For a long time the UK was the fourth-largest economy in the world. I always thought that was pretty good, given our empire was long gone and that we aren’t a particularly big country. But now we’re slipping.
Last year we were number six (in GDP terms). That put us behind Germany and France and just ahead of Italy. Things haven’t exactly improved since. Our economy is 4.7% smaller than at the end of 2008. The only positive I can find in all this is that up to the third quarter of 2009 the cumulative fall in Italy’s GDP came to 5.9%. So at least we’ll still be ahead of them on the 2009 biggest-GDP list.
The upshot, says Martin Wolf in the FT, is that the UK “is poorer than it thought it was”. On the Treasury’s current forecasts (which could well be nonsense), the economy won’t regain its 2008 size until 2012. Depressing stuff, particularly when you add it to last week’s revelations about our huge debt levels (“deficits unmatched in peacetime”, notes Wolf) and this week’s unemployment news. The most shocking statistic? One in five people of working age in Britain is “economically inactive”.
Clearly, we should be worried. Very worried. But I’m not sure we should be defeatist. There is a general assumption that the West is toast – that our finances are too much of a mess, our workers too lazy and uneducated and our systems too constrained by regulation for us to put up a fight against the emerging economies of the East. In a typical press release, Andy Beal of the Henderson TR Pacific investment trust writes that most of us don’t fully appreciate “the scale of the transformation of the global economy over the next 20 years”. Expect China to have overtaken the US by 2030, he says, and India to be close to challenging America’s new number-two position.
But is it really certain that China will soon be number one? No, says Edward Chancellor on Breakingviews. The “China dreamers” are ignoring the country’s “widespread corruption”. The sale of public offices is commonplace. The legal system is not separate from executive government. The banking system is politically controlled (so capital is routinely misallocated, often to premature infrastructure creation).
And bribery is endemic. Here’s a telling statistic: an estimated half of all luxury goods bought in China are given as bribes to public officials. This matters. The US and the UK rose to power in the first place due in large part to “strong institutions which protected property rights and encouraged wealth creation”. We still have those institutions – we may not respect them as we did, but we still have them. China does not. The consensus view says that I should, but there’s no way I’d bet what pension I have on China being number one in 2030.