Low growth in the UK – and across the West compared to the East is not inevitable. It has happened because we have strived to achieve the wrong policy goals.
Chasing inflation down to 2% per annum requires deflationary policies which push up the exchange rate, making the economy uncompetitive. The result is a dearth of profitable investment opportunities combined with perennial balance of payment deficits, leading to slower and slower growth. Instead, we should pursue an activist exchange rate strategy oriented to keeping the economy competitive enough to generate export led growth and investment. We need an exchange rate which will stop us haemorrhaging our share of world trade, making the economy grow sustainably by at least 2.5% to 3.0% per annum. This will require a one-off devaluation of around 25% but will provide us with a growth rate strong and consistent enough to keep the performance of the UK economy up with the rest of the world for the foreseeable future.
The key to economic growth is not stability. It is competitiveness.
