As we reach the mid-point of the Parliamentary process passing the Bill which will give the authority to the Prime Minister to activate Article 50 we move further and further away from those heady days of June last year when the most momentous democratic event in British history took place. The referendum was the most delicious example of the people of the UK putting the self-satisfied and failed political class and the similarly self-important satellite communities of the media, commerce, the law and the arts, in their place.
Since the vote the Government has set out its 12 objectives for the UK’s new relationship with the EU and more recently expanded on them in a White Paper. While the Labour Party, led by Jeremy Corbyn, have taken the honourable and right route of supporting the Bill that will allow Article 50 to be initiated it is a shame that the Labour Party has not been more pro-active. It would have been good to see the Labour Party try to seize the policy initiative and set out a clear and exciting vision for a ‘Lexit’, based upon some clear ideas about the UK’s future international economic relationships, now they are no longer going to be mediated through the EU, and the UK’s political economy.
Part of the reason why the Labour Party has fallen short is because a significant proportion of the Party are still suffering from a ‘Remain’ hangover, despite the referendum being so long ago. Most of what the Parliamentary Party has done so far has been defensive positioning. Looking to preserve as much of the current EU-UK relationship as it can get away with. Some are no doubt hoping those who voted in the referendum won’t notice that parts of the Labour Party are continuing to argue for things that were very clearly rejected by the electorate in the result on 23rd June. In particular, the sight of the Labour Party arguing for the maintenance of the privileges of Big Capital in the City and as much of the neo-liberal Single Internal Market as possible is, well, odd to say the least. In the long-run this approach (of ‘merely accepting’ that the UK is leaving the EU and not embracing it as the epoch changing opportunity that it is) will be strategically counter-productive for two reasons:
It allows doubt to hang over the extent to which the Labour Party is willing to accept the democratic mandate given to the UK political class by the people, a mandate that the elite in general and the Labour Party in particular, asked the people for. Failing to stand by the principle of ‘letting the people decide’ when the Labour Party overwhelmingly voted for the people ‘to decide’ would present an existential threat to the Labour Party as a democratic organisation. The large numbers of Labour MPs who voted through the Article 50 Bill was heartening but a significant minority failed to uphold their side of the agreement that they entered into when the Labour Party overwhelmingly voted for the 2015 Act passing the decision on membership to the people. Consequently, there are still lingering doubts, due to the mixed signals from the Parliamentary Party, that need to be swiftly pushed aside.
The Party will remain on the back-foot over policy, leaving it trailing while the Conservatives set out and establish the contours of the new policy landscape (both international and domestic) post leaving the EU. This is particularly the case in relation to the UK’s international economic relations and associated questions about the shape of the international political economy as well as the debate over the domestic economy. If the Labour Party wants to influence the future economic policy landscape it needs to develop well thought through positions swiftly.
The remainder of this post focusses on exploring some ideas for a democratic socialist vision of the UK’s future international economic relations (including the economic aspects of the UK’s future relationship with the EU) and elements of domestic economic policy. The goal of democratic socialists, post-EU, should be the development of a new domestic political economy: a British Social Model (BSM). This can only happen however if democratic socialists in general and the Labour Party in particular argue for an approach to the UK’s future international economic relationships that avoids the mistakes of EU membership and that allow the development of BSM.
Achieving democratic socialist objectives
A future British democratic socialist government will want to pursue policies that:
Deliver greater levels of equality.
Empower people with more autonomy over their lives and control over the tools for dealing with the problems that impact them, their families and their community.
Both these desirable ends require a productive, high wage economy within an effective redistributive policy framework based upon high quality public services. In other words, it requires the development of a new domestic model of political economy. The only way such a BSM is possible is through policies which speed up the current pace of capital accumulation and increase the total economic surplus produced by the economy. Achieving this is only possible with a large degree of autonomy over economic and social policy. It means that the UK cannot try and stay in the Single Market (through the European Economic Area) nor the Customs Union as some on the Labour benches are still arguing.
The starting point: the return of ‘economic sovereignty’
Once the UK has left the EU, the UK will have restored what scholar Andrew Mullen has called ‘economic sovereignty’ (Mullen; 2010). ‘Economic sovereignty’ describes autonomy over the tools of economic policy and the freedom to use them to achieve desirable economic and social ends.
The policy autonomy that comes from ‘economic sovereignty’ is an essential pre-requisite for any future democratic socialist policy agenda, whether international or domestic and specifically for the development of a BSM. Policy levers self-evidently cannot be exercised to achieve democratic socialist ends if they aren’t under the control of a democratic socialist government. While the UK was a member of the EU, policy could not be democratic socialist in its aims because of the constitutionalisation of a neo-liberal political economy by the EU.
