City of London (Image: Ben Rimmer)
Between 2007 and 2009, the value of the pound fell from close to $2.00 to $1.60, a fall of 20%. Most people think that sterling must therefore be at a competitive level. This is a huge mistake. On the contrary, all the evidence shows that the pound, by any reasonable measure, is still grossly over-valued. We have a massive trade deficit. Our share of world trade is now barely 2.5% and still falling - compared to 25% in 1950. We are now importing well over £100bn more manufactured goods each year than we export. How can this be after a 20% devaluation?
There is a simple answer. For most of the 2000s sterling was not just very over-valued. It was grotesquely too strong. This is why between 2000 and 2010 the proportion of our GDP devoted to manufacturing fell from 17% to 11% while our manufacturing labour force tumbled by a third from 4.2m to 2.8m. Financial services would be our long term saviour, yet this hasn’t turned out quite as hoped. Meanwhile, our trade deficit in goods went from £33bn to £98bn – we import far more than we export. But how could sterling have been so strong if our trading performance was so poor? All else being equal such a large trade deficit would naturally devalue the pound over time, bringing exports and imports back into balance. The reason this hasn’t happened is that there was a huge flow of funds into the UK over this period which had nothing to do with the UK’s trading performance – that inflow drives the value of the pound upwards. The money came in because between 2000 and 2010 we sold off a massive proportion of our national assets. We then frittered away the proceeds on a flood of imports.
Between 2000 and 2010, our total trade deficit was £286bn, but during the same decade the value of our net sales of portfolio assets was much larger than this – at £615bn. None of this money was spent on direct investment in plant, machinery and industrial buildings, which would have strengthened our economy. Portfolio assets are no more than titles to ownership – mostly shares - so selling these to foreign owners involved no physical investment in the UK, just loss of ownership and control on a grand scale.
What did we sell? Foreign interests bought from us an incredible range of what had previously been owned in Britain. Most of our power generating companies, our airports and ports, our water companies, many of our rail franchises and our chemical, engineering and electronic companies, our merchant banks, an iconic chocolate company - Cadbury, our heavily subsidised wind farms, a vast amount of expensive housing and many, many other assets all disappeared into foreign ownership.
No other country in the world allowed this sort of thing to happen. Why did it occur in Britain? There were three main overlapping reasons. The first was an institutional change. Until 1999, when it was abolished, the Monopolies and Mergers Commission was required to consider whether take-overs satisfied a general public interest test. The organisation which replaced it after 1999, the Competition Commission, had no such remit. It was only concerned with whether acquisitions would weaken competition. This left the UK with no process for reviewing whether the wider interests of the British economy were likely to be compromised by the purchase by foreign interests of UK companies and other assets.
Second, this was the time when there was blind faith in the market. If there were buyers for British companies why not sell to them? Did it matter who owned UK companies provided they were well run? Third, there were vast sums of money to be made arranging the take-over deals. It seems that 3% was about the average fees and commissions charged on all the take-overs which took place. The City – for most of the 2000s at the zenith of its political influence - must have earned about £40bn from the sale of UK assets during the 2000s.
Does it matter that we lost ownership and control of such a large proportion of our national assets? Yes, it makes a huge difference for all of the following reasons:
When any company is bought by another one based abroad, it is inevitable that control will pass to those whose focus is primarily based not on the UK but on their home markets. This is where research and development will tend to be concentrated. This is where the loyalties of top management will lie. This is where taxes are more likely to be paid and where the links between the businesses concerned and the government are likely to be strongest.
When acquisitions are made by foreign companies, it is not unusual for undertakings to be given that investment levels will be maintained and factory closures minimised or avoided. These assurances, however, are always time limited, and when trading conditions worsen and hard choices have to be made, international companies nearly always give preference to their home markets. There is a huge problem, for example, in the UK at the moment where most of our power companies are foreign owned. They all have serious problems raising the capital required for investment and pressing needs for large scale investment in their home markets. Are they really going to be able and willing to provide the expenditure we very badly need in the UK to avoid power outages in a few years’ time?
When a British company is sold to a foreign owner the flow of future profits goes with the ownership. Of course there is a temporary infusion of funds to the UK as the assets are sold but this is at the expense of losing the right both to future profitability and to any growth in value of assets lost to UK ownership. There is a very unfortunate parallel here between the way we treated North Sea oil from the 1970s onwards and the huge sale of UK portfolio assets in the 2000s. In both cases the proceeds were used to pay for imports we could not otherwise have afforded while the opportunities for alternative future benefits, had the proceeds been used more sensibly, were lost.
The Exchange Rate
When allowed to take place on a big enough scale, the impact of very large volumes of sales of portfolio assets to foreign companies inevitably tends to be to make the exchange rate much stronger. This is exactly what happened in the UK, with all the negative effects that this had on our exports, which got priced out of the market. This is why the sale of so many UK companies in the 2000s was a major factor in undermining the rest of the economy’s capacity to compete in the world – the public interest of such sales goes far beyond merely domestic “competition”. The net sale of British portfolio assets during the 2000s financed the sharply increasing trade deficits which were caused by the damage done to our ability to compete in the world, which in turn was occasioned by the over-valued exchange rate which itself was largely brought about by excessive asset sales.
Did it make any sense at all to run the economy like this? Surely it was a disastrous error to allow this free for all sale of UK assets to take place. We mortgaged our heritage, made the economy dramatically less competitive, hollowed out our manufacturing base and made it even more difficult to get the economy to perform satisfactorily in future. Some price to pay for belief that the market always knows best!
John Mills is a donor to openDemocracy.