The difficulties over Mittal Steel suggest that governments
should adopt an arms length approach to business

Tony Blair has christened the controversy over his support for the Mittal bid to take over a Romanian steelworks Garbagegate. But anyone who thinks that the affair has been forgotten in the fuss over the rival spin doctors at the Department of Transport knows little of the ways of Whitehall. Every nerve is being strained to avoid similar episodes of either kind. These efforts are taking up the time of senior officials who ought to have better things to do; and it is making normal contacts between government and the outside world more difficult. Cynics may laugh, but the view of top officials is and always has been that the conduct of government - like Caesar’s wife - should be beyond suspicion.

Of the two, Garbagegate raises the wider issues. All sides in the argument appear to agree that the main questions at issue are whether Mittal Steel is a truly British company - which clearly it is not - and whether Mr Mittal’s donation to Labour affected the government's attitude. All sides are wrong. The true issue is whether it is the government’s job to promote national businesses; or whether it should adopt a more arms length approach. There are always going to be alleged scandals and conflicts of interest so long as the business promotion view prevails.

Tony Blair has been described by one of his own Ministers, Robin Cook, as a broad river that runs shallow. Whether or not he is shallow, he is deeply conventional. Because previous prime ministers and heads of other governments have wasted their time promoting national corporate champions, he thinks he has to do the same. And in the course of this pursuit, Labour’s original and excellent aim of a foreign policy with an ethical element has been, not so quietly, cast aside.

Behind all the salesmanship on behalf of British business is the mercantilist fallacy that jobs in Britain depend on the government actively promoting specific commercial projects and products. Usually government support for business takes the form of trying to encourage overseas purchases of British products. The Mittal affair differs in that the government was supporting an attempt, not to sell, but to buy, an overseas steelworks. Being as charitable as one can, the line of thinking must be that anything which strengthens a supposedly British company increases its ability to provide jobs inside the UK in future.

Adam Smith might have lived in vain. For one of the key ideas of economics is that of the circular flow of income. There is a circular continuing flow between purchasers who desire to buy products, the income received from supplying their needs and still further purchases. Unfortunately public discussion is dominated by the opposite idea, the myth of irreplaceable sectors. It is assumed that if Britain loses, say an arms order, then the displaced workers will simply waste away in idleness. It is not asked whether there will be other purchasers at home or abroad to make up the difference.

The argument that jobs derived from exporting weapons cannot be replaced is akin to that for keeping open uneconomic coalmines for the sake of employment. Such arguments assume that there is a lump of labour engaged in making specific products. Then, it is supposed, if orders or output are lost in one area, then they cannot be regained anywhere else. Yet people change jobs constantly. Three million leave the UK unemployment register every year, more than half of them for new jobs or training.

The only remotely plausible argument for government support for British business overseas is that there are some benighted countries that will only take western exports if they are seen to have official support. This is not a way of doing business that should be encouraged; and it is doubtful how far these sales are really worth having.

The vast majority of British exports are sold without official credits, prime ministerial arm-twisting or royal visits. A glimpse at the amount of officially generated overseas sales might be obtained from the fact that arms exports are estimated at £6bn per annum. The ECGD underwrites some £3bn of business per annum. The two categories overlap; and not all arms sales are officially financed. A guess on the high side suggests that officially sponsored exports might amount to £10bn per annum or 1 per cent of UK gross domestic product.

What would happen if this support were withdrawn? Assuming no change in capital inflows into the UK, other exports would have to increase by that amount, involving perhaps some job changes. On the worst assumption a small depreciation of sterling would be required to unload these substitute products onto international markets. At present such a depreciation would be more than welcome in Whitehall; but even if sterling were at an equilibrium to start with, all that would be involved would be a modest terms of trade loss, also approximating to one per cent of GDP.

This is not peanuts; but it is a long way removed from political fears that without official export promotion, the economy would collapse and hundred of thousands of jobs would be lost for ever. Indeed it would be a small price to pay for cleansing the Augean stables. Another moral of this analysis is that we should ponder a long time before giving up the blessing of a floating exchange rate.

If you do not like Adam Smith, examine what a supposedly more interventionist economist, namely John Maynard Keynes, taught. It was that the government has a role in maintaining the total flow of spending sufficient to maintain growth and employment. He did not say that it was the government’s duty to maintain people in the same specific employment for ever and ever. On the contrary he thought that if the management of overall demand - now more or less entrusted to the Bank of England’s Monetary Policy Committee - was carried out successfully, the Adam Smith principles about the benefits of free trade and non-intervention would come back into their own.

In fact the issue of government support for one particularly controversial British business sector, the arms trade, was recently investigated in some detail by a group, including the chief economist of the ministry of defence, which reported last year. Beforehand the ministry was touting that report, which it expected would vindicate its support for British arms sales.

Yet, despite a methodology which probably understated the subsidy provided by the Export Credit Guarantee Department,the group concluded that the economic effects of halving UK arms sales would be negligible. The costs of reducing arms exports, it stated, would be relatively small and largely one-off. A halving of defence exports from recent levels would, it estimated, result in the loss of nearly 49,000 jobs in the defence sector and their replacement over 5 years by around 67,000 new jobs, at somewhat lower wages, in civilian employment. It therefore suggested the balance of argument about defence exports should depend mainly on non-economic considerations.

When it saw how the report was shaping, the MoD ran a mile away from it. In the end it was published as a research paper by the University of York. (The Economic Costs and Benefits of UK Defence Exports, November 2001). The government left its response to the Defence Export Sales Organisation - the part of the Mod which exists to sell arms - which cherry-picked among the findings to find reasons for continuing arms promotion as usual.

It is interesting that much of the pressure to support and subsidise British industry overseas comes from the Foreign Office and the Department of Trade and Industry - and does so from similar departments in other western countries. Yet it is the Treasury which has to take a view on the overall health of the economy, which includes growth and employment: and the Treasury is against most of these projects. Indeed some of its members would happily close down ECGD altogether. Unfortunately it is all too often overruled in favour of departments which push specific interests.

Much worse than anything to do with Garbagegate has been the recent push to sell Hawk aircraft to India - following the doubling of arms sales to Africa over two years. One might suppose that a Labour government, supposedly dedicated to making the world a more peaceful place, would pause before trying to force on India the purchase of yet more military aircraft. The country is embroiled in a dispute with its neighbour Pakistan over Kashmir, which could become an international conflagration at any time. India, large though it may be, is still a poor developing nation; and it would be worth asking the UK Department for International Development whether it regards the purchase of military hardware as a priority.

But even if it could not have brought itself to stop the sale of these aircraft - which have previously been supplied to Indonesia when it was engaged in suppressing East Timor and to Zimbabwe - the Government could at least have left BAE Systems severely on its own. If we cannot have an ethical foreign policy let us have a neutral rather than a pernicious one.