The proponents of the need for a Plan B have got one thing right – rebalancing the economy is a painful process and anything that could reduce the pain would be jolly nice. However, it is not clear that they understand the disease and thus the remedy.

In a way we need to go back to the definition of what an economy is about. The fundamental measure of economic activity is based on value added. This is what work adds to inputs to make outputs that people want. In a state-run economy this can be subverted by the government deciding what we ought to want, a proposition whose failure is now pretty well established. Indeed the failure is even worse, since governments are particularly bad at establishing what is wanted by non-citizens and it is especially clear that it is trade that drives economic performance.

For example, ‘China’s share of world trade in goods has soared, rising from an insignificant 1% of the total in 1980 to 9% today. And China and India are enjoying increases in living standards every decade which took the US between 30 and 50 years to achieve in the 19th and early 20th centuries’.* It is growth and trade which are intimately connected.

So value added is also connected to trade – to creating specialism, and to meeting the needs of not only your own citizens but also the citizens of other countries. Over recent decades, indeed most of the second half of the twentieth century, Germany did this with machinery and the UK with professional services, including banking. Nonetheless, the UK also has some niches in high performing textiles, chemicals, medicine and computing. At least these are the ones I know about, there may be others. Building on these, allowing them to be successful, will reduce the trade deficit and equally the government deficit.

Creating real value added then also allows spending on services which make life more comfortable. Plan B would only work if it helps create that value added. It does not do so if it binds up wounds which are still festering under the bandages.

*The Southern Silk Road, HSBC Global Research, June 2011