Peter Lilley is a former Secretary of State for Trade & Industy and for Social Security.
It is widely assumed that there is a trade-off between sovereignty and prosperity. Remainers argue that we will make ourselves poorer by taking back democratic control of our laws, borders and money, and deride sovereignty as a nostalgic illusion. Some Leavers tacitly accept this trade-off, but argue that democratic self-government is good in itself and worth making sacrifices for.
But this is a false choice. In fact, democracy and prosperity go hand in hand. This is because in a sovereign democracy, if the government fails to deliver prosperity the people can chuck it out. So there is democratic pressure to tailor policies to engender prosperity.
The issue has returned because the Government’s “EU Exit Analysis” claims that if we ‘take back control’ from the EU we will be worse off than if we remained – even as a non-voting member – inside its main institutions.
As a professional economist, I learnt that to evaluate an economic study one must elucidate the assumptions on which it is based. These are often well hidden – even from the authors’ consciousness. Although the EU Exit Analysis claims it is based on a different methodology from the Treasury’s referendum Analysis of the Long Term Impact of EU Membership, both are based on the same three assumptions.
The first is that the more a country removes legal, administrative and institutional differences and obstacles between itself and its neighbours – i.e. the more they become like a single country – the more they will trade with each other.
This is often true. Canadian provinces trade more with each other than with adjacent American states. However, the Treasury model manifestly overstates this effect. During the Scottish referendum, another Treasury model ludicrously claimed that even if Scotland kept the pound and remained with the rest of the UK in the EU Internal Market: “the creation of a border [with no tariffs or border checks] would reduce trade by 80 per cent relative to Scotland remaining in the UK”.
The second assumption is that the higher the proportion of a country’s economic activity that is transacted with those outside its own territory, the faster it will grow. There is no evidence for this as far as developed countries are concerned. Yet the Treasury admits that this supposed relationship “is the main driver of the estimates of the long-term effects of EU membership on the economy”.
The third assumption is that foreign trade and trade agreements are the most important determinants of growth. Our own experience demonstrates that this is false. We certainly hoped that joining the Common Market would help revitalise our sluggish economy. But four years later, Britain was bankrupt going cap in hand to the IMF. Joining the Common Market was not the cause (though our trade balance worsened), but nor was it the cure. That came from the Thatcherite domestic reforms which, during the 1980s, transformed Britain from the slowest to the fastest-growing major economy in the EU. Regaining control of our laws and money will give us the opportunity further to streamline regulation and to free up our economy.
Taken together the Treasury’s assumptions imply that big countries should grow faster, and therefore be richer, than small countries.
So Singapore, Hong Kong, Taiwan and New Zealand should be among the poorest countries of the Asia/Pacific, not among the richest.
And how come Switzerland, Norway and Iceland (not only small, but outside the EU) are the richest countries in Europe?
And why has Europe, since establishing the largest, most integrated Internal Market, been the slowest-growing continent in the world?
What are the factors – missing from Government models – that account for this lack of correlation between size and prosperity? I suggest that they are the consequences of these smaller countries exercising democratic sovereignty.
They have been able to tailor their policies to their own needs.
They avoid the ‘one size fits all’ policies which larger entities often impose on their component parts (e.g. the impact of monetary union on southern Europe).
Their governments are under constant democratic pressure to deliver prosperity.
They cannot escape responsibility for their own destiny. Their politicians cannot blame a higher tier of government, like the EU, for their problems nor look to it for their salvation.
Perhaps the shock to a country of realising it is responsible for its own destiny is particularly salutary.
Singapore did not want to leave the Malaysian Federation. But, once outside, it realised it must boldly address its enormous problems – like the run-down of Britain’s economically important naval base. Then Singapore’s income per head was half that of the UK. Now it is double ours.
Similarly, the Swiss governing class were dismayed when their compatriots voted against the European Economic Area. But once the shock wore off, they realised that they could no longer look to EU membership to solve their problems. So, they reformed their education system, training, universities and a range of other matters. Much of this they could have done in or out of the EEA. But it needed that vote to provoke action.
I suspect that once Britain actually leaves the EU we will realise that we can and must tackle a whole range of problems: housing, skills, regional and sectoral imbalances. Many of these could be addressed, at least partially, within the EU, but we need the sense of renewed responsibility to force us to face up to them. Not being able to blame Brussels for our problems nor look to the EU for solutions will be immensely reinvigorating.
Brexit will restore our democracy and thereby help us revive our prosperity.