From the Editor’s Desk: Brexit on the ground – an economic slow puncture

DUBLIN — As the UK lurches ever-closer to a no-deal Brexit, the view from the ground in the UK is depressing. Business investment has slowed as companies consider their long-term future. Many are setting up shop offshore in Europe to avoid potential disruptions and maintain their European market share. Many others are simply adopting a wait-and-see policy, holding off on acquisitions, new hires, and investment. And many of the foreigners who live and work in the UK have decided to abandon ship. Many Leavers will be glad to hear that foreigners are leaving – anti-immigrant sentiment was a big part of the Leave campaign. But in the years to come, the UK may miss the skills those foreigners brought to British shores. If the UK achieves an orderly Brexit – a big if at this point – the economy won't collapse. But Brexit will act as a slow puncture, gradually letting air out of the British economy. The UK may survive (assuming Scotland and Northern Ireland don't opt for their own Exits), but it will be diminished in many important ways. For Leavers, the sense of British sovereignty will make it worthwhile. But you can't eat freedom. In this episode, Alec Hogg and I discuss what we've seen of Brexit on the ground. We also reflect on Pravin Gordhan's big Eskom speech and our hope that his technocratic approach spreads. – Felicity Duncan.Hello and welcome to this week's episode of The Editor's Desk. I'm Felicity Duncan. And with me on the line is Alec Hogg. .___STEADY_PAYWALL___.Alec, we didn't chat last weekend because I was up in Northern Ireland – which is part of the United Kingdom – up in the city of Belfast. And I have to tell you it was a very interesting trip. Now, here in Dublin, we have an enormous amount of construction happening, with these cranes as far as the eye can see on the horizon. In fact, I'm told this is the most cranes we have ever had in Dublin even during the Celtic Tiger years. So, a lot of construction happening, a lot of companies opening, a lot of little retail stores opening, and a very vibrant and busy city and a lot of growth. And then, going up to Belfast, I was really struck by how much quieter and how much more subdued the city was. As I was walking down some of the big main streets – you know, the big retail streets – and there would be… every second building on some of them was too let, was vacant or was boarded up. .There were a lot of buildings that seemed to be almost collapsing and they were being held up by scaffolding. And it was just such a contrast. I mean, these cities are, you know, less than two hours apart by car. And yet, economically, they seem to be in such a different place. .And it really made me think about the realities of Brexit and what that's going to mean, you know, for Northern Ireland for the Republic of Ireland. And also, you know, we read a lot about deindustrialization in parts of the UK and you read about the struggles of a lot of people who are living – not in the main metropolitan area, right, Londoners are doing very well – but outside of London, there have been a lot of service cuts, and a lot of poverty, childhood poverty is rearing its head again. And that really struck me, you know, driving through Belfast, how real that is. And it made me think about what Brexit is going to mean for communities that are already in bad shape. .It's a brilliant example, and I feel that we as journalists sometimes get a little bit too caught up in the theory, in the academic approach towards life, and towards what's happening, and don't pay enough attention to the thing we should be paying all our attention to. And that's what's happening on the ground..So, a trip like that, to me, carries so much weight. You see it with your own eyes, you see the contrast between the uncertainty which exists in the United Kingdom and the flourishing in Dublin, where people are hedging their bets. On the one hand, hedging their bets on a hard Brexit. On the other hand, saying, well, here's another English-speaking city in Europe, which will remain part of the European Union, and will be able to serve the role that London had in the past..And it's interesting, from my side Felicity, we are coming to the end of our three-year adventure in the UK, establishing our business here, and setting up hard currency revenue streams up for Biznews – anti-fragiling the business if you like – and on our way home at the end of the month. And talking to vets because, obviously, we're taking our two Jack Russell's home. The vet says she's never been busier. You have to go through quite a lot of protocols. It's an involved system – wasn't that difficult coming here, but taking your animals home, not from the South African perspective, but from the UK perspective, there're a lot of hoops to go through. And she says – the vet – that she's never been busier. She's working until 11 o'clock at night, doing these kind of things that we are busy with. Talking to the removals company – the removals company says they've never had this kind of demand, never moved as many people out of the UK, rather than bringing people into the UK..Now, this is the real world. This is where the takkie hits the tar. This is the result of A. People making their own rational decisions on the way they see their future. We're a special instance. We were going to go back home anyway. But for many other people – by being exposed to our journey, we're seeing this and we're getting an indication of what you saw in Belfast and it kind of brings it home doesn't it..It really does. You know when I was reading last week, or perhaps it was the week before, a brilliant op-ed by Martin Wolf in the Financial Times. Just talking about the realities of what Brexit means, whether it's hard or soft. And I think people, you know, people are tired of the process, a lot of people are sort of sick of the back and forth and the hemming and hawing and there's a lot of talk about Project Fear. .But when you see something like that, when you see the real actual state of a place like Belfast… You know, you think, is a Project Fear or are we just looking ahead to what it's going to mean to be a country moving towards isolation