There is a moment in the musical Hamilton, right after America wins the Revolutionary War, when British King George III strides on stage and asks cheekily, “What comes next?” This is an urgent question for the United Kingdom as it lurches toward separation from the European Union.
The answers are far from clear. Brexit proponents continue to argue that getting out from under the yoke of the EU will solve all its problems through better trade deals, fewer regulations, and curtailed immigration. But an objective strategic assessment makes it clear that these solutions are illusory, says competitive strategy expert Michael E. Porter, of Harvard Business School.
The competitive challenges now facing the UK have been made significantly worse by years of inaction. “Our worry is that the UK remains mired in wishful thinking about Brexit,” says Porter, the Bishop William Lawrence University Professor at HBS.
Far from a drag, he argues, being part of Europe was a key competitive advantage for Britain. Its economy benefitted more from EU funding than it contributed, even as a net contributor to the EU budget. Immigration was a positive, not the negative that populist politics asserted. And EU regulations were in step with sound international practice.
Remainers, on the other hand, have spent little time explaining what the UK can do better within the European Union to address the very real competitiveness challenges Great Britain’s economy is facing. While they have rightly pointed out the costs of leaving the EU, citizens have not heard a forward-looking plan on how the country could leverage EU membership more effectively in the future, if the country would decide to stay.
The country needs to get on with taking steps to raise productivity and restore prosperity growth. While improving productivity is one of the few areas where pro- and anti-Brexit groups agree, how to do so is far from clear and not much discussed by either side
“Our worry is that the UK remains mired in wishful thinking about Brexit.”
Porter and colleagues have been examining the competitiveness of the UK economy for years, starting with a white paper solicited by the government in 2003. He recently published the paper, "UK Competitiveness after Brexit."
Despite a stated emphasis on pro-growth policies since then, there has been limited improvement in competitiveness. Part of the reason is that the membership in the European Union has too often been a convenient scapegoat and distracted from the failure of government to mount a credible and actionable economic strategy.
Hit hard by the 2008 economic crisis because of London’s major position in financial services, the UK has been slower to recover than other European nations. Government has focused on lowering taxes, decreasing regulation, and imposing fiscal austerity, but not really addressed deeper weaknesses such as overstretched infrastructure and limited investment in innovation. The UK also has major skills shortages, particularly among middle-skilled workers. Immigration, seen as a drag on the economy by anti-Brexit forces, was a plus by adding badly needed skills to the workforce. Another longstanding problem is that the government has failed to trigger more economic dynamism in regions outside of London.
“The UK has failed to grasp the regional approach to development that has been so important to success in other economies,” Porter argues.
Slow growth and low wages are primarily the result of regional competitive weaknesses, which have offset strengths in London. The UK’s centralized structure failed to put in place strategies to drive prosperity in the regions. In addition, its policy has also focused on a few strong industries, such as pharmaceuticals, aerospace, and car manufacturing, while ignoring that the broader economy that has been falling behind.
While there have been some steps toward developing a post-Brexit strategy, including a green paper on industrial strategy published last year, Porter believes a far bolder approach is needed.
First and foremost, the UK must define a new value proposition for itself as a location for doing business outside of the European Union. A key reason that the UK has been able to attract top Japanese and German company investment is that it is both a relatively efficient place to do business and one with access to the broader EU market. Companies in the United States have also seen the UK as a natural launching pad for competing in Europe, given similarities in culture and language.
“There need to be new reasons for companies to do business in the UK despite a far smaller home market,” says Porter.
Academia a strength to build upon
The United Kingdom’s strengths in academic research provide one key pillar for such a new strategy. The UK is still by far the leading academic research center in Europe in terms of science and technology. ls. A focus on attracting more technologically intensive industries and better connecting the country’s academic institutions with companies to speed up innovation and entrepreneurship could give the UK an advantage over European competitors.
It also needs a more proactive approach to identifying and upgrading its areas of strength outside of London. The UK has strong biosciences and information technology clusters around Cambridge and Oxford, a study cluster of automotive companies in the South and Midlands, and some other areas of strength to build on. But government has done too little to develop these and other key regional assets.
A sound post-Brexit strategy must also build positions in fields that employ more low- and middle-skilled workers, such as tourism and food processing. These are large potential employers in fields where jobs are accessible to currently underemployed citizens.
Sound government policy can build on these by investing in job training on needed skills, streamlining regulations that will enhance productivity, working collaboratively with industry groups to remove obstacles and improve local capabilities, and recruiting foreign companies to deepen local capabilities.
“There need to be new reasons for companies to do business in the UK...”
Finally, the UK needs to take pragmatic steps to minimize the major disadvantages of leaving the EU, and avoid self-inflicted wounds, says Porter. While part of the argument for leaving has been that the UK can negotiate better free trade agreements on its own, the reality, says Porter, is that this is highly unlikely. The EU has been a leader in establishing trade agreements globally, with far greater negotiating strength than the UK.
Don’t finalize the divorce
Rather than completely divorce itself from European markets, Britain should aim to achieve a trading agreement with the EU that is as open as possible. The UK also has much to gain from maintaining regulations that are closely aligned with those in Europe in order to ensure compatibility of UK produced products with European markets. And it will be essential to maintain the strong ties that have led to much EU research funding going to the UK. Britain needs to follow the lead of Norway and Israel in retaining access to EU science funding even as it leaves.
Many of the needed steps in a sound UK economic strategy could have already been taken by the UK as part of the EU, and the country would be in a stronger position today, says Porter. It is urgent that UK policy confront the reality of the nation’s competitive situation and put the days of wishful thinking and divisive politics behind.
“Avoiding a disruptive crashing out of the EU is a start for the UK, and urgent,” says Porter. “But more needs to follow to put the country on a more promising trajectory.”