POLITICAL ECONOMY

United Kingdom

The United Kingdom is noteworthy for its contribution to the liberal economic model. Indeed, most would trace liberalism itself to the UK, where philosophers like John Locke spoke of the inalienable rights of "life, liberty and estate," ¹ setting the stage for political innovations such as the American Declaration of Independence. Yet liberalism in the UK has undergone a number of shifts over the past decades, from a greater emphasis on social democratic values after World War II to the neo-liberalism under Thatcher, which has been largely continued under the current Labour government.

If there is a common theme that one finds with regard to the UK's economy over the past thirty years, it is that of decline. As we recall, during the Industrial Revolution the UK was "the workshop to the world," the richest country on the planet. Yet over time this position of dominance deteriorated. As of 2001, the UK's per capita GDP at Purchasing Power Parity ranked around twentieth in the world, behind once far poorer colonies like Ireland and Australia (though the UK still remains one of the ten largest economies in the world).

Why the decline? There is no single explanation. One basic issue is the downside of the UK's early industrialization. While this early industrialization made the country the world's first industrial power, it was also the first country to face the obsolescence of its technology and the difficulty of shifting to a new economic environment. A second factor was the burden of empire. Although industrialization helped fuel imperialism (and vice versa), the British Empire soon became a financial drain on the country rather than a benefit. Related to this is the argument that the UK's orientation toward its empire meant that the country was slow to pursue economic opportunities with Europe when the continent moved toward greater integration after World War II. Finally, many have argued that the collectivist consensus not only blocked meaningful economic reform in the UK for much of the postwar era, but also focused on social expenditures while ignoring the simultaneous need to modernize the economy. ²

Where does this leave the UK's economy in the new century? Like other advanced democracies, the UK is a postindustrial economy. Although industries such as steel, oil, and gas still play an important role, nearly three quarters of the country's wealth is generated by the service sector, in particular, financial services and tourism. Privatization has signficantly shrunk the role of the state in the economy, including the sale of a range of assets, from public utilities to housing, British Airways to Rolls Royce and Jaguar. Blair's Labour government has sought to extend privatization into rail, healthcare, and even the London Underground (its famous subway system). There have also been substantial changes in the welfare state, moving from a system of direct benefits to the unemployed to "welfare-to-work" programs that emphasize training in order to find employment. These actions have all required a significant rethinking of Labour ideology. The party has ended its traditional call for a greater state role in the economy (nationalization of industry was in fact enshrined in the Labour Party constitution until 1995) and has distanced itself from its once close ties with organized labor.

To some observers, the Thatcher revolution and its preservation under Labour has finally helped the United Kingdom turn a corner. The UK's unemployment is half of what it was ten years ago, and the country has enjoyed a decade of economic growth. In both areas the UK looks much better than France, Germany, or Japan. But concerns remain. As in many other countries, neo-liberal economic policies have increased financial inequality in the UK, which has one of the highest levels in Europe. This inequality also has a regional element to it, with the south of the UK growing much faster than the north, the traditional home of heavy industry. Whether this gap is rising or falling is hotly debated. It has also been argued that welfare reform has, in reality, been a costly program that has done little to ease unemployment. ³

Finally, there is the issue of the UK's economic relationship to the outside world. Historic ties notwithstanding, over the past half-century the UK has become closely tied to Europe, with half of British trade going to other EU member-states. However, the country still remains outside of the common currency of the European Union, the Euro, which was fully introduced in most member-states in 2002. British leaders and the public have been cool toward the idea of giving up the pound; they fear this change will undermine the country's sovereignty, placing important economic decisions (such as interest rates) in the hands of other member countries and EU bureaucrats. Opponents also argue that the British economy is significantly different from those found on the continent, and a single currency would reduce the UK's flexibility to respond to the different economic challenges that it faces. Supporters of the Euro argue that if the UK were to switch, the country would avoid fluctuations in the exchange rates that now exist between the Euro and the pound. Adopting the Euro would help trade (since there would no longer be the threat of a rising pound, making British goods too expensive for other Europeans) and promote investment (since investors would not worry about how exchange-rate volatility might affect their exports to the rest of Europe). Blair has been a supporter of the Euro, and early in his tenure called for an eventual referendum on monetary union. However, he faced not only resistance from the public and the Conservatives, but from within his own party as well, most notably from the Chancellor of the Exchequer, Gordon Brown. Membership currently does not seem to be an option, though Blair has kept open the idea that a referendum might be called before the next elections, which would be held no later than 2006. In the end, these issues tie into a much broader question: what is the UK's place in the contemporary international system?