Sunday, 27 September 2020

The real economy will prevail

A few years ago, Moni visited Berlin for a weekend and concluded that "everyone in Berlin's a DJ." The party moved from one club, where a friend was playing a set, onto another venue, and then another until daybreak and beyond. The pandemic's varying effects on economies around the world has reminded me of that insight.

Substitute 'DJ' with 'service-sector worker'. Like management consultant, PR advisor, travel agent, translator, events organiser. Jingle-writers working on radio ads. 

Now, for this thought exercise, let's imagine for a moment an island economy in which everyone works in the service sector. 

A lawyer needs an accountant, who needs IT support from a firm that requires a social-media expert, who needs a mentor, who in turn needs an accountant, who from time to time needs the services of a lawyer. And sales! And marketing! And new business development!

And so a merry-go-round of invoices is issued, for work done in supporting each other's businesses. Everyone needs technology. Desktops, laptops, mobiles - which need broadband, routers, apps, operating systems and synchronisation. The new oil, as we constantly hear nowadays, is data. IT guys keep everyone's devices connected to everyone else's devices. And everyone needs an office to sit in, and furniture to sit on. And they need to get to that office. And there's the state, which needs money to pay for roads so people can get to their offices and schools to provide the next generation of office workers and hospitals to care for the sick accountants and SEO managers and travel agents, so everyone pays tax - and the accountant accounts for the VAT on the lawyer's bills to the PR advisor for drafting a contract for services rendered to the social-media start-up. Banks lend money here and take deposits there, ensuring financial liquidity for one and all. 

I'm minded of Julian Tuwim's Wszyscy dla wszystkich from 1947, (along with a rough translation by me):

Notice the tangibility and local nature of the economy that Tuwim describes. Shoes, houses, clothes, loaves of bread, essentials of life, made and delivered within your village. No lawyers or accountants or PR agents or network architecture designers in Tuwim's village.

[There's a part of 'services' that's firmly rooted in the tangible economy - maintenance and repair. As I write, there's a roofer on our roof in Jeziorki, fixing a number of minor issues (for the first time in 19 years), before the photovoltaic panels are installed. Repairing things - buildings - cars - clothes - laptops - tools - anything that needs repairing or replacing - is, in my books, part of the tangible economy. As is maintenance - preventing the need for repair.

And then there's retail. The intermediary between manufacturer and consumer. Whether it's the shopkeeper in Chynów selling bicycle inner tubes, scythe blades and broom handles and wire by the metre, the multinational hypermarket in Piaseczno or the courier that delivers goods bought online, retail is an essential part of the economy that we cannot do without.

Then cometh the lockdown...

It swiftly separated the essential from non-essential sectors of the economy.

The tangible economy must continue to function. And in Poland that's what it did. Lidl on the corner stayed open (though only 16 shoppers at any one time, hour-long queue to enter). Construction work on the S7 extension continued (one guy per bulldozer). Factories did what was needed to keep producing, with appropriate distance between workstation. Farmers ploughed, sowed, fertilised, irrigated and harvested their crops. Workshops kept fixing cars, buses and vans. And motorbikes.

Google's Mobility index gave us some fascinating insights into the different responses of economies to the Covid-19 lockdown. The latest one, from 11 September, shows that 20% fewer Poles were in their workplace compared to the baseline established before the pandemic. The figure for the UK was 39%.
And at the height of lockdown, on 17 April, Google reported that 42% fewer Poles were at work whilst 68% of Britons were staying away from their workplace. This is clear looking at GDP in the second quarter; the UK contracted by 20.4%, while Poland's shrank by 'only' 8.2%.

My great fear for the British economy is that it has strayed too far from the tangible, deep into the realms of sophistication. Manufacturing, agriculture and construction represent but 18.0% of the value added to the UK's GDP. In the case of Poland, it's 31.0% (World Bank, 2019). Which means that 82% of the UK's GDP comes from services - and 69% of Poland's. Services that can be postponed or done without altogether are far more vulnerable to the disruption caused by pandemic than 

Listening to business managers and entrepreneurs from around Poland, I can see that some sectors are indeed doing better than others. New inward investment is being driven by corporate refugees fleeing China (for supply-chain reasons), India (near-shoring for better quality of outsourced services) and Brexit Britain (for obvious reasons). 

Some services are more tangible than others. Hairdressing (I'd almost put it into the 'repair and maintenance' category. You can't export hairdressing. But if you can do accountancy from home, you can do accountancy from a cheaper country. The real economy peril that the UK is in right now is that services have become far more portable thanks to IT and globalisation; if services shrink in the same way that manufacturing shrunk, and agriculture before that - what will be left to keep the UK economy going forward? Not something most Brexit voters considered, I'll be bound.

This time two years ago:
Polish railway stations with names in two languages

This time three years ago:
Two weeks - six cities

This time four years ago:
A guide to naming streets in Poland and the UK

This time nine years ago:
A glorious month

This time ten years ago:
My maternal grandfather

This time 11 years ago:
My home-made fixie bike

This time 12 years ago:
Well-shot pheasants


Richard - Woodworks said...

Good God! an hour wait to get in to Lidl! Culture shock! It must have felt like the ‘good’ old pre freedom days. Here in the eminently unsustainable West Oxfordshire, it was an hour wait to get in to Sainsbury’s, but just round the corner at Lidl, no queue, just a free for all mask or none. I guess the management of Lidl thought, “let them in, they’ll die anyway”.
I agree with your view on how the entire balloon of an economy keeps going. To my mind it’s all completely absurd. My experience of the world is that the more a nation’s economy is based on real essential things like fish, mangos and rice, the poorer it is, and say one based on computer games, insurance and cafes the richer it is. The other surprise is how resilient these systems seem to be. I would have said that in the 80s and 90s London was totally unsustainable and would collapse under it’s own weight of inconvenience and environmental ruin not to mention the pointless nature of endless trips to Ikea in Wembley week after week. But somehow it keeps going presumably with a mixture dire need and inexhaustible amounts of optimism.
I remember thinking this in 2016 on returning to Britain from Malawi after the surprising Brexit vote; it will take a very, very very long time for London to become as poor as Lilongwe, even if we borrow ten times our GDP for the next 50 years and utterly squander everything on this or that perceived threat. Having said that, when we arrive at that point the average Cockney will be just as happy and forward looking as your average resident of Lilongwe, so no need to worry!

Michael Dembinski said...


"My experience of the world is that the more a nation’s economy is based on real essential things like fish, mangos and rice, the poorer it is, and say one based on computer games, insurance and cafes the richer it is."

83% of Malawi's population is still rural; agriculture represents 25% of the nation's GDP. The economy is as you noted, the mirror opposite of the UK's - both need rebalancing. Malawi towards services and sophistication - the UK towards making, growing and building things rather than trading in derivative futures and serving skinny lattes with soya milk.

I feel Poland has it about right.