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Response to Curzon Price on a British devaluation

Devaluation alone is not the solution to the UK's economic woes. But it is the necessary foundation needed for other policies to work.

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I am really grateful to Tony Curzon Price for his thoughtful and detailed review of my book Exchange Rate Alignments – which I can only agree has an unappealing title, chosen not by me but insisted upon by the book’s publishers who thought it would increase sales! Let me turn away from what the book is called, however, to the major criticisms which Tony Curzon Price puts forward on what it has to say. He has three specific lines of attack, which I deal with in turn, these being: 

1.A       Devaluation may provide only a temporary respite from uncompetitiveness. Far from kicking off a virtuous cycle, bad managers and over demanding workers are let off the hook from their economically irresponsible decisions.

1.B       A more competitive exchange rate will not address the social conditions which have produced “deep structural weaknesses – from infrastructure to science; from education to industrial policy – that hold businesses back. Devaluation is addictive. It is also an admission of defeat.” 

1.C      Policies involving faster growth will fall foul of resource constraints, particularly those round carbon emissions.

As regards devaluation only providing a temporary competitive advantage, as poor management and over-grasping labour are let off the hook, surely the answer is to look at what actually happens rather than to rely on judgements of this sort. There are dozens of cases of large devaluations by countries with broadly similar economies to ours. They all show common characteristics as Tony Curzon Price recognises earlier in his review. In almost all cases there is little, if any, change to the rate of inflation despite almost universal belief that the opposite will happen. A long lasting improvement in competitiveness is thus achieved. As a result, the growth rate goes up, investment as a proportion of GDP rises, living standards increase, government deficits go down and social and geographical inequalities decrease. These benign developments arise because a lower exchange rate makes them all possible. The reason for the UK’s deindustrialisation is not “bad decisions” by management but sensible ones in all the circumstances, to close down manufacturing operations which have no hope of making any money because the exchange rate is much too high for them to have any chance of being profitable. Nor should “over-demanding workers” be blamed if they desert low-paying export orientated jobs in unprofitable businesses for the easier life provided by service industries.

A similar approach needs to be taken to the “social conditions” argument that the UK is unable to compete in world markets because of inadequate standards of education and training, combined with outdated infrastructure. These kinds of problems are far from unique to the UK yet both our own and other countries’ histories show that they are no bar to better performance with a lower exchange rate. The UK economy performed dismally badly during the 1920s but far better in the 1930s as a result of the 30% devaluation in 1931. Between 1932 and 1937 the UK economy grew at over 4% per annum – the fastest rate of growth over this length of time we have ever achieved. The German economy at the end of World War II was in ruins, but this did not stop a highly competitive post war exchange rate propelling Germany into a growth rate for decades not far off what is now being achieved in China. The problem with the UK economy is that we have had an over-valued exchange rate for as long as almost anyone now alive can remember and it is this which has caused so many of the adverse social conditions with which we are now confronted. Faster growth will not solve all our difficulties but they would make almost all of them much easier to tackle than if we face years of completely unnecessary stagnation, because too strong a pound means that we cannot compete in the world. 

How about the impact which higher growth rates might have on resources constraints? Much depends on the view you take about humankind’s capacity to find solutions to impending shortages. If you take the sort of approach adopted by the Club of Rome 40 years ago, of course you will conclude that growth is finite. If, on the other hand, you think that those who want to curb growth now on resource constraint grounds are as likely to be as wrong in their assessments as the Club of Rome turned out to be when it published “Limits to Growth” in 1972, you can be much more optimistic, as I am. This is particularly the case if you look at where the crucial pinch points might come, as my book does.

Of course carbon emissions provide the route to a different kind of constraint and it may well be that carbon taxes may have an important role to play in curbing them. Global warming may or may not turn out to be as threatening as some people believe it will be but there seems to me to be a strong argument for saying that the richer the world is the more easily it will find the resources to combat the negative effects of the world’s temperature rising, if this is what happens. It also seems to me that the point made in my book, that the biggest threat to the future viability of humanity is that the world’s population becomes unsustainably large and that this is best counter-acted by raising living standards in the poorest countries with the highest birth rates, must be the best way ahead. This will not happen, however, without a return to prosperity in countries like the UK to provide us with the capacity – mostly through trade rather than aid – to help the poorest countries raise their living standards, so that the demographic transition to smaller families takes place.

Finally, Tony Curzon Price takes me to task for appearing to believe that devaluation is a panacea which will solve all our problems on its own. I do not believe this at all. I think that there are many complementary policies which will need to be implemented to help a  lower exchange rate make the UK more prosperous. I also believe, however, that none of these other policies will achieve any significant results until exporting is made far more profitable than it is now and importing much less so. A  lower exchange rate for the UK is not a sufficient condition for pulling us out of stagnation. It is, however, one which is absolutely necessary. Any mix of growth oriented policies which does not include an active exchange rate strategy is doomed to fail.

About the author

John Mills is a businessman and economist. He is chairman of direct to consumer retailer, JML, and has published widely as an economist. He sits on the openDemocracy board and is a donor to oD. His most recent book is Exchange Rate Allignments.


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