Diversity is Key

I’ve for some time been trying to advocate much greater diversity in the UK economy and I’ve often linked to this research, which suggests that economically diverse countries are more prosperous. To quote directly:

inequality lives within a range of values that are determined by your underlying industrial structure.

Which, being translated, means that if your economy is skewed and specialised towards one or perhaps two industries then it is certain that the prosperity will be found in those industries and those overwhelmingly but to the exclusion of others. Doesn’t that remind us of Britain’s banking and financial services industry?

[In] Germany or Switzerland, where the economy is very diversified, and there are many people who are generating money in many different industries, firms are going to be under much more pressure to be more inclusive and redistributive.

The good news is that there is now more research, which I’d previously missed, from October 2017. This focuses on “economic fitness,” a measure that seeks to capture the range and sophistication of the goods a country produces.

The more different things a country produces, and the more complex those things are, the greater its fitness — and one indication of a product’s complexity is how few countries can successfully make it. Advanced nations such as Germany and the U.S., for example, make just about everything, from breakfast cereal to supercomputers. Less fit nations tend to make fewer, simpler things.

Even if it it can properly be considered a product, I fear that in spite of its invented complexity, this is more bad news for the UK’s specialisation in Financial Services. It is also an indictment of the lack of any industrial policy for the last 40 years. Effectively we are being told that ‘the market’ hasn’t given us complexity and diversity in the UK economy, and it isn’t working for the good of the country.

The only real thing that the UK has that is unique-ish is its legal system. But the decline in legal aid has been so acute that it has resulted in legal access being severely limited and, as we have seen in the recent Crown Prosecution Service mistakes and the privatised Forensic Science collapses, if you do not invest in the law, quality suffers. If Financial Service users lose confidence in English law then Britain will certainly have absolutely nothing to offer.

The economic diversity requirement also reinforces not only the now obvious requirement for a National Investment Bank, but also the need for localised and not for profit banks.

The same article draws attention to some highlights:

In Germany the cooperative banks share of all loans in Germany is 17%, but the share of loans to SMEs stands at 28%. Research shows that SMEs perform better in countries with large cooperative banking sector and suggests that they loan to SMEs with lower costs. During the crisis the cooperative banks were more likely to continue or increase lending to SMEs than their competitors.

Cooperative banks are better taxpayers: for every one billion in assets, German co-operative banks pay 2.5 million in taxes, compared to big private banks that pay only 0.5 million. A bank run by the people are more than willing to see their profits go back into society. They also engage more in other socially beneficial activities. For example, the Nationwide Building Society gives out community grants to projects submitted and selected by the members on one-member-one-vote basis.

Without shareholders pressuring for maximising immediate returns, cooperative banks have a more long-term focus. Numerous studies have shown that they are more likely to establish long-term relationship with their clients, especially with Small and medium enterprises. This, along with profits going to reserves instead of shareholders, manifests itself in less volatile return on equity. A stronger focus on relationship banking also leads to stronger local ties and networks. This can lead to co-operative banks having more sustainable growth.

These advantages would assist the UK to create a more diverse economy which would be able to flourish in lots of different areas of the country and would be likely to improve our balance of payments. It is encouraging that research now backs up this intuitive idea and good too, that it looks as though the RSA is willing it to succeed..