When globalisation turns nasty

As policy leaders and decision-makers scramble to adjust to international upheaval in the form of Britain’s departure from the EU and the election of Donald Trump, John Bradley offers some advice on the fundamental changes which must occur in strategic thinking in order to survive in the post-Brexit era.

In normal times when policy makers in the public and private sectors need to address internal or external problems, the required policy changes are usually modest and marginal. An emerging budget deficit may require some changes to tax and expenditure instruments, whereas a decline in demand for a product in one market may require seeking out new markets. Conventional economic discourse is designed to handle such issues. The focus is on stabilisation and a rapid return to normal operations. Fine tuning. No radical rethink needed.

Two recent developments have destroyed this rather comfortable scenario, for the wider world and particularly for the UK and Ireland. The first was the result of the UK referendum, mandating withdrawal from membership of the EU. The second was the election of President Donald Trump in the USA, who was both protectionist and unpredictable.

In the case of Brexit, it proved surprisingly difficult in the UK to debate the leave and remain cases in a balanced fashion. The leave case tended to be based on extreme optimism about the opening of new opportunities outside the constraint of EU membership. The remain case, however, tended to rely on portraying apocalyptic consequences of being ejected from the EU customs union and single market. And the business community, for reasons easy to understand, was the dog that initially didn’t bark.

There is more in common between Brexit and the election of President Trump than one might think. In many ways the election result was a kind of Amerexit, based on ‘making America great again’ by diluting the forces of globalisation that had produced many internal losers. Tariffs and other protective trade barriers have started to go up.

Here on the island of Ireland we find ourselves uniquely vulnerable to both Brexit and Amerexit. The highly productive part of the economies of Ireland and Northern Ireland rely on foreign direct investment, with the USA providing most of the activity in Ireland. Ironically, the negative consequences of a hard Brexit for the British economy may be partially offset by deflecting a higher share of a diminished overall US FDI to Ireland in order to retain full access to EU markets.

However, the consequences for the Irish indigenous manufacturing and traded service sectors are likely to be more serious. For cultural and historical reasons, the indigenous Irish enterprise sector still functions in many ways as if Ireland, although an independent state, were still a region of the British economy. An Ireland facing tariff barriers with Britain would be like Greater Manchester facing similar tariff barriers. Both Ireland and Greater Manchester could diversify to new markets, but that would be costly, slow and likely to cause major disruption.

“…the business community, for reasons easy to understand, was the dog that initially didn’t bark.”

Behind the Sturm und Drang of a contentious and increasingly chaotic Brexit debate, the UK Government has developed a renewed interest in industrial strategy. In the past such strategic thinking had been dismissed as being ineffective. The view was that governments shouldn’t try to pick winners. The context that gave rise to ignoring a co-ordinating public policy role in strategic development of enterprises has been recently examined in ‘How Growth Really Happens’ by Professor Michael Best (Princeton University Press, 2018).

Professor Best points out that there is an uneasy relationship between the kind of conventional deductive economic theories that motivate much thinking about the performance of the macro economy, and the largely inductive thinking based on case studies that motivates micro-level investigations into industrial capabilities, innovation, governance and the role of “place” in regional growth strategies. On the macro side there is a large body of knowledge, with much of it incorporated into formal models that can be used to plan and explore the consequences of policy actions, ranging from short-term fiscal issues to longer term policies of investment in physical infrastructure. This kind of top-down, macro analysis is not without its problems. But such economic thought processes feed directly into conventional policy making and media commentary.

Micro policy analysis of a structural kind is directed at individual enterprises or clusters of interacting enterprises in a way that provides guidance to their growth and evolution. Such thinking often has location-specific characteristics that differentiate it from conventional economic policies that have their effects across space in a homogeneous way. Although there is evolving literature on spatial issues in economic theory, it has provided little by way of practical guidance to policy-makers tasked with development or re-generation enterprise strategies that have important regional dimensions. Micro structural analysis has to fall back on inductive reasoning based on careful examination of what is happening on the ground, drawing on selective case studies and placing these insights into taxonomies that lead to useful insights and conclusions.

The narrative in the 2017 UK White Paper on Industrial Strategy: Building a Britain fit for the future displays a conflict between, on the one hand, assertions that the performance of the British economy is really good, but needs to do even better, and, on the other hand, a warning that the British economy faces serious challenges that must be addressed. It displays a degree of confusion as to how spatial governance should be treated by policy makers. While challenges of uneven distribution of activity over space are recognised, there is uncertainty as to whether spatial policies should be designed at the centre (in a top-down process) or whether policy making ought to be devolved to some degree to the periphery (in a bottom-up process). Although history tells us that major enterprise innovations have tended to be location specific, driven by local circumstances and actors, the centre often believes that it is better organised and informed than the periphery. The outcome of this kind of indecision can result in the worst of both approaches: remote guidance by a centre that lacks local knowledge and insufficient resources and inadequate ‘power to convene’ in the periphery.

The kind of strategic thinking that is under way in the UK must surely be under way on the island of Ireland, where Brexit and Amerexit threatens to shake the foundations of a strategy that has yielded good outcomes for over half a century based on inward investment from the USA and seamless access to the relatively huge British market for Irish indigenous enterprises. The standard form of economic thinking about these issues is of very limited use. When faced with the prospects of such serious challenges, we must re-examine the foundations of our enterprise policies. As Professor Best shows in his book, such re-examination of UK performance is chastening, and things need to change dramatically if the UK is to prosper outside of the EU. The need to rethink enterprise strategy on the island of Ireland is no less urgent.

Dr John Bradley was for many years a Research Professor at the Economic and Social Research Institute (ESRI) in Dublin, and is an international consultant in the area of analysis and modelling of economic development and industrial strategy (EMDS).