How the shock of Brexit could make the British economy stronger
In 1975, the American jazz pianist Keith Jarrett found himself in an unenviable position. Shortly before beginning one of his improvised solo performances, he discovered that some backstage bungle had left him with an old rehearsal piano. It was out of tune, tinny and had sticky keys and pedals. After protesting and realising nothing could be changed, he decided to play anyway. The flaws in the piano pushed him to play in a new style, discovering fresh ways to express himself. And against all expectations — certainly against Jarrett’s — the result was a masterpiece: The Koln Concert album.
First, immigration. The debate on this has taken a xenophobic turn but the pure economics of tighter immigration also looks challenging, particularly for agriculture, catering, the National Health Service and higher education. Since EU migrants have more than paid their way, discouraging them will also weigh on public finances.
Second, trade. We don’t know what the post-Brexit trade landscape will look like but the UK will find it harder to remain an open economy. It will be more difficult to integrate with pan-EU supply chains, the costs of imports will rise and, while exporters benefit from a weaker pound, they may find themselves facing higher tariffs and, more important, non-tariff barriers.
Third, financial services. London will be a less attractive financial centre hub if it cannot be used as a base to provide financial services across the EU. US banks, in particular, may find Dublin, Frankfurt, Paris or New York to be more sensible vantage points to serve the EU market.
These, then, are the obstacles. What are the opportunities? As labour markets tighten, companies may invest more in skills and particularly in capital: better tools, smarter software and more robots. We may see a more productive economy with higher wages, at least for those who can manage the robots rather than be replaced by them.
If the UK economy cannot integrate smoothly with EU suppliers, that will raise costs but it may also stimulate more local networks. This import-substituting strategy is often associated with the policies of Latin American strongmen but it has occasionally worked.
Is there a bright side from a weaker City? Perhaps. A country that exports a lot of a commodity such as oil can start to suffer from the “Dutch disease”, a condition resulting from a currency so strong that it becomes almost impossible to do anything except pump oil and spend the earnings. In principle, the same thing might occur with a very concentrated industry such as the high finance of the City of London. If the oil — or the high finance — dries up then the exchange rate weakens and other industries can flourish. Perhaps this is part of what we are seeing now as the pound falters, and perhaps the misfortune of the City will be beneficial to other industries such as software or high-tech manufacturing.
There is also the possibility of building affordable houses. Once the country’s tabloid press can no longer blame Brussels about red tape, they may turn their fire on the British regulatory thicket holding back the economy: land use restrictions. If we had built more houses where people wished to live, fewer people would be feeling left behind and blaming Lithuanians for troubles that were engineered in Westminster.
All this suggests a British economy with a larger presence as a producer and consumer of high-tech software and robotics: the Japan of Europe, although hopefully without the quarter-century of economic stagnation. It is not impossible. Data collected by Massachusetts Institute of Technology’s Atlas of Economic Complexity project suggest that the UK has untapped capacity in industries such as cars and precision engineering.
I do not believe in “economic models”. Models are all very well when we are talking about Lego. When it comes to a major 21st-century economy, things are too complicated for that. We will have to see what emerges. The situation looks unpromising but so, too, did Keith Jarrett’s unplayable piano.
First written for the FT’s “Future of Britain” project.