Essay on British Economy
Britain’s Participation in International Trade
Britain is among the countries that have managed to remain successful in the international market in addition to having enjoyed a substantial share of the total global exports. The good performance in the global market can be attributed to a combination of Britain’s ability to penetrate emerging markets and the competitiveness associated with the high time overvalued sterling pound. However, British exports have been declining steadily over the past six decades except during the period when the North Sea oil registered huge success. The decline of the UK global sector is largely blamed on underperformance of the UK export sector and partly due to the popularity and the emergence of BRIC (Brazil, Russia, India, China) countries which have proved to among the most competitive and major players in the global economy. This period of relative underperformance was met with the flourishing of the home economy that was driven by consumer demand. As such, large amounts of imports found its way into the country leading to the opening of a wide and persistent deficit on trade (Chang, 2008).
After the Second World War, majority of Britain’s export market was closely tied to the colonial links, which formed majority of its trading partners. The leading consumers of UK exports were New Zealand, Canada, India, and Australia in addition to other countries in the common wealth. After the UK joined the European Union, the percentage of exports to Common wealth countries reduced significantly because a substantial percentage of these exports were now directed countries in the European Union. Furthermore, British exports to other developed economies such as the Japan and the US increased substantially. Nonetheless, British exporters have found it exceedingly difficult to penetrate BRIC countries, which have the highest proportions of consumers.
Another factor that has contributed to the significant reduction in exports is the shift from the production of goods towards the production of services. Composition of UK exports has evolved over time with much focus being directed towards the importance of service exports as compared to the expense of locally produced goods. For the past two decades, the percentage of service exports has been increasing steadily. Information services and computers, insurance services, and financial services have been among the strongest performers in the UK service exports. Equally, the percentage of goods export supplied has been falling significantly from 70% in 1990 to 59% in 2010. The loss of competitiveness of Britain in the export market can thusly be attributed to the declining goods export and the increased competition from emerging economies particularly the BRIC countries that enjoy significantly low production costs.
The effects of BRICs on the UK exports has accounted for the declining competencies of UK exports because the low production costs has led the production of certain goods being redirected to these emerging markets. In such countries, labor accounts for a higher percentage in terms of production costs and therefore, a combination of low-skilled labor and mass-production techniques becomes a critical factor (Chang, 2008). On the other hand, the persistent overvalued exchange rate of the pound saw it appreciate steadily from the early 1998 until it leveled during the financial crisis that begun in the late 2007. This benefitted the sectors that required large amounts of commodity inputs in terms of the benefits associated with the impacts of dollar-denominated costs of inputs.
Comparative advantage and opportunity cost
Despite the massive deterioration in competitive levels, Britain has managed to remain competitive in the weak but competitive global economy by retaining its comparative advantage in the few remaining good export sectors. This form of comparative advantage enjoyed by Britain is measurable in different ways. First, the opportunity cost of producing manufacturing goods is less as compared to the opportunity cost of producing the same item in another country (Belli, 2007). In such a situation, the level of productivity in one industry is relatively high as compared to other industries. Comparing the UK with other countries in the EU such as Germany shows that the UK has continued to enjoy a comparative advantage in different industries such as technological industries in the manufacturing sector (Belli, 2007).
Financial Crisis and Depreciation of the Sterling Pound
The global trade has largely declined due to the effects brought about by the global financial crisis. This had heavy impacts to the volume of UK exports leading them to drop sharply between the year 2008 and 2009 whereby the volume of exports fell by approximately 13% (Hermerijck, Knapen, and, Ellen, 2009). In turn, it led the volume of global trade to plunge heavily. Nonetheless, the 2007-to date financial crisis led the capital flows into the UK economy to dry up, a factor that made the sterling pound to depreciate by more than 25% during this period. Similarly, the competitiveness of UK exports was boosted and thereby it provided a cushion against unforeseen fluctuations in the global trade. As such, the decline in the levels of UK exports to be substantially smaller as compared to the level of decline in other developed economies such as Japan and Germany. The continued deterioration of the global export of services meant that the UK was greatly exposed to the effects of the worsening global trade than those countries depending on the export of goods.
The sharp depreciation of the sterling pound after the downfall of the Northern Rock bank, which contributed to the global financial crisis (Connolly, 2010). This has been a leading contributor in enabling Britain to reducing the level of trade deficit. As earlier mentioned, the level of the UK export market has been in constant decline over the past two decades due to the entrance of emerging countries such as those in the Eastern Block and the BRIC countries. Since the financial crisis, the decline of the UK export market has stalled proving that the depreciation of the sterling pound has brought some positive benefits to the growth of the UK export market. Earlier during the depreciation of the UK export market in 1992, the growth of the UK export market has registered substantial share particularly with respect to the levels of the goods export market. During this period, the sterling pound seemed to have exerted less positive impacts in terms of the positive impacts during this time. According to a leading economist at Dublin Davy Research, MacCoille Conall, the total level of traded services, which makes up nearly 40% of the total volume of UK exports, is very significant to the overall level of trade in the UK. Even though the UK continued to gain increased market share in the volume of traded goods, the financial crisis of 2007 brought negative consequences (Connolly, 2010).