in an ever-more interconnected economy. .And Martin Wolf was saying, you know, look the reality is – people talk a lot about how the United Kingdom is the fifth – I think it's the fifth-largest economy in the world. He really broke it down and he put it he put it into a little graphic. He showed the size of the United States, their economy, the size of the Chinese economy, and the size of the European Union – as a single market, because it's a single market we treat it as a single economy. .And then he showed the size of Great Britain relative to those three. Now, obviously, the UK… I mean it's just nowhere near the size of those three big players. It's really a tri-polar world, if you think in economic terms. So, what does that mean?.Well England is going to be, or rather the United Kingdom once it leaves is going to be much like South Africa – a small open economy. And, as we know from South Africa's experience, being a small, open economy means that you become a rules taker. That you become a country that has to bend over backwards, in a lot in a lot of ways, to accommodate the big players. And you have to align yourself with one of the three big players. It's just the reality of dealing with that kind of world. .So, looking ahead, you know, the UK is going to regain sovereignty in an important sense, but it is also going to have to decide which of those three poles it's going to align itself to. And as a non-member of the European Union, it's not going to be part of the rules-making process in that economic collective anymore. So, it's going to have to say, either we take our Greenwich Mean Time from China, we take it from the US, or we take it from Europe, without participating in the rules-making process anymore. It was a really interesting article, a very worthwhile summary of the realities of what the decision to leave is going to mean. .That is really fascinating insight there from Martin Wolf and from the way that you contextualized it. Also, thank you for doing the newsletters. That was a serious upgrade on the normal this week..This week. I had a couple of South African friends who now have a business in the United States and it's a significant size business. I think they do about $100 million a year in turnover. So, it's not huge, but it's something that they've built from scratch over the last few years – again, showing South African ingenuity. But they were visiting here and we went to a factory that they buy from. And it was very… again where the takkie hits the tar. You get to see the reality. The chaps were obviously showing their products and explaining why their products were better than others and showed us through the factory and the plants etc..And then – of course, I wasn't there as a journalist I was there as a as a driver, I suppose, a hanger on. But, I asked them what about Brexit? And it came out in that conversation that they weren't too concerned about it. This is a company that's been around 100 years. It's got a dominant position in the UK market in its field, as a consequence of that – and we could go into that in a lot of detail, but it's hard to break into a country where you have incumbents who've been around for a long time. But in 100 years, they've made no acquisitions outside of the UK. But in the last year, they've bought an operation in Germany..And you could read between the lines that their thinking is, well, if things go wrong in the UK – which is possible – their factory here, which produces roughly half of its product for the UK market and roughly half for export, would then reduce by half and the export market would be served from Germany. It would be that simple, because if you've got no trade rules, or no longer have duty-free access, or, as you were saying, the muscle that the EU can put onto both China and the United States, which Britain will be in no position to make those kinds of deals. Well, you're going to be supplying from the most efficient location and that is no longer going to be within the UK..This switched on quite a few lights for me, because they must be many businesses in a similar situation. If you are totally exposed to a market, which which at the moment Brexit is going to make you totally exposed to the United Kingdom, then you have to make your plans for what is going to happen once Brexit occurs..And it still appears as though that's likely to happen, even if it's a soft Brexit, it's going to mean a lot of changing of the rules. And business have been complaining and whining but primarily, they've been making plans..We've seen this in the financial services sector, which is a huge chunk of the British economy, and most of those companies – the banks, many of them foreign that are based in London at the moment – are moving, as you see from your cranes, to Ireland or elsewhere within the European Union. Because, when Brexit does occur, they will no longer be able to justify the set up that they have just for the UK market, and they will need to be able to get into the international markets..So, you're seeing what I saw up close, an example of how a business is acting rationally in the way that it understands the future is looking, and as a consequence of this, you can you can almost draw a little bit of a line. We don't know, it's a highly complex world, and who knows, the Brits may pull off an absolute miracle and Brexit may be a wonderful thing for the country, as Nigel Farage reckons it will be..But generally speaking, rationality is suggesting if you're not part of the of the big blocks, on a trade basis, you are going to be struggling. So, if that happens make sure that you aren't exposed to it. So, you protecting yourselves as British companies are now doing. Interesting real-life examples in both instances..You know I've seen, even here, I know a couple of people who work at places like, for example, PWC – you know, those types of financial services-adjacent companies that do a lot of back office services – and all of them have said that they've had a lot of people moved into their offices, or they've been hiring new people to take on some of the functions that they would have been doing, historically, in London. .And we've also read, of course, that about a trillion