The great competitiveness hoax

An open letter signed by some of the world's most prominent economists and regulators - and by us

Welcome to The Counterbalance, the newsletter of the Balanced Economy Project. We have two pieces of big news to report.

First, the core subject of today’s post, we are honoured to have been invited to sign an open letter on “competitiveness” alongside over 50 experts from around the world and across the political spectrum, including Nobel Laureates, former Government Ministers and financial regulators, economists and others. Our co-signatories include Anat Admati, Joseph Stiglitz, John Kay, Amelia Fletcher, Vince Cable, Dani Rodrik, Adam Tooze and Yanis Varoufakis.

The open letter on competitiveness is here. (It’s covered in various newspapers.)

In sporting terms, competitiveness is great. In economic terms, it’s . . . more complicated. (Pexels)

Second, we have been heavily involved in a conference in Berlin last week to build the early foundations for a fledgling anti-monopoly movement in Europe. Again, the conference included a range of prominent participants and organisations, ranging from Lobby Control in Brussels, a video cameo from our own Michelle Meagher, now on maternity leave, and Barry Lynn, Zephyr Teachout and Stacy Mitchell from the United States, among many others. While the conference was an internal organising event with no published outputs as yet, it confirmed the enormous reservoir of transatlantic energy and enthusiasm on this topic, waiting to be tapped. Watch this space.

So, what is competitiveness?

We have already written about “competitiveness” and competition before, in The Counterbalance, in Foreign Affairs, and elsewhere.

This c-word can mean several things, but usually it is thrown about by people who consider themselves smart, to refer to the supposed competitiveness of whole countries - or sectors within countries, such as financial services, or car manufacturing. That is the meaning that we will use here.

Competitiveness sounds great - after all, who wants to be uncompetitive? But it is a concept that, on examination, falls apart in your hands.

The general arguments we make are relevant to every country, across many sectors, though today’s open letter focuses on a current and specific threat: plans in the UK government’s new Financial Services and Markets Bill to introduce a statutory objective for the financial regulators to promote international competitiveness.

This is important for every country, because of the UK’s central role in global financial markets. This post-Brexit move is the biggest shake-up of the rules since the 1980s. It will affect everyone.

The letter exposes the incoherence of, and the threat from, a “competitiveness” agenda. It makes several points, including these:

1. “Competitiveness” is a recipe for excessive risk-taking. Competitiveness was a regulatory objective before the last financial crisis, and it was removed afterwards in wide recognition of its role in helping cause the disaster.

2. Finance competes against other parts of the economy and society, so a more ‘competitive’ financial sector will harm other sectors. For example, it inflicts a “brain drain” of talented people out of other sectors into highly paid finance; or a large and competitive “dirty money” sector requires lax money laundering controls: Ukraine reminds us how dangerous this can be. What’s good for a financial sector may not be so good for the country that hosts it - or for the climate.

3. It will likely reduce overall economic growth. There is extensive academic literature showing that “too much finance” will make us poorer. The literature is contested, but there is good evidence that the UK is in this position, and that the UK could usefully “shrink finance, for prosperity.”

4. The objective is confused and poorly defined. Policy-makers can’t seem to see the difference between private competition in markets, and the ‘competitiveness’ of whole countries, or of economic sectors. The only thing these two concepts really have in common is that they share a word in English.

5. A race to the bottom. The classic way to build up a domestic financial sector is to cut taxes, degrade standards, weaken enforcement, and generally give mobile capital an easy ride, to attract it. But if you do this, other jurisdictions will respond, in a race to the bottom, leaving you not only back where you started, but also in a more subservient position to mobile capital.

6. Financial regulators should not be cheerleaders for the financial sector. Their proper role is to protect the public interest. Finance has quite enough powerful cheerleaders on its side already, thankyou very much.

(See the letter for the full explainers, and relevant links.)

A Trojan Horse

The essence of international ‘competitiveness,’ in the sense that politicians love to use it, involves taking resources away from one part of the economy and handing it to a favoured sector (or company), to help it ‘compete’ against the Americans, the Chinese, the Swiss, or whoever. This term is used in many sectors, far beyond financial regulation.

As such, competitiveness is a tremendous lobbying tool of bamboozlement, to persuade us to hand public and private subsidies of one kind or another to favoured sectors, like finance. Those subsidies might include risky financial deregulation, special tax cuts and loopholes, relaxation of money laundering laws and their enforcement, deliberate wage suppression, and so on. Competitiveness, to put it crudely, involves hanging up a ‘Come Exploit Me’ sign in global capital markets.

With these policies, there are winners and losers in an economy, but in our years of experience, the effect of ‘competitiveness’ is always to favour the large, dominant players. Competitiveness is thus a power grab by elites: in this case, finance.