According to views from Ernest & Young ITEM club, the period of negative growth resulting from the global financial services can be attributed to the depression of the total value of services and goods. However, this can also bring positive opportunities in regions where the UK continued to exert positive strongholds given that the sterling pound has continued to undergo steep devaluation and thereafter improving the level of competitiveness of the UK export market. These positive factors have been significant in forecasting the possible levels of contributions that can be derived from the net exports (E & Y. 2011).
Reasons for the depreciated pound
The consequences that led to the depreciation of the sterling pound can be attributed to numerous reasons and varied factors but the most common causes of the fall of the sterling pound has largely to do with the effects of the global financial crisis and the government control through controls from the Bank of England. The Government, through its intervention policies, to exert steep cuts in terms of policy interest. This led to the downgrading of currency markets with respect to their expectations of effects from the credit crunch.
On the positive side, the consequences of the depreciated pound meant that British exports became competitive in the global market hence British firms participating in the global market could reduce their selling prices that would consequently boost the overall volume of orders. Similarly, the British exporters could decide to keep the prices of their products constant and thereby they would register higher profit margins (E & Y. 2011). Other positive advantages include the re-balancing of the British economy by reducing the levels of high imports and expanding the level of imports. This has an effect of reducing the levels of trade deficits and expanding the volume of net injections and circular flow of income. Closely linked to the above factor is the issue of enabling the economy to register accelerator and positive multiplier effects on the general levels of real income.
The source of increased and continued competitiveness
The weak sterling provides positive incentives to Britain’s export market as well as in providing a long-term boost to exporters in Britain. The weakening of the sterling pound has been significant in enabling UK exporters to increase the levels of their competitive advantage given that they have greater abilities in terms of competitive advantages in terms of price. The ability to compete in terms of price has enabled UK exporters to counter the effects of exporters from low cost competitors particularly those found in Germany. The Bank of England has also been very helpful in ensuring that the nation maintains a loose monetary policy that has been critical in offsetting the impacts brought about by very tight fiscal monetary policies. This has ensured that the sterling pound will continue to be weakened over prolonged periods thereby enabling UK exporters to make huge differences.
The growing consumer demand from emerging economies and the strong economies in BRIC countries would see the average income of many middle-class consumers would see an increase in the demand for household goods. The improved living standards and the expansion of the middle class in these emerging countries has been a substantial factor in the expansion of traditional goods manufactured by UK exporters. Another important factor for the continued growth and competitiveness of UK exports is the excellence performance of the UK in terms of financial services. The growth of the UK service sector has been influential in enabling the UK to expand its performance in global exports. Global projections have showed that financial services are likely to form the largest percentage of contribution into the export market.
Impacts of Government Interventions and Changing Economic Planning Processes of Organizations
Undeniably, analyzing the market conditions is very critical in enabling policy makers to identify the right sectors as well as the inappropriate sectors that need interventions. However, this analysis is not enough for policy makers to identify the regions that should be allocated much prioritization as compared to others. As such, there is need for governments to be involved in providing guidance and directions to organizations and players in the trade market to rectify the disadvantages and deficiencies brought about by market failures. This provides evidence that the goals of the public policy is to ensure that resources are allocated efficiently throughout the economy (Hall, and Lieberman, 2008). This calls for the prioritization of resources based on the levels of comparative advantage. For this reason, the provision of pure public goods should be prioritized before the provision of mixed goods.
Government’s participation in trade is critical in bringing controls in form of bringing balances and as well in the allocation of resources. For instance, the British government has been very influential during the financial crisis to ensure that the effects of the global financial crunch do not exert great consequences to the entire economy. By examining the effects of the AS-AD framework, the Government used its interventionary policies instructed the Bank of England to exert steep cuts in terms of policy interest. This led to the downgrading of currency markets with respect to their expectations of effects from the credit crunch (Saleh, 2010). This had both positive and negative effects of economic planning processes of many organizations involved in the international trade.
