The MoneyWeek Podcast with John Mills: why a weak pound is good for the UK

In a special bonus mini-podcast, Merryn talks to John Mills, founder of consumer goods distributor JML, chair of Vote Leave and one of the Labour Party's biggest donors. His latest book – “Why the West is Failing” – argues that a weak pound is needed to help revive UK manufacturing.

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Hello, and welcome to the MoneyWeek podcast. In this bonus mini-podcast, Merryn is joined by John Mills. John is the founder of consumer goods distributor, JML. He was the chair of Vote Leave and is one of the Labour Party’s biggest donors.

He has also written several books on economics. His latest, called Why the West is Failing, argues that the weaker pound is desirable and indeed necessary if we want to increase manufacturing in the UK, raise productivity and drive growth.

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Thanks for listening. And now, over to Merryn.

Merryn: And so, John – these are ideas that you’ve been developing for a long time. Tell us about the core idea in the book.

John: The core idea in the book is that a lot of economic history is written in competitiveness and that the UK economy has been quite competitive on services but has been very uncompetitive on manufacturing for a long period of time. And the reason for this is that the British economy is run essentially for services, not for manufacturing.

The problem is that most productivity increases come from manufacturing and not from services. So if you have a very heavily service-orientated economy, you get a very low rate of economic growth. And this is the problem that we’re now facing in the UK.

Now, the reason why we’ve got into this problem is that the exchange rate has been too high to enable a lot of investment in the UK to be profitable compared to what it would be if it was located somewhere else. And what we need to do, I think, is to get the exchange rate down to a point where manufacturing is profitable in the UK rather than China or in Malaysia. And that would mean that…

Merryn: OK, let me interrupt you right there just to ask a question that I know the non-financial listeners will be asking right away, which is before we even get on to why it’s a good idea to force the exchange rate down, how do you do that? How do you force down an exchange rate and keep it down? What’s the mechanism there?

John: Getting the exchange rate down actually isn’t all that difficult if you’re determined to do it. And there have been all sorts of examples of this being done, the most conspicuous being China, who devalued by an amazing 75% in real terms between about 1980 and the mid-1990s. And we don’t need to do that sort of thing. We don’t need to go down that far. But we do need to get the exchange rate down to a point where we’re competitive.

Merryn: But again, how?

John: How do you do that? There’s a number of different ways you can do it. First of all, the reason why the exchange rate is this high is that it is partly because we sell off UK assets wholesale year after year after year, and all this importation of capital pushes the exchange rate up. You can put all sorts of tax restraints in place to stop that happening.

Secondly, you can run a wealth fund to buy foreign assets to bring the exchange rate down. This was done on a huge scale by China, very successfully. You can get the Bank of England’s mandate changed from trying to get the inflation to 2% down to getting the growth rate up to, say, 3% per annum, with a target which makes it quite clear where future profitability is going to lie. So there are lots of things you can do to get the exchange rate down if that’s what you want.

In fact, in the UK, for a long period of time, we’ve been trying to keep the exchange rate as high as possible, supposedly to bear down on inflation. And this has been a huge problem to the UK economy, and I think a great mistake that’s been made over a long period of time.

Merryn: OK. So let’s say that we do this, that we manage to get the exchange rate down and then it becomes… The idea is it then becomes significantly cheaper for people to set up manufacturing plants in the UK, and hence employ skilled people, and that will generally improve productivity across the economy.

John: Yes, that’s certainly exactly what the idea is. And that rebalances the economy as well. Because one of the problems about the UK is that the southeast, and London in particular, are doing really very well, but large areas of the country really have got very little to sell to the rest of the world now because they used to be dependent on manufacturing, which is no longer there.

So one of the prime objectives we need to undertake is to get new manufacturing capacity installed in the regions of the country which lack enough to sell to the rest of the world at the moment, and rebalance the economy in that way.

Merryn: But it doesn’t matter what you do to the exchange rate, how can it ever possibly be as cheap to set up a new manufacturing plant in the UK as, say, in Vietnam?

One of the things that’s happening at the moment, obviously, is we’re having many conversations globally about supply chains and about how we have allowed overspecialisation across the globe.

We’ve allowed, for example, chip manufacturers to be too focused in Taiwan and various other things to be too focused in China. So much conversation now about friendshoring, reshoring, spreading manufacturing capacity around the world rather than focusing it.

But once you start looking at that, the UK might look like a reasonable place to do it for some things if you want to go for security of the supply chain, but given wage levels, etc, how can it ever make sense to set up most kinds of manufacturing here rather than in some of the African economies or particularly at the moment in, say, Vietnam?