The contours of a democratic socialist blueprint for future international economic relationships
The experience of EU membership should tell democratic socialists that in designing the UK’s new international economic relationships eschewing arrangements which end-up constraining domestic economic policy should be a top priority. There are a number of reasons for an approach which steers clear of national policy constraints. One short-term and two long-term reasons:
In the short-term, the Conservatives will set the terms of the UK’s immediate international economic relationships after the UK leaves the EU. These could, depending on the terms on which the Government enter into new arrangements, to some degree tie the hands of future UK governments in undesirable ways. Such constraints could be particularly detrimental to pursuing democratic socialist economic and social policies. Therefore, the Labour Party should argue robustly for as neutral a set of new international arrangements as possible i.e. an approach and agreements with other countries which facilitate co-operation but which respect the internal control of economic and social policy levers.
In the long-run anew relationship with the EU which recreated many of the current neo-liberal economic arrangements associated with membership will mean that the failed economic policies of the EU continue to apply to the UK. Consequently, the UK will continue to be stuck with an unsuccessful policy framework and therefore the UK would be unable to fully move on from neo-liberalism and implement a BSM.
Over the long-run international and domestic circumstances will change due to economic, technological and political factors. This will inevitably require policy changes to react against or adapt to such changes. Many of these changes aren’t yet able to be envisaged, even by the most talented clairvoyants. Therefore, future governments must have the authority to alter policy when relevant circumstances arise. One of the numerous problems with the EU was its inability to adapt (i.e. change policy direction) in any significant way. The ‘locking-in’ of a set of (frequently ineffective) policy prescriptions has had, and is likely to continue to have, long-term deleterious effects on the economies of the EU Member States. New relationships which could make it more difficult to adapt policy in the face of changes in circumstances need to be avoided.
The Single Internal Market: finally breaking free of its failures
‘…Britain’s political and business establishment, the belief that it [the Single Internal Market] generates enormous benefits has become an unqualified article of faith…’ (Baimbridge, Whyman and Burkitt, 2012).
Some on the left who, inexplicably, are wedded to the Single Internal Market (SIM) are still arguing that the UK should stay in it. Oddly, for a group who want to radically change the political and economic structures of a society, support for the SIM is one of the most egregious examples of parts of the left are lining up squarely behind the status quo and supporting the interests of the business establishment and large swathes of the domestic and international technocracy. Thankfully the Labour leadership seem to have eschewed their early flirtation with this position and now talk about ‘access’ to the SIM. Not least because membership of the latter was clearly rejected in the referendum result. Nevertheless, the feeling still lingers that many on the Labour benches would like to remain in it, if the political circumstances allowed it. This has always been puzzling! The only robust argument for the SIM is that it is a political tool for achieving ‘ever closer union’. There was, at one time, a theoretical (albeit highly contestable) economic rationale for a SIM in the EU. The theory went something like this: a SIM would be beneficial for trade creation and the generation of additional production economies of scale beyond what would otherwise be possible without the complete elimination of ‘transaction costs’. The outcome of their disappearance would be lower prices for consumers and a much more productive economy with concomitant low unemployment. Famously the 1988 Cecchini report predicted gains of between 5 to 6.5% of additional GDP (Baimbridge, Whyman and Burkitt, 2012). Well, if the theory was ever thought to have some validity, it has certainly been proven nonsense by history.
The Single Internal Market and capital accumulation
Notably, any additional growth benefits due to the SIM have been barely noticeable with performance across the original founding members of the SIM lagging behind the performance of comparable countries since the SIM’s inception. For example:
Between 1993 and 2012, the combined GDP of 10 non-EU advanced economies (OECD members) grew by 54% while that of the 12 founder members of the SIM only increased by 34% over the same period (Burrage, 2016). A cumulative difference of 20% despite the alleged growth enhancing benefits of the SIM.
The compound average annual growth rate of 9 comparable OECD countries over the period 1993 to 2013 was identified as 1.57%. This compared to only 1.18% average growth across the original founding EU members of the SIM (Burrage, 2016). An annual average difference of 0.39%. With the benefits of the SIM accruing to the founding members it is curious to say the least that they failed to match the growth rates of equivalent advanced economies not in the SIM.
The evidence of the faster growth experienced by non-EU countries clearly illustrates that whatever growth benefits are imagined by supporters of the SIM, they are significantly drowned out by other factors. These latter are more important to sustained capital accumulation.