On the positive side, the consequences of the depreciated pound meant that British exports became competitive in the global market hence British firms participating in the global market could reduce their selling prices that would consequently boost the overall volume of orders. Similarly, this interventionary measure ensured that British exporters had options of maintaining constant prices of their products constant leading to the registration of higher profit margins (Joshi, 2005). Alternatively, the negative consequences brought by this government policy included the increase in the prices of imported technologies, inflationary dangers associated with the sharp decline in the levels of currency thereby leading to increased prices in the levels of imported components and commodities. Additionally, the weakening of the currency is not an objective that can be achieved within the shortest period and therefore it took time before the effects of this policy could be felt. The final negative consequence of such policy is the difficulties associated with the attraction of foreign inflows that are critical for the purchase of highly valued bonds.
Britain is an open economy and therefore, the government’s participation in trading activities is very critical for controlling the trading activities. This calls for the implementation of policies to bring about the desired macro-economic effects. These policies have significant impacts in changing the changing economic planning processes of organizations. Among such policies are export, import, and industrial policies. First, export policies include the reduction in tariff policies that are exerted on exports, and as well, subsidies that are given to exporters to encourage them export more commodities.
Additionally, exports subsidies enable exporters to reduce the prices of products. The weakening of the currency also exerts added advantages in terms of making exports relatively cheaper in the international market. Second, the regulation of imported products with the effects of reducing the amount of pounds that would be exchanged for foreign currencies. Examples of import restriction policies include import quotas that are critical in reducing the amount of foreign currencies leaving the country. Lastly, the implementations of industrial policies that control the activities of manufacturing industries have been very influential in controlling the amount of manufactured goods that leave the country (Pugel, 2007). Britain being a highly industrialized nation means that the country depends on imported technologies to facilitate various activities of the industrial sector. The government uses selective policies that are geared towards the reduction of prices for critical raw materials.
Generally, the British government usually plays a critical role to facilitate the process of re-orientating exports to some of the emerging markets in addition to enacting policies aimed at the reduction of regulatory barriers for exporters and companies wishing to enter into these emerging markets. Furthermore, governmental policies are usually formulated in such a manner that it supports the competitiveness of the export sector by improving the levels of skills in addition to providing incentives to investors (Stiglitz, and Charlton, 2005).
Admittedly, Britain is among the countries that have managed to remain successful in the international market in addition to having enjoyed a substantial share of the total global exports. After the World War II, majority of Britain’s export market was closely tied to the colonial links, which formed majority of its trading partners and this was one of the leading factors for the strengthened forces in the global share. The shift from the production of goods towards the production of services. Additionally, the composition of UK exports has since evolved over time with much focus being directed towards the importance of service exports as compared to the expense of locally produced goods. However, the emergence of BRIC countries has had effects on the UK exports has accounted for the declining competencies of UK exports because the low production costs has led the production of certain goods being redirected to these emerging markets. British exporters have rather found it difficult to penetrate these emerging markets despite them having higher percentages of consumers.
Britain has managed to remain competitive in the weak but competitive global economy by retaining its comparative advantage in the few remaining good export sectors. The weakening of the Sterling Pound has enabled the country to remain competitive because British exporters are able to reduce the prices of their products or keep them constant leading to higher profit margins. Furthermore, the weakening of the sterling pound makes British products to be relatively cheap in the international market thereby attracting more traders. Lastly, British exports have started finding their way into emerging countries such as those in the Eastern Block and BRIC countries.
Finally yet importantly, the government’s participation in trading activities has been critical in controlling trading activities of various organizations in addition to bringing about the desired macroeconomic effects. Allocation of resources and government controls are some of the activities that the government uses to influence the change in planning processes of many organizations. The British government facilitates the process of re-orientating exports to some of the emerging markets and enacts policies aimed at the reduction of regulatory barriers for exporters and companies wishing to enter into these emerging markets (Stiglitz, and Charlton, 2005).
Belli, P. 2007. “The Comparative Advantage of Government: A Review, Policy Research” Working Paper 1834, World Bank, Washington DC
Chang, H. 2008. Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, Bloomsbury Press.
Connolly, J. 2010. “Economic Review: Will the Sterling Boost Ever Arrive?”Second Quarter 2010, Deloitte
E & Y. 2011, The Outlook for UK exports: ITEM Club Special Report. ITEM
Hall, R., and Lieberman, M, 2008, Macroeconomics: principles and applications. Mason, OH: Thomson/South-Western.
Hermerijck, A, Knapen, B. and, Ellen, 2009. Aftershocks: Economic Crisis and
Institutional Choice. Amsterdam: Amsterdam University Press
Joshi, R. M, 2005. International Marketing, Oxford University Press, New Delhi and New York
Pugel, T. A. 2007. International Economics, 13th edition. New York: McGraw-Hill Irwin
Saleh, N. 2010. An Anatomy of the Financial Crisis 2007-2010: Blowing Tumbleweed. London:
Stiglitz, J. E., and Charlton, A. 2005. Fair Trade For All: How Trade Can Promote Development. Oxford University Press