UK: Editorial - How to grow.

UK: Editorial - How to grow. - If it were possible to design an economy from scratch, how should it differ from the modern British economy? What kind of institutions should it have, how big should its public sector be, relative to the total economy, and

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Last Updated: 31 Aug 2010

If it were possible to design an economy from scratch, how should it differ from the modern British economy? What kind of institutions should it have, how big should its public sector be, relative to the total economy, and what kind and mix of firms should its portfolio of companies consist of?

Notwithstanding the difficulties being experienced right now by both the occidental and oriental variants of capitalism, it would be prudent to choose a free market economy, with a small public sector. Although such economies are clearly not immune to periodic recessions and persistent stagflation, their overall record is immeasurably superior to that of so-called "control" economies.

But one would need to establish some ground rules to ensure the free market is efficient and to protect it from its enemies. There is a "paradox of free markets" which states that if markets are too free, monopoly tends to develop. A strong anti-trust institution would, therefore, be needed, to maintain the freedom of markets and it would also be wise to foster market efficiency with a law guaranteeing freedom of information.

Having elected for a free market economy, one is, of course, obliged to accept, as right and proper, the kind and mix of firms that develops. It would be perverse first to give an economy its head, and then to question the validity of the corporate pattern that emerges within it.

But we did not design the British economy from scratch, and, during its long history, its development has been distorted by periodic government intervention, the results of which have invariably been harmful. It is now hard to see how these distortions could easily be remedied, without corrective intervention.

The most serious distortions are in the unusual size mix in the British corporate portfolio. As our report on Europe's largest 500 companies (p38) indicates, Britain is relatively well-endowed with large, efficient, low-growth companies but relatively ill-endowed with medium and small-sized, high-growth companies. Growth is Britain's problem. There is reason to believe that British firms are now, or will soon become, as efficient and productive as any, but we seem to be deficient in the adrenalin of organic, as opposed to acquisition-led, growth.

And it is to the SMEs - small and medium-sized enterprises - that we should look for a solution to the problem of growth. Corrective intervention is called for here. Roger Eglin (p30) proposes legislation to ensure prompt payment of bills, a revival of the Business Start-Up scheme (which lost much of its therapeutic effect when it became the Business Expansion Scheme) and, most important of all, the formation of a new bank, specialising in SME lending. In view of the strength with which German SMEs - the mittelstand - are believed to have endowed the German economy, we could do worse than take as our model for such an institution, the Frankfurt-based Kreditanstalt fur Wiederaufbau. For over 40 years it has been proving that the way to reduce the risks of SME lending is to lend SMEs lots of money, at reasonable interest rates.

But, more favourable legal, fiscal and financial environments will not be enough to turn Britain's SMEs into a mittelstand powerhouse. What is needed, in addition, is a new strategic paradigm for SMEs themselves.

Only when Britain's SMEs, as a group, acquire the confidence and the strategic vision to take on world markets, will they become like the "mighty minnows" that have driven the German economy to its present pre-eminent position in Europe.

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