Brexit and Perestroika

When, a few months ago, the Bank of England released some conditional forecasts on the impact of a no deal Brexit, Paul Krugman, by no means a Brexit fan, took issue with their findings. How could even a no deal Brexit result in an 8% drop in GDP? Figures derived from changes in trade flows would surely result in a much smaller number. Later, he explained than he had been informed by members of the BoE that such forecasts were not merely based on analysis of the effect of trade barriers on patterns of trade , but the impact of supply chain disruption if authorities failed to implement an effective new regime quickly. His response was telling: OK, that makes a little more sense, but surely the British state would be a little more competent at dealing with disruptions of this kind than the BoE figures seem to imply. Perhaps, but perhaps not.

What this illustrates is an important distinction. Picturing what a system might look like in the long term when it adapts to a series of changes is one thing, how, immediately, a system responds to such a set of changes is another. The example of Perestroika in the Soviet Union is a case in point. When, in 1987, Gorbachev presented the basic theses of Perestroika to the Central Committee of the Communist Party, he was presenting policies based closely on what (certainly outside the Soviet Union) were widely accepted economic ideas. The eventual goal made sense: to end central economic planning, and to move towards something more akin to the social market economy, with an active state, but firms largely operating on the basis of price mechanisms. The problem was not with the end goal, it was how it was to be reached. Ending central planning and removing price controls in a system where supply chains, management, political and social structures had evolved under the direction of Gosplan proved so disruptive that the fabric of the Soviet, and later Russian economy, state and society that not only was the short term catastrophic, but the end goal was never reached. Living standards did not return to the level of the mid 1980s until the early 2000s, indeed by some measures they still have not done so. 

What does this mean, in the context of Brexit? Even a good idea, in the case of Perestroika based on an enormous amount of thought and research, and with a clear end state in mind, can end in catastrophe if the short term systemic shock is one too severe for the system to adapt. In the case of Brexit, what we have is a kind of crap Perestroika. There is little in terms of a rationale for the long term, but an analogous risk of short term disruption. This comes through the risk to supply chains, and to political structures in the form of the enormous legal black holes of what happens in a no deal, and the administrative burden of response which may be beyond the capacities of the British state.  Perhaps the British economy, society and politics will be better placed to respond to the shock of a no deal than the Soviet Union was to Perestroika. It is probably impossible to quantify such a risk too precisely. But it is surely worth having a vague idea that such a risk may be real.