The UK’s Opportunities After Brexit
The United Kingdom has been through a wrenching experience in transitioning out of the European Union. Many economists opine that its economy will suffer once it is out of the EU trading system, and forced to trade on WTO rules. There is widespread scepticism that the UK can achieve similar tariff arrangements to the ones it enjoyed when it was inside the EU.
While tariff arrangements and immigration quotas have occupied the public’s attention, though, a quieter challenge is mounting for the UK economy. Can it restore its ability to grow, and can it become an innovation leader in the world economy? Without growth and without innovation, the UK’s ability to provide a better life for its citizens will be highly attenuated, no matter what terms it trades on with the rest of the world.
According to the World Bank, the UK’s economy has grown only slowly since the financial crisis, averaging less than 2% growth a year. Since the UK population has grown over that time, the growth rate of GDP per person has averaged around only 1% a year. And the UK economy has also tipped strongly away from manufacturing towards services, particularly financial services. This has created an Us vs. Them situation between London and the rest of the country, since the vast majority of the high paying services jobs are only found in London.
The UK retains some important strengths, particularly with regard to its science base at its universities. Not only do Oxford and Cambridge continue to produce some of the best science anywhere in the world, but other universities in Manchester, Edinburgh and Surrey also have pockets of excellence. This provides a strong foundation for innovation in the country. However, the manufacturing sector has suffered greatly in the post-Thatcher era, and most UK companies no longer do much, if any, internal basic research. This hollows out their capability to engineer new breakthroughs, and also inhibits their ability to recognize and absorb similar breakthroughs from others outside their own four walls.
As the UK rallies from Brexit to map its course going forward, it would do well to focus attention on its innovation infrastructure. The innovation infrastructure consists of the hard and soft assets in the society to generate, disseminate, and absorb new innovative knowledge. This requires investments in hard assets, like 5G connectivity or up-to-date airports, roads and train stations, as well as investments in soft assets, like training, skills, universities and other forms of human capital development. The infrastructure starts with public investment, which in turn attracts a larger amount of private investment, which culminates in greater innovation capability for the whole society.
The Conservative Party, or what’s left of it, needs to embrace a catalytic but limited role for public investment to kick-start the process. The Labor Party, by contrast, will readily embrace the initial public investment, but will likely interfere too much in the subsequent diffusion of new ideas, technologies and private investment, which are essential to realizing the actual economic benefit of innovation. Perhaps a centrist group like the Liberal Democrats can craft a clever combination of public and private innovation infrastructure investment to get the country growing again.
The point here is that there is much that the UK can do on its own to chart the direction for its future. There remains much to build upon, but there needs to be the political will to embrace policies that will enhance the generation, diffusion, and absorption of new ideas and technologies in the economy, in order to achieve a brighter future for its citizens.