left the EU, it seems likely that we would mostly eliminate manufacturing, leaving mainly industries such as design, marketing and hi-tech. But this shouldn't scare us. Around half of young adults now go to university, ending up in professions such as finance or law, while the making of things such as car parts or carpentry has hugely shrunk — but there will always be jobs for people without sophisticated skills.”
This is the essential economic logic of Brexit and it has been embraced by people from the Conservative Party like the eccentric Jacob Rees-Mogg, who are insisting that Britain retain none of its present economic arrangements with the EU. Scholars at the London School of Economics who looked at Minford's modelling of a post-Brexit UK summarised that it was bonkers.
A clean Brexit means that the UK will have to go back to the World Trade Organization and then set up from zero. (Photo: Reuters)
They wrote that basically Minford's “policy recommendation is that following a vote for Brexit, the UK should not bother striking new trade deals but instead unilaterally abolish all its import tariffs (let’s call this policy “Britain Alone”). The UK would simply pay the tariffs imposed by other countries on UK exports. This is usually the worst-case scenario that other economists have examined.”
This would be a pretty hard sell to UK citizens. Minford admits his model predicts that the policy would cause the “elimination” of UK manufacturing and a large increase in wage inequality. But although he is relaxed about these outcomes, we suspect that voters in Port Talbot and elsewhere in Britain wouldn’t be so impressed.”
The scholars said: “Indeed, we know of no cases where an industrialised country has ever implemented full unilateral liberalisation — and for good reason. Persuading other countries to reduce their trade barriers is easier if you can also say you’re going to reduce your own as part of the deal. If we’re committed to go naked into the world economy, other countries are unlikely to follow suit voluntarily.”
So why do his supporters have such faith in Minford? This is also a fascinating story and goes back to the year 1981, when the UK was again at an economic crossroads. It had very high inflation, high debt and credibility in the economy was low. Conventional wisdom would have the government lower taxes and encourage business but what prime minister Margaret Thatcher did instead was to increase taxes. This was a tough decision and ran counter to what was being done in the United States under Reagan.
Philip Booth wrote in the Daily Telegraph in 2006 that “It was extremely difficult for a government elected to cut taxes. But by showing a determination to cut borrowing, the government made it easier to control monetary policy, too, as interest rates could be reduced. This helped convince the markets, which were also worried that high borrowing would lead to high inflation, because in the 1970s, governments had financed their deficits by printing money.”
Thatcher was resisted not just by Labour but also her own back benches. At one point 364 economists signed a letter to The Times stating that there was “no basis in economic theory or supporting evidence” for the policy that the Budget was seeking to implement, that it threatened Britain’s “social and political stability”, and that an alternative course must be pursued. This list of academics included former and future Nobel Prize winners.
Booth wrote that “it is said that Mrs Thatcher was asked in heated debate in the Commons whether she could even name two economists who agreed with her. She replied that she could: Patrick Minford and Alan Walters. As the story goes on, her civil servant said when she returned to Downing Street: ‘It is a good job he did not ask you to name three’.”
Today, when Brexiteers are asked to name economists who support their enthusiasm for going it alone, they can name only one. But it is one of those two who were right in 1981.