The record of the SIM on unemployment in general and long-term unemployment in particular has been even more dismal than its record on growth:
Between 1993 and 2013 the average unemployment rate across the 12 founding members of the SIM has increased from 10.8% to 11.2% (Burrage, 2015). An increase of 0.4%.
In 10 comparable OECD countries, the unemployment rate, which was already lower, has fallen by 1.2%, from 7.3% to 6.1% over the same period (Burrage, 2015).
In 1993, in each founding Member State, on average 44.2% of the unemployed were long-term unemployed (Burrage, 2015). By 2013 this had risen to 45.6% (Burrage, 2015).
Clearly, whatever benefits the SIM was bringing to its original founding members, it was not employment rich economies.
Any positive impact on living standards as a result of membership of the original European Community (EC) and latterly the SIM has been negligible (at best) too. As Gudgin et al note:
‘Even starker is the evidence that per capita GDP in the EU28 has remained close to 50% of the US level since the early 1970s' (Gudgin, Coutts and Gibson, 2017).
In the UK:
‘…per capita GDP has remained close to 72% of the US level throughout the post-war period. It is not obvious that membership of the EU since 1973 has made any sustained difference'. (Gudgin, Coutts and Gibson, 2017).
In other words, the SIM has done very little for the economic performance of the UK or its other founding members. Further, it membership of the EC since 1973 has made no discernible difference to living standard in the UK. All this despite the so-called ‘unarguable’ benefits of membership.
The so-called ‘trade advantage’ of Single Internal Market membership
The much vaunted ‘trade advantage’ of being a member of the SIM is also, for the UK in particular, notable by its absence (Burrage, 2016). The evidence of this absence is visible in two key metrics:
The proportion of UK exports that goes to the EU has fallen consistently from over 60% at the turn of the millennium to around 44% currently. Further, the Rotterdam and Antwerp affect means that the proportion genuinely going to serve the consumers and businesses of other EU Member States is a lower proportion than the headline data suggests. If the SIM was a significant contributor to UK export performance, driving UK exports to other Member States higher than would otherwise be possible, the proportion of UK trade with other SIM countries would have held up rather better than the 25% fall that has in fact occurred.
UK exports to the original members of the SIM have relatively underperformed many third countries i.e. states that are not members of the EU (Burrage, 2016). This comparative out performance by non-EU countries is perhaps the most damning refutation of the claim that the SIM is a singular boon for UK exports to the EU and conversely that countries that are not members operate at an exporting disadvantage due to their outsider status.
These two trends strongly suggest that SIM membership is not a key factor in driving up exports to EU markets. To confirm this picture, the Cambridge Centre for Business Research recently highlighted that:
‘The influence of the UK membership of the EU [S]ingle Market is difficult to discern…much of the…increase in UK trade with the EU has been a continuation of previous trends and…increases have also occurred for exports into the EU from non-member states such as the USA…The share of the EU as a market for UK exports has been falling fast in the present century and will soon be below the level of 1973’ (Gudgin, Coutts and Gibson, 2017).
Any trace of a trade ‘insider advantage’ from being a member of the SIM is conspicuous by its invisibility. On the contrary, the historical evidence collated by Burrage and highlighted by Gudgin et al suggests that the UK will be able to export successfully to the EU from the outside like other third countries.
The overall impact of the Single Internal Market
The main impact on the UK’s political economy of the SIM has been to impose a particular kind of accumulation regime which, in the long-run, has delivered no discernible additional benefits. Indeed, it may have done harm. As the economists Mark Baimbridge, Philip Whyman and Brian Burkitt have observed:
‘Experience to date provides no support for the established belief that the SIM [Single Internal Market] provides significant benefits for the UK…the final effect on UK growth and employment rates is at best marginal, and at worst will further damage the UK economy…’ (Baimbridge, Whyman and Burkitt, 2012).
‘Easy trade’ rather than ‘managed trade’
Rather than clinging to the SIM, democratic socialists should be looking to set out a consistent approach to future international economic relations with all countries. This should be based upon identifying a set of universally applicable principles which can be applied to all new economic arrangements.
This should start with the realistic perspective on free trade. Free trade does bring micro-economic benefits. However, the overall effect can be ambiguous with some groups gaining and others losing. Its value to economic prosperity has been fetishised in recent decades. In reality, many of its benefits are contingent on the details. As economist Dani Rodrik has succinctly points out:
‘Many of the conditions under which free trade between nations is guaranteed to be desirable are unlikely to hold in practice. Market imperfections, returns to scale, macro imbalances, absence of first-best policy instruments are ubiquitous in the real world…[which]…mean[s] that a knee-jerk free trader response is faith-based rather than science-based’ (Rodrik, 2015).
