From the TUC

BIS and HM Treasury: Constructive Collaboration or Covert Warfare?

05 Sep 2012, by in Economics

Attracting much comment after yesterday’s reshuffle is the idea that a couple of Conservative free-marketeers, namely Michael Fallon and Matthew Hancock, have been placed in the Department for Business in order to reign in the more interventionist instincts of the Secretary of State, Vince Cable. As the BBC’s Nick Robinson blogs:

“Vince Cable, referred to privately by some Tories as the “anti-business” secretary, could not be moved in this reshuffle. But he now finds himself with two Conservative ministers in his department who will be friends of George – Mr Osborne’s former chief of staff, Matthew Hancock, and former Tory deputy chairman Michael Fallon. They are there to keep an eye on Mr Cable and to chivvy him into embracing deregulatory measures.”

I’ve always found it interesting that intervention is equated with being anti-business among the Tory right – if I were a Tory, I guess that would make me a ‘Heseltini’. I haven’t met Michael Fallon, but if he is the new Industry – or is that Business? – Minister, then hopefully I will. But, leaving aside internal coalition tensions, this story got me thinking about whether the Treasury can ever work comfortably with a business/industry department. Apart from being the stronger player, the Treasury has always seen its role as to protect the nation’s balance sheet, resisting attempts by the business department to strengthen the long-term industrial base, if those attempts are seen as too costly. On the face of it, that’s an illogical position, but it doesn’t only happen here.

Over the summer, I read a fascinating book, ‘Deng Xiaoping and the Transformation of China’, by Ezra Vogel. This book describes Deng’s role in taking China from the closed economy and its accompanying poverty left by Mao to its breathtaking role in the world today.

Vogel describes the tensions between the ‘builders and the balancers’ in the years between 1988 and 1991. In the words of Vogel, the balancers, led by Chen Yun, “cautiously tried to ensure that resources were available for all the national priorities”. The balancers were concentrated in the Ministry of Finance, the State Economic Commission, the State Planning Commission and the banks (surprise, surprise!). The builders, “could see how Japan and the four little dragons (Hong Kong, Singapore, South Korea and Taiwan) had achieved the most rapid growth rates in the world, and they were eager to do the same”. Deng, according to Vogel, “was at heart a builder who wanted to see rapid progress”. Deng considered the cautious balancers “necessary, but annoying”.

As the story continues, that necessity becomes clear. When Deng tries to pursue growth at too fast a pace, inflation became a huge problem. In 1988, when growth was 11.3 per cent, RPI hit 18.5 per cent. As the pendulum swung towards Chen, the stuffing was knocked out of growth policies. By 1990, RPI was down to 2.1 per cent. But growth had now fallen to 3.8%. In the west, we’d call that healthy. In China at the time, it meant growth was on the floor.

Deng was learning as he went along; indeed, he made a point of reminding audiences that bold reforms would inevitably result in mistakes being made. But the lesson seems obvious enough. A balance between the needs of growth and the public finances – between the builders and the balancers or, to put it another way, between departments like BIS and those like the Treasury, has to be achieved. If balance is achieved at the outset, it would help to avoid pendulum swings like those experienced in China at the end of the 1980s Are both those departments so siloed, so set in their own cultural histories, that they find that impossible to achieve?

As growth seems to be the name of the game today (in word, if not indeed), the Coalition might ponder this. Of course, it has lessons for Labour too.

During the Cultural Revolution, Deng Xiaoping spent three years under house arrest. In fact, he emerged with a tolerance and even a forgiveness for Mao that is incredible in itself, but those were not three wasted years. Deng spent them pondering where he felt China needed to go, so when he achieved political power, he knew exactly what he wanted to do with it. Happily, we don’t do Cultural Revolutions in the UK, but I hope the two Eds, Chuka Umunna, Rachel Reeves and those driving Labour economic policy had some time to think and reflect over the summer. All four of them will be participating in a Policy Exchange conference tomorrow, which will also hear from former US Treasury Secretary, Larry Summers. According to Mary Riddell in Monday’s Telegraph, Summers’ involvement is seen by some as “dispiriting evidence of a ‘no-change’ agenda”. But a no-change agenda won’t do and I’m sure everyone in the Labour Party knows it. As a first step, when Labour gets back into government, it needs an economic and industrial policy where the needs to grow the economy and those to balance it go hand in hand. If that means knocking down a few cultural walls in both Horse Guards Road and Victoria Street, we’d all be better off as a result.