If Only The Observer Had A Clue About Economics

There was a time when The Observer did in fact understand this socioeconomic polity around us. Sure, they were on the left of the argument even back then but that was when being on the left was being on the right, correct, side. You know, free trade, international markets, globalisation, all that stuff, in opposition to the more conservative protectionism. Things have changed somewhat.

No, not just that they’re hopelessly woke and all that. But they’ve not got the economic chops, the hinterland in theory and knowledge, to be able to understand what they’re being told. This does matter:

As Britain walks closer to the EU’s exit door, it is worth considering the nation’s capacity to survive without, as the Bank of England governor, Mark Carney, would say, the kindness of strangers. The strangers in this case are foreign investors and the foreign companies they own, which are based in the UK either to sell stuff to the domestic market or as part of a global network of suppliers. As we know, the UK plays host to a large number of foreign companies. In the summer the Office for National Statistics (ONS) said they make up one in four large businesses in the UK (that is, firms with more than 250 employees). They also rank among the best known, whether that is Siemens and Nissan or JP Morgan and Nestlé. They employ millions of people and, embarrassingly for top-flight British businesses, the largest ones are about twice as productive as domestically owned equivalents.

Yes, this is normal.

The comparison gets worse when medium-sized services businesses are assessed. The foreign-owned ones are about three times as productive as similar-sized UK rivals. Analysis by the Bank of England last year pulled together much of the research into productivity, including that of an academic, Jonathan Haskel, who in September became a Threadneedle Street employee as a member of the interest-rate-setting monetary policy committee. Haskel found that foreign-owned companies were not only a source of well-paid, productive jobs, they were also a source of expertise that rubbed off on British-owned firms. Think of Arsène Wenger’s Arsenal in the 1990s and the influence it had on the Premier League. Without foreign companies in the mix, UK businesses stand to be hopelessly outclassed by firms located abroad that are better managed and better resourced.

Yes, this happens in every economy. We do also know this:

In discussing the origins and implications of international trade, economists
emphasize comparative advantage, increasing returns to scale and consumer love of variety
but pay relatively little attention to the firms that actually drive trade flows. Yet engaging in
international trade is an exceedingly rare activity: of the 5.5 million firms operating in the
United States in 2000, just 4 percent were exporters. Among these exporting firms, the top 10
percent accounted for 96 percent of total U.S. exports.
Since the mid-1990s, a large number of empirical studies have provided a wealth of
information about the important role that firms play in mediating countries’ imports and
exports. This research, based on micro datasets that track countries’ production and trade at
the firm level, demonstrates that trading firms differ substantially from firms that solely serve
the domestic market. Across a wide range of countries and industries, exporters have been
shown to be larger, more productive, more skill- and capital-intensive, and to pay higher
wages than non-trading firms. Furthermore, these differences exist even before exporting
begins. A large literature documenting these findings has emerged, beginning with Bernard
and Jensen (1995).
The ex ante productivity advantage of exporters suggests self-selection: exporters are
more productive, not as a result of exporting, but because only the most productive firms are
able to overcome the costs of entering export markets. This sort of microeconomic
heterogeneity can influence macroeconomic outcomes.

Exporting and overseas production sites are substitutes for each other. So, the same applies.

The reason? Mediocrity is easily available just around any corner. Only those who are already more productive can – or bother – to expand into overseas markets. Yes, this happens in every economy, there’s nothing unique to the UK about it. And wouldn’t it be useful if The Observer knew these basic facts before it pontificated at us?

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