Practical ways to facilitate trade in the short-term should be the focus of the UK’s new international economic arrangements with the EU and other third countries rather than ambitious ‘managed trade’ agreements. Rather, the initial focus should be putting in place the measures which facilitate the movement of goods and people across borders. In other words, dealing with the administrative blockages to trade which are often referred to as ‘At-the-border-Transaction-Costs’ (Chapman, 2016). They are also encompassed in the term ‘Technical Barriers to Trade’. (Leave Alliance, 2016). Of primary importance is having in place agreements on customs procedures, mutual recognition of product conformity assessment and certification to ensure, for example, that products, food etc. exported and imported are meeting safety standards of the importing country (Veggeland and Elvestad, 2004).
The costs of customs procedures at the border vary by country (BIS/ DFID, 2011). In many cases the costs are by no means insurmountable for an exporter. For example, for a business looking to export to New Zealand the customs and port 'tariff equivalent' costs were calculated to be around 3.3% (USAID, 2007). This compared favourably with Italy where the 'tariff equivalent' costs of exporting into Italy were thought to be around 6.7% or Spain, where the costs were estimated to be 3.4% (USAID, 2007). With the UK in a customs union with Italy and Spain it is somewhat remarkable that the tariff equivalent costs for such ‘At-the-Border-Transaction-Costs’ appear greater than for trade with a non-EU country on the other side of the world. Further illustrating how membership of the EU confers few noticeable advantages for UK exporters.
As highlighted by the (then) Department for Business, Innovation and Skills (BIS) and the Department for International Development (DfID) in a joint paper by far the largest element of the costs of trade are ‘handling’ and ‘inland transportation’ costs:
‘Inland transport and handling are by some margin the most important costs in all countries…[in the UK]…it is about 22% more expensive than in Germany’ (BIS/ DFID, 2011).
These sorts of costs can only be reduced through adequate infrastructure investment such as road and rail transport and dynamic transport sectors which minimise costs. The irrelevance of the EU to dealing with these costs (evidenced by the sustained disparities in costs between EU Member States) is another example of why the reality of the EU and its supposed role in driving ever greater levels of economic prosperity is more wishful thinking than reality.
Negotiations over mutual recognition of conformity assessment and customs procedures should be a central ‘ask’ of the current Government in the forthcoming exit negotiations. The Labour Party should support this as a priority issue for resolution. With the UK and EU starting from alignment and conformity, if both sides in the exit negotiations act rationally, then there should be little difficulty in swiftly agreeing a framework which will allow trade to continue without additional ‘At-the-Border-Transaction-Costs’. Getting these administrative elements that facilitate trade agreed should be the key focus of early discussions with other countries around the world too. In order to minimise disruption, where agreements already exist between the EU and third countries and the UK is a signatory, the UK should look to seek permission from the other contracting party to carry these over. This is a recognised practice in international law. In the longer-term some of these may need to be revisited.
Of course, if during the exit negotiations with the EU there is a clear desire to settle tariff and quota issues quickly (and this could be done as both sides are starting from the point of zero tariffs and no quotas) the opportunity should be seized. However, the likelihood is that the main elements of the terms of trade will be negotiated after the leaving agreement is signed. Further, for short-term convenience the UK should look to carry-over the trade agreements it is also party to courtesy of its EU membership.
Another aspect of the movement of goods (and indeed people) is that of transportation. In particular, air transport of both freight and individuals. An area of priority for the UK, in the exit negotiations should be arrangements that mean air transport can continue as easily as possible between the UK, the EU and third countries. International air transport is currently governed by a complex mix of bilateral, regional and plurilateral agreements as well as unilateral measures taken by various countries (ICAO, 2016). It is all underpinned by the International Civil Aviation Organisation’s (ICAO) Chicago Convention.
The international aviation sector has been liberalising for many years (ICAO, 2016). The EU has been no exception to this trend. In fact, it has typically gone further than most to apply neo-liberal economic ideas in the aviation sector. The EU established a single market in aviation called the Single Aviation Market in the late 90s. The EU has worked with other European countries to establish a wider market called the European Common Aviation Area (ECAA). Finally, the EU has pursued even greater liberalisation with non-European countries like the US, through initiatives such as the ‘Open Skies’ agreement (EU, 2007; Butcher, 2016).
Membership of the ECAA requires participating states to accept EU aviation laws. Similar to membership of the EEA. Consequently, democratic socialists should look for alternative relationship models to preserve national policy freedom while ensuring continued access for aircraft to all EU destinations. One attract