Laughton, Stephen John (2018) What role have Sterling overvaluation, fear of devaluation and the demise of UK manufacturing played in the relative decline of the UK economy, and how can this decline be reversed? (MA(R) thesis), Kingston University, .
Abstract
For over a century the UK has experienced relative long-term economic decline, as evidenced by its disproportionate loss of world trade and slow growth rate when compared to Germany and other OECD economies. This thesis examines whether sterling overvaluation has been the cause of this decline and the UK’s current economic dilemma. Thirlwall, (2011) wrote: ‘foreign exchange is a major constraint on the growth performance of many poor countries and that with improved export performance and a lower income elasticity of demand for imports, they would grow much faster.’ Would a more competitive pound relieve the UK of a balance of payments constraint or would it cause inflation, depress living standards and leave structural problems unaddressed? The thesis analyses the pro and anti-devaluation arguments. The pro-devaluation demand-side argument rests on the supposition that UK economic policy has long favoured finance over industry causing sterling to be overvalued, arguably since its original overvaluation in 17111. This has drawn investment and human capital away from manufacturing which in turn exacerbates supply-side deficiencies. The UK’s long-term trade deficit on goods has been financed through a combination of a surplus on invisibles and a reliance on income from overseas assets. In this decade net income streams have turned negative leaving the UK dependent on foreign direct investment and further sell-offs of UK assets both at home and abroad. The thesis argues that this is unsatisfactory because: 1. In the short and medium-term it creates unemployment and a hugely unequal and polarised society. 2. In the long run it is unsustainable, as when there are insufficient assets left to sell, the inevitable unplanned exchange rate crash will occur. The thesis finds that overvaluation causes a lack of investment in those parts of the economy where productivity increases are readily achieved and a lack demand which induces either deflation or the unsustainable substitution of private debt. When private debt creation slows, this induces a rise in government debt. Without a competitive currency, the UK faces a balance of payments constraint or a burgeoning and unsustainable debt burden. This exacerbates inequality and risks the breakdown of consensual politics. 1 In 1711 Newton, as Master of the Mint, reluctantly valued sterling at £3 17sh 6d to the ounce of gold; see page 93 for concluding summary on this theme.
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