John: Well, it’s not just wages that are relevant here. It’s all the costs that are incurred in sterling, which is around about… well, typically, for manufacturing, about 70%. That includes wages and salaries, all overhead costs, interest, taxation and all the rest of it. And that’s what needs to come down to a competitive level.

Now, do we need to come down to the same competitive level as Vietnam or China? Not necessarily, and I think there’s a lot to be said for relatively undeveloped countries growing their economies more rapidly than developed ones like ours to even up opportunities across the world.

But what I do think we want to avoid doing is being in the situation the UK has been in for a long period of time, losing share of world trade, deindustrialising. Because it’s so uncompetitive to install manufacturing capacity in the UK that it just doesn’t happen. What we need is to be somewhere between where we are now and Vietnam, not necessarily all the way, but not remaining where we are at the moment, with our share of world trade still poor and our ratio of GDP to manufacturing still drifting down.

Merryn: And how does that impact on inflation? This is the obvious and immediate question, particularly at the moment. If energy prices stay this high, inflation may or may not be a global problem. We’ll find out. But if then everything we import becomes significantly more expensive, and in particular, we’re talking about energy here, how can it be that that will not lead us down, at least in the short term, probably in the medium term, maybe in the long term, a very inflationary route?

John: Well, if you look at the history of devaluations, what you find is that sometimes they push inflation up, sometimes they push inflation down, and sometimes things stay more or less the same as they were. It’s not true that devaluations always produce inflation. Certainly what does happen is import prices go up, but lots of other things go down. You get longer production grants. You get lower interest rates, lower levels of taxation and so on. So the fear that devaluations always produce inflation is misplaced.

It’s not a cure-all, however. If you’ve got very high levels of inflation, as we have now, you’re not going to get it down necessarily by reducing the exchange rate. But what you will produce in the longer term is a more stable economy which is capable of absorbing inflationary shocks better than we are.

And one of our problems in the UK is that we’ve got higher inflation rates than almost everywhere else because our economy is more unbalanced than other people’s is. We’ve got such a low rate of manufacturing compared to GDP, less than 10%, compared to Germany, around about 20%, Switzerland, Singapore, other countries like that. And this puts us, in the longer term, in a weaker position to fight inflation.

Merryn: What about the general…? We talk about Germany having this very high level of manufacturing, but that’s been because they have been very able to import cheap gas, long term, from Russia, and that is why their energy costs have been very low. And we know, we know, of course, that a lot of economic growth is based on very cheap energy prices. So it may be that the German miracle is moving towards being the German disaster.

And then, when we look at China and its long-term management of its exchange rate, one could say, and I think I would say and others would, that China’s management of its exchange rate to unrealistically low levels is one of the main reasons why the global macroeconomy is in such enormous trouble at the moment.

Because it introduced this artificial disinflation that allowed the central banks to believe that they were controlling inflation when they were not, and has generally corrupted the entire global economy. There are side effects to managing exchange rates that don’t necessarily fit with the very attractive case that you make.

John: Well, I think the answer is that no policy has got no side effects and no downsides. What I am saying is that the Chinese have been extremely successful in growing their economy remarkably fast for a long period of time. Their rate of inflation at the moment is now way below ours. I think it’s running at about 3% or 4%. But the reason for this is their economy is much more stable in terms of growth to absorb shocks than ours is.

Merryn: I’m not sure everybody would agree with that.

John: And what I think we need to do is to rebalance the world economy so that the whole of the West has a rather more competitive environment to operate in compared to the East.

Merryn: You mentioned earlier that simply by reducing the exchange rate in this way, we’d end up with lower tax rates. Do you mean that simply a function of higher productivity and a faster-growing economy would mean that tax rates across the board could be lower?

John: Yes, I do, and I think we’ve got some very heavy costs coming down the track on climate change, on increased health and social care costs, more training, more military expenditure, all of which is going to depress living standards if we’re not very careful.

What you need is a reasonable rate of growth to absorb these costs so that you can take them on board at the same time as increasing living standards. And that’s a much more attractive prospect than what we’ve got at the moment, which looks to be declining living standards over the next few years and great difficulties in dealing with all these costs that they’re going to have to face up to.

Merryn: No policy is a panacea in itself. What other policies would you think should be brought in at the same time as this devaluation?

