Four decades ago, everyone knew that the UK had a social problem. Class divisions stunted the development of a substantial, well-educated middle class, leaving the economy in a strangely Victorian state – divided between a gruff working class, which was prone to strikes and obstruction; and the incompetent elite, which seemed unable to adjust to the end of Empire.
Times have certainly changed. Britain is now prosperous and predominantly middle class. Union strangleholds have given way to flexible labour markets. The country is a magnet for global talent, drawn by a cosmopolitan culture, not to mention the use of the leading global language. High value-added international services are its speciality.
But something is still wrong. A country with so many advantages should be doing better. Think Switzerland – another country of social peace, high skills and a post-industrial economy. The Swiss run a hefty trade surplus. The country has a very low unemployment rate, low inflation and a fiscal surplus. The nation’s biggest monetary challenge is to keep the currency from rising.
By those counts, the UK looks almost like an anti-Switzerland. Both the inflation rate and the fiscal deficit are uncomfortably high and hardly falling. Unemployment remains a serious problem and there is a fairly substantial current-account deficit. The flexible labour market has not led to strong export growth, despite a 20 percent fall in the currency’s value five years ago.
What’s the problem?
In narrow economic terms, I think the best explanation is what might be called a Double Dutch disease. The Netherlands found out a half-century ago that substantial easy revenues from resource extraction distort the economy. They inflate the currency, seduce politicians and demotivate would-be entrepreneurs. The UK, a net fuel exporter through the 1980s and 1990s, had a Dutch-style energy windfall in North Sea oil. In the following decade, a strong position in cross-border finance allowed it to double up on potentially debilitating cashflows.