The headline for Harvard economics professor Ken Rogoff’s Project Syndicate piece is stark: Britain Is Not an Emerging Market – Yet
One little word. A wealth of meaning.
What dispiriting signs does Professor Rogoff see? There are several.
First, the pound’s reserve-currency status is in some peril. It is, as the professor points out, “the last remaining vestige of Britain’s once-vaunted position at the center of the international monetary system”. He is very fair about the current implications. The UK is not going to default today or tomorrow but it’s probably likely to continue its usual practice (from the 1950s through the 1970s) of taking bailouts from the International Monetary Fund (IMF). This made the UK “the IMF’s most loyal customer”. No wonder, the IMF is now trying to push back against British prime minister Liz Truss’s “half-baked economic package, just as it does for potential emerging-market claimants on its resources.”
That said, as of end-September, the UK government’s ten-year borrowing rate was only half a percentage point above US Treasury rates, ie, “still well below that of emerging markets like Indonesia, Mexico, and Brazil, whose government borrowing rates exceed those of the United States by three, five, and eight percentage points, respectively.”
One of the problems Professor Rogoff identifies with the Truss government’s plans to boost investment by making Britain more hospitable for the rich investor is fundamentally about politics. The more likely a Conservative defeat at the next general election (in 2024) the less likely a huge inflow of investment in the British economy.
Why? Well, in principle, businesses might invest in the UK if you make it more attractive for them by cutting taxes and suchlike, but that’s if you expect low tax rates etc to last. With the polls increasingly indicating voters’ disaffection with the Conservatives, why would businesses send in oodles of cash right now? As the professor writes, “If you think that a Labour government could come to power and reverse the tax cuts (and much more) within the next three years, there is no point in starting construction on a new plant that will take three years to complete. And, of course, the more incoherent the policy package, the more likely it is to be reversed, regardless of who is in power.”
Then there are the Truss government’s energy subsidies – untargeted, expensive and lazy – something she has been tom-tomming endlessly. As the professor points out, not only do they add “an estimated £100 billion ($108 billion) to the UK’s already high debt load, they also will distort the incentives to reduce fossil-fuel consumption at a time when it is in high demand.” The difference between Britain’s energy subsidies and the measures being taken by other European countries to help their people, who are also suffering energy price spikes, is described as follows by Professor Rogoff: “…the Truss plan resembles an emerging-market scheme in both its scope and scale. Many emerging markets, particularly fuel exporters, seek to cap the energy prices their consumers face, often at huge fiscal expense.”
All in all, Ms Truss’s policies are both ill-advised and lack a mandate. She neither fought a general election on her economic platform, nor won anything other than roughly 81,000 votes of the Conservative Party’s 160,000-odd dues-paying members. A leadership change of Britain’s governing party, mid-way between elections, is not the mandate anyone will accept for wholesale change. As well for trashing Britain’s credibility.
As the headline of the professor’s piece said: “Britain Is Not an Emerging Market – Yet”.