John: Well, there’s a big supply-side agenda which needs to complement what you do on the demand side with the exchange rate. You need better education and training. You need longer-term capital. You need better infrastructure. The problem is that all these sorts of expenses don’t increase the growth rate very much, but they are necessary to balance the increase in GDP and to get social benefits as well as economic benefits. So you need a big supply-side agenda in place as well.

But a supply side agenda on its own doesn’t deliver the goods. If you don’t have a reasonable amount of demand from abroad, you don’t have a reasonably stable balance of payments, you finish up in the situation we’re in. In the first quarter of 2022, the balance of payments showed a deficit of about 10% of GDP. So at the moment, we’ve got a living standard that’s almost 10% above what we’re actually earning. This is just not sustainable, and we need to rebalance our economy to stop this happening.

Merryn: And if that doesn’t happen, let’s say, it’s a fairly out-there policy to introduce full management of the exchange rate and I can’t see Keir Starmer going for it, for example, I’m not sure I can see Liz Truss going for it either, in the absence of that policy, are there any things that could work without it? Or without that, does nothing else work?

John: Well, I very much doubt it. The analysis that I’ve done suggests that the supply-side policies on their own, that’s education and training, infrastructure, patient capital, all of that, at best adds to about 0.5% or 1% of GDP per annum. All the rest of it, all the rest of the increase in GDP in China and everywhere else comes from fiscal investment. And unless that fiscal investment is profitable, it won’t happen.

And the problem we’ve got is that if we stay as we are, it will go on being unprofitable. Manufacturing as a percentage of GDP will go on drifting down. We’ll have very, very low rates of economic growth, if any. Living standards will stagnate or fall. And I think all of this is avoidable. But it will only happen if you deal with the demand side of the equation as well as the supply side. And that’s what we’re not doing at the moment.

Merryn: When you talk about light manufacturing, John, what are you thinking of? What sort of businesses would you see setting up all over the UK? And how would they be owned? Are we talking about UK businesses setting up here, or are you thinking of particular foreign countries that may want to set up business here? What is the actual vision of the types of businesses and the ownership structure of those businesses?

John: Well, the types of businesses, if you would go into any of the big stores and look around all the shelves that are there, why can’t we make Christmas lights? Why can’t we make pressure washers? Why can’t we make kettles? These are all the sorts of goods which are now made in the Far East which could perfectly well be made in the UK if the environment was profitable enough to make this happen.

And who owns the businesses I don’t think is that important. I think if you can get in with investment in factories and machinery, that’s a plus. What’s much more important is where is the manufacturing carried out? Where are the productivity increases secured? Where are the things happening that are going to push up wage levels and skill levels?

And I think the answer is in manufacturing, particularly in a wide range of light industry, which actually we need to do for other reasons as well, reshoring and so forth. But we need to rebalance our competitiveness to make sure this happens.

Merryn: And how do you think a policy like this would be looked at globally? Look around the world, and there’s been a lot of criticism of China’s exchange rate management. We like to live in a global world and be very friendly with our neighbours, etc. How would it be perceived if the UK were to say, do you know what? We would like some of your growth, and we’re going to effectively take that growth by artificially manipulating our exchange rate?

John: Well, I think what you really need to do is to spread out reasonably evenly throughout the world the sorts of economic activity which push up productivity, which is largely manufacturing. I think that the big mistake the West has made is to allow manufacturing to all shift to the East to the extent it has.

And in the UK, for example, we have now manufacturing as a percentage of GDP running at less than 10%. I think it’s very difficult to see how you can rebalance the economy, paying our way in the world again until you get it back to somewhere around about 15%.

It doesn’t necessarily have to be as high as it is in Germany or Singapore or China where it’s nearly 30%, because we’re very good at services and we’ve got good income coming in from that, but it’s got to be more than 10% from manufacturing. And 15% seems to me to be about the figure we ought to be aiming for.

Merryn: OK. Well, fingers crossed someone is listening to you in the Labour Party or, indeed, in the Tory Party. Are they, do you think?

John: Well, I think that there are great difficulties. People like their strong pound. The problem is the strong pound means weak growth and a long-term stagnation in living standards. What I’m trying to do is to shift the debate a bit towards making sure that manufacturing gets a bigger amount of support, that we give more opportunities for getting manufacturing back to the UK to rebalance the economy.

I know it’s difficult to get this across to the public, that a lower exchange rate is beneficial economically, but I’m sure it is. And if we don’t do that and we’re facing a future of stagnation and living standards falling as costs go up, then I think that’s a pretty bleak future. And I think we need to avoid that if we possibly can.

Merryn: Brilliant. John, thank you. Thank you very much.