Competitiveness undermines competition policy

The headline here is that competition, competition policy and competitiveness are closely linked. That is because an international competitiveness agenda favours mobile and multinational firms, which tend to be large and dominant, over domestic firms, which tends to be smaller. So competitiveness boosts monopoly power. Or, to put the flip side: competitiveness hurts competition. It is a Trojan Horse for deregulation and for bigness.

We won’t dwell on it in depth here, as we have already explored this topic in some detail.

But we will add that we have prepared a paper, coming soon, on how a “Washington Competition Consensus” has been foisted on lower-income countries, around the world, alongside (or as part of) a better-known “Washington Consensus.” The latter is a package of economic and financial policies that have been widely condemned for making life easy for large and dominant multinationals, while harming many countries that enthusiastically adopted them. Those that substantially resisted the Washington Consensus - notably, China - seem to have done far better economically.

The Washington Competition Consensus has essentially told poorer capital-importing countries: “let the monopolists in, let them dominate your economy, or you will be uncompetitive and nobody will invest.” (Similar arguments were used to browbeat countries into accepting unfair international tax rules, or such horrors as the Trade-Related Aspects of Intellectual Property Rights (TRIPS) for similar reasons of ‘competitiveness.’) Competitiveness is not just a billionaire factory, but a monopolists' charter too.

By and large, countries have believed this threat, and accepted the pro-monopoly policies that have prevailed in the United States and Europe in recent decades, even though there was never any good evidence that these policies helped national development! The opposite was the case, in fact.

That is a subject for another day: our main point here is just to note that there is such a thing as “competitive” competition policy - and that it’s a bad thing, just as “competitive” financial regulation is - and for similar reasons.

Out of touch and elitist

A choice to prioritise competitiveness for the financial sector, during a cost of living crisis is clearly totally out of touch.

The last thing people need is to have their employment, and what small savings they have, put at risk by provoking another financial crisis. Polling evidence by our allies at the UK charity Finance Innovation Lab shows that 70 percent of people think such a policy is ‘out of touch and elitist’, and nine tenths don’t want it to be a priority.

Instead of focussing on competitiveness, governments should ensure that financial regulation helps the financial sector play its part in tackling our real social challenges.

Our vision is of a balanced, diverse, resilient economy serving the broad public interest - rather than a supposedly ‘competitive’ economy where a few dominant sectors or players are favoured, and everyone else scrabbles for pennies, caught in the giants’ gravitational pull.

A much better approach would be to strengthen regulatory mandates to ensure that finance contributes to our fight against climate change, overcomes deep-seated financial exclusion, or promotes stable and sustainable economic growth evenly across the country. Those are the kind of objectives for the future of finance we can all get behind.

ENDNOTES

We’ll keep these short, and focused on competitiveness.

The Rally for Better Financial Regulation - Transparency Task Force. If you’re in central London on Tuesday, May 24th after lunch, do please turn up. (If you can bring a sign saying something like “Shrink finance, for prosperity,” or “Competitiveness hurts Competition”, or ‘Damages the Climate’, or ‘Undermines Leveling Up’ etc., so much the better.)

Competitiveness will harm the climate - Jesse Griffiths. Among other things, because it will introduce incentives to promote greenwashing.

Vince Cable: Our obsession with competitiveness risks another crash - Vince Cable. From a former top UK official who was in the thick of the last crisis. See also financial expert and Conservative parliamentarian Kevin Hollinrake, saying much the same thing.

Competitiveness could undermine ‘levelling up’ - Northern Echo. Highlighting how competitiveness worsens regional inequalities, in any country. (One can of course extend this analysis to gender inequalities, racial inequalities, etc.)

The Queen’s Speech failed to turn our financial regulators into a public asset - City AM. Noting the incoherence and confusion over the difference between competition and competitiveness.

Rishi Sunak to weaken City regulation in post-Brexit nod to Tory donors - The Guardian. Noting the links between competitiveness and corruption.

City regulation post-Brexit will need greater accountability - Financial Times. Noting how competitiveness hurts democracy.

John Kay on competitiveness - Sky News. Noting how competitiveness is what we call a Trojan Horse for risky financial deregulation, and low quality businesses.

Call for FCA to be required to "have regard" to financial inclusion - Thomson Reuters Regulatory Intelligence. Now there’s a proper regulatory objective.

Poll shows widespread concern over Chancellor’s financial reforms - Finance Innovation Lab. Including the point that 90% of people did not want competitiveness as a priority, and that it is out of touch and elitist. (See also the conservative Philip Blond, earlier noting that “nobody voted for that vision” of competitiveness.)