April 8, 2013 8:01 pm

Thatcher: the great transformer

Pragmatic politician who defended free markets

Margaret Thatcher was the most important peacetime prime minister of the UK since the late 19th century. She transformed the Conservative party and British politics, overturning the ruling assumptions about the relationship between the state and the market.

Thatcher was also a towering figure on the global stage. Her close ideological connection with US President Ronald Reagan helped give her a global role unlikely ever again to be occupied by a British politician.

True believers view her as a Saint Joan of free markets, dedicated to rolling back the state in all its dimensions. In reality, however, Thatcher was a pragmatic politician who showed little interest in embarking on politically suicidal attempts to demolish pillars of the welfare state, such as the National Health Service. Under her governments, public spending never fell below 39 per cent of gross domestic product.

Nevertheless, hers was a transformational premiership. The legacies of Thatcher’s governments include liberalisation of exchange controls, a huge cut in top income tax rates, liberalisation of labour markets, transformation of the legal position of trade unions and defeat of militant organised labour, notably in the miners’ strike of 1984-85, sale of a large part of the council housing stock, privatisation of most nationalised industries and the liberalisation of finance, including the “Big Bang” of 1986, which transformed the City of London into the world’s biggest international financial entrepôt.

In macroeconomic policy, Thatcher’s governments started with monetarism and ended with a row over the role of exchange rates in monetary policy. But the rejection of Keynesian fiscal policy and the shift to relying on monetary policy, in its place, were cemented during her period in power. It was left to the incoming Labour government to take the logical step of making the Bank of England independent, in 1997.

Thatcher also played a large role in Europe, contributing to launching the single market programme and the concomitant Single European Act, in 1986. She saw this as an attempt to export liberal economics to the rest of the European Community.

But she became anxious about the dirigiste consequences and was staunchly opposed to the single currency. Her speech to the College of Europe in Bruges, in September 1988 – when she said: “We have not successfully rolled back the frontiers of the state in Britain, only to see them re-imposed at a European level” – marked a turning point for Thatcher and her party.

Big Bang saw London attain ‘top tier’ status

During Big Bang, the head of a tiny bond brokerage announced a multimillion-pound buyout offer to colleagues with the words: “We have just been kissed by the Holy Ghost”, writes Jonathan Guthrie.

London’s pre-eminence as a financial centre was a lasting legacy of the deregulation of the City of London in 1986 under Margaret Thatcher. “The City was on a slow burn until then,” says Brian Winterflood, chairman of securities dealer Winterflood Securities and a City professional since the 1950s. “A lot of people argue against Big Bang but it was what put us into the top tier.”

The changes were emblematic of Thatcher’s determination to elbow aside vested interests. Diversified US investment banks, such as Merrill Lynch and Chase Manhattan, were allowed to buy traditional UK securities dealers, triggering an influx of capital that London deployed to pull clear of continental rivals. Within months, the bulk of share trading had moved online. Long, boozy lunches fell from fashion. In the Square Mile, a new era had dawned.

Euphoria was shortlived, with a crash ensuing in October 1987. The asset bubble stoked up partly by government giveaways through privatisations and council-house sales was beginning to deflate, presaging the recession of the early 1990s. City reforms, meanwhile, bear some blame for the far worse reversals of 2008, according to the historian Philip Augar.

“Good characteristics of the City were thrown out with the bad,” he says.

“It put us on a helter-skelter course towards the financial crisis.”

On the world stage, Thatcher’s influence rested on both her outspoken defence of free markets and her close relationship with the US. On privatisation, she persuaded many around the world that even countries with socialist legacies could roll back state ownership.

How is one to assess Thatcher’s legacy, then, more than two decades after she was unceremoniously evicted from power?

For the UK, the 1980s, 1990s and 2000s did mark the first sustained period since the 19th century when GDP per head rose more than in the other large European economies. Unfortunately, the post-crisis economic malaise, the high inequality, the persistent regional imbalances and the over-reliance on an unstable financial sector mar this success.

Nevertheless, even though Thatcher was, and remains to this day, an intensely divisive figure, UK politics remain in her thrall. Even Ed Miliband’s Labour party has not dared to suggest a return to the policies of the 1970s. At home and abroad, the ideas with which she was most strongly associated – above all privatisation – remain influential.

On Europe, Thatcher’s worries about the obstacles to running a single currency for such different countries have proved prescient. Yet the project is still in place, while the UK creeps towards the edges of the EU.

Globally, the end of Thatcher’s period in office coincided with the collapse of the Soviet Union, a triumph for the roll-back of socialism that she proclaimed. After the Tiananmen protests, China’s reform seemed to have been aborted. Yet if one asks today which political leader did most to transform the world through a shift towards markets the answer would be Deng Xiaoping, not Reagan or Thatcher. The transformation of China is the great economic and political event of our era.

Thatcher was a political giant, albeit within a declining nation. She stood for a revival of free markets and a declining role of the state. Today, however, it is not the west but emerging economies, which are the flag-bearers of relatively free markets. This was far from her doing. But she could well have regarded this outcome as a great success.

Her appreciation would have surely been marred by disappointment over the state of her own country. History has not been kind to confidence in a durable British economic resurgence. Today, alas, the post-Thatcher renaissance looks as much illusion as reality.

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