by Damon de Laszlo, ERC Chairman
The weather at last gives some uplift to the spirits and helps with optimism, making it more difficult to address the underlying economic problems that we still face. Elections in the UK have deteriorated into political farce, with the two major parties playing a sort of game of “anything you can do I can do better”! and the minor parties seeming to be primarily absent from the debate. The biggest issue facing the UK, the US and, to only a slightly lesser extent, European governments, is their huge and growing deficits. During the last fifteen or sixteen years, various crises have been successfully mitigated by fiscal and monetary policy. The inability to address pain has meant that governments have thrown cash at every problem but have failed to reverse the process when the primary pain has been mitigated.
The consequence is that our political systems have learnt to enjoy taking credit for the positive outcomes of spending decisions, without warning of, or taking responsibility for the negative consequences. Today, government deficits are running high and getting higher by historical standards and within living memory. The distinction between borrowing to invest in productive assets and borrowing to cover current expenditure is lost. At what point a government deficit becoming unsustainable is unpredictable.
The US deficit running at 6+% of GDP is a major issue but, for the time being, can be sustained owing to its reserve currency status. The UK’s smaller but growing deficit depends on sucking resources out of the country’s savings and insurance industry; and so on through the rest of the Western democracies. The lack of government’s ability to either raise taxes or curtail their expenditure, means resources diverted from production and productive employment, creating a slow attrition in productivity and reducing the country’s resilience and reserves to meet future challenges. The West’s infrastructure – roads, rail, airports and, even more importantly, electricity supplies are deteriorating, compared with ASEAN countries. The primary functions of government – defense, law and, in particular, fiscal responsibility seem to be being undermined by popularism and the political distraction of paying undue attention to minorities and pressure groups, i.e. the will to govern, to lead and take responsibility is being undermined by noise generated by instant news feeds and twitter groups. The deteriorating competence of our bureaucracies, whether it be in the health service, education or government procurement, undermines political ambition and is a large part of government waste. However, there is still extraordinary economic energy in the underlying economy where it is not impeded by government departments.
In the US, UK and, to a lesser extent, in Europe, technological advances are happening rapidly. The by-product of the supercomputer chips designed by Nvidia in the US, made by TSMC in Taiwan, on machinery designed and built in Holland by ASML, the three leaders at the top of the pyramid of computing, supported by an ever-growing number of businesses who are learning how to use the technology, is exciting. While computers have been around for a long time, we are now really entering the computer age. The best analogy is probably the movement from the Wright Brothers’ first lighter-than-air machine to the modern mass cheap travel regarded as a ubiquitous part of life. This augurs well for the revival of Western economies led by the USA.
Visiting China at the end of last month, one was shaken to see the conspicuous advances made in the last five years. High speed rail links all the major, and most of the second-tier cities in central and eastern China. Carriages with electronic notices, when there are no other announcements, show speed usually averaging around 350 kph on long stretches. Speed not noticeable while sitting in the comfortable seats. Travelling from Beijing to Hong Kong, with diversions to two second tier cities, visiting nine companies, one sees endless motorway networks and beautiful modern buildings; in towns, either new or re-built in the last twenty years. Offices, factories, and shopping malls that are full of high standard retail outlets and apparently happy, chatty people. Language is now no bar as you hold up your mobile telephone which automatically translates from one language to another. Electric cars and bicycles are nearly everywhere, China leads the world in electrification by miles. From visiting travel companies to BYD Motors, one cannot but be amazed at the difference between China today and when I first saw it in the 1990s, a devastated country after old-fashioned communism collapsed.
The main lesson from China is that it is a benevolent dictatorship, with hard edges but based on a one-party state with a government and bureaucracy whose members are selected on a purely meritocratic basis. Incompetence and corruption are seriously addressed. Hopefully, the West will look at what is happening in the so-called Far East. Look, listen and learn rather than dictate to an ASEAN world that is rapidly growing in prosperity and becoming a serious industrial competitor. At the moment, Western leaders, along with their experts and advisors, seem to studiously ignore what is really happening in the Far East, as well the real implication of the modern superchips that are becoming an integral part of today’s world, and which will be hugely more influential in the future.
One can and should be optimistic, but we in the West need to raise our sights, and our game.
Damon de Laszlo
24th June 2024