Should the Rock industrialise?
Turning Northern Rock into an industrial credit bank would greatly help companies of our region to weather the recession, Paul Benneworth suggests.
THOUGH the essence of economic growth is what the Austrian economist Joseph Schumpeter termed “creative destruction”, the creativity in growth we have seen in recent years seems to be giving way to the scary prospect of rather more “destruction”.
Schumpeter was the first economist to trumpet the virtue of entrepreneurship as a driver of economic growth. At its heart, entrepreneurship concerns taking existing resources and combining them creatively in new ways to create new kinds of product, process and technology that improve living standards.
This is where “destruction” is important – it can free up assets being used inefficiently, to be cheaply acquired by entrepreneurs and turned into growth sources. The problem is that in a depression there may not be funders for otherwise sound businesses.
Clearly, the global slowdown is going to have a significant impact on the North East, because of the continued dominance of the “real” manufacturing economy, with Huntsman, Volker Wessels, Komatsu UK and SCA Packaging leading a strong field in the Top 250.
But the question is: how will the “creative destruction” play out? Will it lead to dereliction or revitalisation? One positive sign comes through exchange rate levels.
Sterling then was historically very strong (25% above its relative 2005 level), so manufacturing companies could neither borrow money nor easily increase export sales. Thus 1981 was a “destruction” recession pure and simple.
Contrast that with the current situation where sterling is 25% below the 2005 level, greatly increasing the competitiveness of UK exporters and the UK’s attractiveness for investors.
But before calling it a “creative” recession, the question remains: will there be demand for UK goods and services at any price, given current trading conditions?
Supply of credit to business also remains central to how the current recession will play out.
Likewise, Northern Rock evolving into an industrial credit bank would also greatly help (regional) companies to weather the current recession.
Unless the credit taps are opened more generally, sound businesses may be squeezed between banks rebuilding their balance sheets on the one hand, and belt-tightening customers on the other. This could see a significant erosion of the knowledge-intensive manufacturing economy that has built up over the last quarter-century, and significantly undermine the North East’s prospects in the future.
Dr Paul Benneworth is an academic fellow of Research Councils UK at the Centre for Knowledge, Innovation Technology and Enterprise (Kite) at Newcastle University.
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