UK about to miss a great opportunity

Allister Heath
THERE are two, diametrically opposed ways to respond to the immense challenges posed by globalisation and the rise of the emerging markets.

The first – and right way – is that followed by much of the private sector, especially in London, the most global and open of all the world’s great cities. Everyone with an exportable business model – from the largest FTSE 100 giants to the smallest of minnows – is striving to be as competitive as possible in the UK, increase their productivity, outsource low value functions and to grow and establish themselves in emerging markets.

The second – and wrong way – is that followed by so many politicians: pay lip-service to the need to change; assume we will always be the best in key “knowledge” industries, regardless of our tax, spending, infrastructure and education policies; and continue to pursue an ultra-short term, vote-seeking agenda rather than tackle real problems. Hence crippling tax hikes; an absurd war on the City which will chase investment to Switzerland and Asia; a debilitatingly costly public sector; a still weak education system and endless delays to transport projects.

The latest forecasts from PricewaterhouseCoopers (PwC) highlight the scale of the shift in power. The report projects GDP at purchasing power parities for the G7 relative to the emerging E7 economies (China, India, Brazil, Russia, Mexico, Indonesia and Turkey). PwC suggests that, by 2019, the output of these two groupings will be similar; from 2020 the E7 will be ahead; and by 2030 the E7 will be around 30 per cent larger than the G7.

By 2020, China will be the largest economy in the world. A decade later, the ranking will be as follows: China, the US, India, Japan, Brazil, Russia, Germany and Mexico. The UK will come tenth. India could move into third place as early as 2012 and will grow faster than China after 2020. This is due to India having a significantly younger and faster growing population.

Back in 2000, G7 GDP was more than twice as large as E7 GDP. In 2007, G7 GDP was still around 60 per cent higher; by the end of this year the lead will be only 35 per cent. America accounted for 23 per cent of world GDP in 2000, the EU 25 per cent, China seven per cent and India 3 per cent. This year the US is on 20 per cent, the EU on 21, China on 13 and India on seven. By 2020 the US, EU and China will be neck and neck at 17-18 per cent each; and by 2030 China will be at 19 per cent, the US on 16, the EU on 15 and India on nine.

It is a massive, unstoppable shift of power based on the emerging economies adopting more and more capitalist institutions and practices. So my heart dropped when I read the results of another survey published today: economic freedom in the UK – statistically, a strong driver of growth – is declining, according to the 2010 Index of Economic Freedom from the Heritage Foundation and the Institute of Economic Affairs.

Hong Kong is the world’s freest economy, followed by Singapore, Australia and New Zealand. The US is 8th and we are 11th. The UK figures reflect reduced financial and monetary freedom and higher corruption and government spending. They suggest we stand no chance of truly benefiting from the rise of the emerging nations, a development which could go down as one of the UK economy’s greatest missed opportunities of all times.