THE BLOG

If a Cycle of Debt and Low Demand is Prohibiting Economic Expansion Look to the Foreign Market for Growth

21/01/2015 10:00 GMT | Updated 21/03/2015 09:59 GMT

As a macroeconomist I often get asked to assess problems which prevent economic growth and social improvement. Below I have put forward a short diagnosis with some in built definitions of economic terms to describe the limitations the British economy is currently experiencing. I then suggest remedies to combat these difficulties.

Demand for goods and services that originate from British buyers, 'domestic demand', is low due to high levels of public and private sector debt. The debt has to be repaid reducing the spending levels and material enrichment of consumers, who the goods and services of the economy are produced for. This prevents economic growth.

Less public and private sector spending, or 'consumer consumption', leads to less need for manufacturing and service providing reducing levels of productivity, which is a decline in economic output. A lower demand for goods and services reduces the need for labourers and service providers resulting in an increase in unemployment.

Higher unemployment leads to a greater need for benefits/welfare increasing the size of public sector debt. Also private sector debt may increase as household income declines, requiring further debt to compensate for lost earnings, brought about by higher levels of unemployment caused by the existing lack of domestic demand.

This cycle of debt and low domestic consumption has lead to a continued reduction in public spending and a fall in government provided services. These cuts also decrease domestic demand leading to further economic woe, including higher unemployment as less labour and services are needed to meet the demands the society can afford.

The cuts are necessary to pay down the existing debt and the interest owed, which is also accumulating making an interest fuelled debt cycle. Domestic demand is very limited and in cyclical decline. There is another option which may turn the nation's economy around, the 'Foreign Market', demand which originates from buyers outside of the British market.

By attracting demand for goods and services manufactured in the UK to sell abroad money can be brought in from outside the domestic market. Domestic demand is not needed to enable an expansion in the economy and provide employment, foreign demand enables it. Domestic public and private sector debt is now not required to allow economic expansion.

Methods of economic expansion into the Foreign Market - Through Manufacturing.

The UK needs to sell products to the foreign market. One method of doing this is to research the product desired/demanded by foreign customers, then manufacture it to sell the product to the targeted market abroad. This method of economic expansion is called, 'New Product Development', it is used successfully by the Japanese in the global electronics market.

Another method is to look at the products already manufactured in foreign markets, which are highly desired and in great demand, then design them better. This is the method used by German car manufacturers to dominate the luxury car market and is called, 'Quality Engineering'.

The Chinese method is to manufacture products which are in high demand at a lower price, although often lower quality, for the needs of the less affluent lower end market. China has dominated the global mass manufacturing market for many years using this technique, enabling them to become a leading international economic power.

Methods of economic expansion into the Foreign Market - Through Innovation.

You don't even have to make the goods yourself. If you come up with a good idea you can patent it and sell the rights to construct the product to existing manufacturers. It is not necessary to have a factory and labour force of your own, when you can use someone else's. New designs, re-engineering and innovation are the products being sold.

This reduces the cost of starting up high expense businesses and takes away the element of risk from the pioneer, if the idea fails only the cost of the patent is lost. Manufacturers would be grateful for design improvements, especially if the product becomes cheaper to produce or better quality, extending their competitive advantage in the increasingly difficult marketplace.

Embassies can help enormously with international trade, they even have offices of solicitation to help draw up legal contracts with their nations businesses and industrial tycoons. It is in their interest to encourage global trade as it helps to prevent international disagreements promoting friendly relationships and allegiances.

Through innovation, patenting and approaching international manufacturers it is possible to enter the foreign market, to expand the British economy, at very low cost and minimal risk for the pioneer/entrepreneur. It will also help with foreign relations through business and co-operation, which can be helpful for other economies too.