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Britain's Boom


International Business: BRITAIN

BRITAIN'S BOOM

On the eve of national elections, Britain is on a roll. Will it last?

In the London village of Belsize Park stands the shell of a former church known as Lyndhurst Hall. Built in 1884 at the height of the British Empire, it once housed a missionary school linked to legendary explorer Dr. David Livingstone. But as its congregation shrank, the structure fell into disrepair and was abandoned. Then, a group led by Beatles producer George Martin and backed by Japan's Pioneer Electronic Corp. spent $25 million to transform the relic into Air Studios, a world-class temple of sound at the center of Britain's $4 billion music industry.

The old church is a fitting symbol of Britain's resurgence from economic decline. After almost two decades of restructuring, Britain is back. Its 3%-plus annual gross domestic product growth and 2.5% inflation are the envy of neighbors across the Channel. Its financial sector accounts for 19% of GDP, and the service economy is a job machine, pushing unemployment to 6.2%, half that of France and a third less than Germany's. "If you compare [Britain] against Europe, it is doing well in all measures: growth, competitiveness, and unemployment," says Bruce Kasman of J.P. Morgan & Co. in London.

Such is the economic legacy of 18 years of Conservative Party rule. If his roughly 20-point lead in the polls is to be believed, Labor Party leader Tony Blair will inherit Britain's boom as his party sweeps to victory in general elections on May 1. Oddly, the Tories under John Major have been unable to capitalize on the economic recovery. Blair is ahead because there is a widespread sense that, after their long tenure, the ruling Conservatives have grown tired, increasingly ideological, and somewhat sleazy. Hardly a week passes without a Tory member of Parliament being accused of sexual or financial peccadilloes. "The Tories lack direction and purpose," said Rupert Murdoch's Sun newspaper, endorsing Blair on Mar. 18. "The country is sick and tired of them."

CENTRIST. The big question is whether Blair will reverse Conservative reforms. A Tory poster warns: "Britain is booming. Don't let Labor blow it." Although Blair is finessing his agenda to hang on to his supporters, the likelihood is that he won't tamper with his predecessors' economic policies. He has worked too hard to get where he is now.

Already, the 43-year-old has proved himself a skilled leader. He has done a masterful job at making Labor, long unelectable, an acceptable centrist alternative. He has largely uncoupled the party from the unions, themselves far less threatening than they were a decade or two ago. Labor won't roll back privatizations, increase income taxes, or let government spending get out of control, Blair vows. "The more cautious you can be, the better," says a Blair adviser.

Blair's vision for Britain is much like Bill Clinton's for America. He wants Britain to be a global leader in the high-tech age. He talks a good game about partnerships with business, the need for lifelong training, and for making sure the have-nots have access to information technology. He is pledging money to improve primary schools and will probably offer tax incentives for investment.

Beyond that, Blair is careful about making commitments. He is determined not to make promises he can't keep. He wants to avoid being tarred as a tax-and-spender. Sound economic management would also give Blair the chance to carry out dream projects in a second term.

On the other hand, Blair is sure to soften some of Thatcherism's jagged edges. His most controversial proposal is a windfall-profits tax of up to $8 billion on privatized utilities. The money would fund a jobs program to get 250,000 people off welfare. Labor would introduce a minimum wage. And Blair is pledging to strengthen the unions' hand at the bargaining table with employers.

Still, there is no question of going back to the bad old days. Using such phrases as "fiscal prudence," Blair sees his task as building on--not dismantling--the revolution launched by former Prime Minister Margaret Thatcher. In that sense, Blair could help lock in Labor backing for Tory free-market gains, much as Clinton has sold the virtues of shrinking government to U.S. Democrats.

How does Blair's image play with business leaders? Most executives are staying on the fence between Labor and the Tories. But behind the scenes, Labor officials have been meeting with corporate chiefs, who seem relaxed about the elections. Whoever wins, says Adair Turner of the Confederation of British Industry, there should be "a few [more] years of 2% to 3% growth with low inflation. This is an environment business likes."

In fact, if Labor wins on May 1, Blair may have to pour cold water on the economy, which could overheat thanks to the Tories' loose monetary and fiscal policies. Champagne sales have hit a six-year high as the Tories have tried to create a "feel-good" factor to improve their election chances. Blair may have to ratchet up interest rates, while hikes in taxes other than those on personal income are also possible, no matter who wins. That could cool the stock market and hold growth down to 2.5% in 1998.

Even if Blair has to brake the economy a bit, he will need to be careful lest he damage Britain's thriving corporate sector. Its large companies now rank as world-beaters in key growth industries such as finance, air travel, telecommunications, and pharmaceuticals. They are moving aggressively into overseas markets and attracting management talent from the U.S., Asia, and the Continent. Investment has poured in from abroad, too, boosting productivity.

Although critics charge that Britain's economic success is due mostly to its low wage rates, the fact is the corporate sector is in fighting trim after massive shakeups under the Tories. Britain has 19 of Europe's 50 biggest corporations and the largest corps of global companies after the U.S. and Japan. The market capitalization of companies on the London Stock Exchange is $1.7 trillion. Only the U.S. and Japan have larger market caps. Blair doesn't want to slow Britain's global giants down.

"GOLDEN EGG." One testing ground could be the City of London. A few months ago, Labor threatened to slap the City with new regulations, including restrictions on takeovers. Last year, London investment banks brought in a record $1.8 billion in fees for mergers. But recently, Labor has reassured the financial community that "it doesn't want to kill the goose that lays the golden egg," says a senior banker.

On the eve of the election, what can be seen in Britain is a three-tiered economy: accelerating highfliers, decently paying global manufacturers, and marginal, low-paying companies. The hottest growth is coming from strong, homegrown industries such as finance, media, and pharmaceuticals, where giants such as Glaxo Wellcome, SmithKline Beecham, and Zeneca Group spend billions each year on research and development. But these industries don't offer enough jobs to keep everyone employed. So Britain must continue to attract foreign capital to put people to work--especially in traditional manufacturing regions. Blair is likely to make this a priority.

Still, not a few European leaders would long to be in the shoes of the next Prime Minister. Britain's political leaders have paid the price for economic change that their Continental counterparts are still resisting. Despite the cyclical ups and downs that are sure to come, Britain's economic outlook is more hopeful than it has been in 30 years.By Stanley Reed and Julia Flynn, with Heidi Dawley, in LondonReturn to top


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