pounds has moved out of the UK. So, only a couple of thousand jobs so far, it's not looking too bad. But I think that's an important thing: A trillion pounds worth of assets have been moved out and seeded into offices in Europe – primarily Frankfurt, Dublin, and Paris – and a lot of new staff has been hired there. .So, it's going to be a slow puncture, you know, for the City of London. They're not necessarily going to collapse. That's not what we're talking about here. What we're saying is the growth is going to be in these other offices, new hires are going to be happening outside of London. London will keep doing what it's doing. But, the big financial services companies are going to say, well, what's our best bet? .Is it to set up in the UK, where there's going to be – whatever happens, even a great, smooth, soft Brexit – is going to mean uncertainty, because the UK is going to be negotiating trade deals for the next however many years. So, do we move there, where there's going to be uncertainty, or do we move somewhere where we know what the regulatory framework is going to be like? .And so, you know, exactly what you're saying that you saw with your friend and like I'm seeing here with these offices growing. Nothing dramatic, but when companies are looking ahead five and ten years, their growth plans are shifting, their investment plans are shifting, from the domestic market out into some of these European cities where they know what they're going to be getting..Ja, I love that – a slow puncture. And when you when you go around London, you still see cranes, but remember that construction is the result of decisions that were taken some time ago..But talking about a slow puncture and a blow out – how are we doing with Eskom? While I was travelling around the country, showing my friends the sights and visiting a factory or two, you did take in Pravin Gordhan, the new public enterprises minister's presentation on Eskom and I'd be fascinated to hear what you thought..It was really interesting – and it was quite a long presentation, and also, in true Pravin Gordhan style, it was extremely complex in parts, you had to know a lot about how electricity works – but watching that, it was just such a reassuring change of enormous magnitude compared to what we've been seeing previously in discussions about Eskom. .First of all, Gordhan said, you know, I'm going to report back to you in a week or two weeks. I'm going to come back to you with a plan and tell you what's happened. And he did it. Within that time allotted, he put together this presentation and he reported back. He reported the detailed steps of the plan. He also explained exactly what went wrong when we were experiencing the level four, level five loadshedding. .And he made some promises that didn't seem to be outside of the realm of possibility. He said, look, if we implement this plan as it is laid out, we are going to have no load shedding over the winter or, at worst, stage 1 load shedding, if something blows up or what have you. .So, he gave South Africans a real promise that he can be held accountable too. And he also had representatives from Eskom, including a gentleman whose name I've forgotten, but an operational guy, an engineer who seemed like a very smart technocrat who was there to say, look this is the reality. This is what we're doing. These are the plants. .So, we desperately need this more technocratic and less political and emotional approach to managing things right. Because, you know, Eskom is a political crisis. Yes, I think it is, and I think that that's fair to say. But the solution to Eskom is, in large, part a technical solution. We need to just make this company work properly and it's so reassuring to see some informed, serious-minded technocrats taking on the challenge and saying, look we're going to fix this. It's busted, but we can fix it. Here's how we're going to fix it. And now we've told you, so you can hold us accountable to that. It's a real refreshing change of pace from my perspective..And classic Gordhan isn't it. It's exactly what he did at the South African Revenue Services, when he was there. He went in as a as an ex-politician or as a politician. He was seconded to SARS. He went into SARS, spent a year as the deputy or as the designated commissioner, took over as the commissioner and after he took over, they started hiring the right people, listening to the right people..And that's probably his genius is that the humility of Gordhan allows him to listen to people who are smarter than him, surround himself with those who know a lot more about the subject that he's dealing with at that point in time. And then he can support them and back them and lead them, because if he understands what they're telling him he can then pass it on to the rest of us. I love that and thanks for sharing that with us, Felicity.I do get quite concerned at the again getting back to those people who make decisions in air-conditioned offices about things they know little about the risk that that to which they're not personally exposed. That seems to have been what's happened very much in Eskom in the past, and it got worse because there was corruption and it kind of went right off the scale. But when you bring it back to reality, there's Gordhan, sitting with the guys who physically have to go and understand how these plants work and understand what happened when Hitachi was fired and Mitsubishi were brought in to look after the boilers, for instance. Hitachi built the boilers one way, Mitsubishi didn't know what the boilers looked like inside there. So, when something breaks how the heck do you fix it kind of thing?.So, there's always an interventionist approach this let's change things sometimes not for the reasons that are fully understood and appreciated. Yet here we've got a guy who does have political clout, does have the ear of the president, and is prepared, because of his personal humility, to listen to those who really know what's going on and not to be swayed by the noise that one sees in the media and by the pundits. So, it's great progress.

From the Editor’s Desk: Brexit on the ground – an economic slow puncture

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