Sunday, October 03, 2004
Britain clocks up a dismal productivity record
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

AT this time of year, when politicians traipse down to the seaside to display their wares, it is unwise to expect too much in the way of economic content. The days when currency dealers listened intently to the conference speeches of chancellors and prime ministers for market- moving announcements are long gone.

In their place, by and large, are re-announcements and political knockabout. And even that’s not what it used to be. Tony Blair, in his big address, laid into the Tories for giving the country 10% mortgage rates during their boom-and-bust years. But why not attack them for 15% rates, which is what we had?

There was some economics in Gordon Brown’s speech, as you might expect, even though it was not market-sensitive. With an election looming, the chancellor is looking to the future. The theme for this autumn’s pre-budget report, and other upcoming set-piece occasions, will be to chart the economy’s course for the next 10 years or so.

That does not mean he plans to stay at the Treasury that long, for we now know the prime minister intends to serve for roughly five more years. It does mean there will be a big focus on the “supply-side” themes of productivity, enterprise, competition and competitiveness.

When China and India were producing a combined total of 4m graduates a year, and their wages were 5% of ours, he noted in Brighton, the central question was whether we could compete in future. That meant, said Brown, exploiting “the ingenuity, talents, dynamism, creativity and inventiveness of all our people”. More simply, it means raising productivity — the amount each worker does. Paul Krugman, the American economist, once said: “Productivity isn’t everything, but in the long run it’s almost everything.” And Britain’s record is wanting.

By coincidence, new evidence was presented last week at a Treasury seminar on Britain’s relative productivity performance. The research, based on a series of projects funded by the Economic and Social Research Council (ESRC) made sobering reading. When Labour took office more than seven years ago, Brown also showed he was a long-term thinker, by committing himself to a productivity agenda. At that time, American productivity was some 40% higher than in Britain while France and Germany were about 20% ahead.

On the latest figures, according to the ESRC research, US output per worker is 39% higher than here, with France and Germany 22% and 19% ahead respectively. No progress there.

Why does Britain lag behind? According to its report (available on esrc.ac.uk), the reasons are many, including “a relative failure to invest, failure to innovate, poor labour relations, trade distortions attributable to Empire, antagonism towards manufacturing, ‘short- termism’ among business leaders and financial institutions, technological backwardness, lack of entrepreneurship, over-regulation of business, an overly-instrumental attitude to work among employees, and the rigidities of the class structure. The list is not exhaustive”.

Ministers have tried to tackle some of these long-standing problems, with mixed results so far.

The productivity gap’s history is interesting. At the end of the second world war, America’s lead over all other advanced economies was acknowledged, and explained by superior industrial organisation and better technology, as well as natural advantages such as bigger markets.

During the “golden age” of the world economy in the 1950s and 1960s, Europe narrowed the productivity gap, as a result of adopting US technology and methods, and removing trade barriers within Europe. But Britain was less successful than France and Germany.

From the 1970s onwards, in an environment of generally weaker productivity growth, Europe further closed the gap, to the point where by 1990 France and Germany looked to be on the brink of overtaking America, which looked like a lumbering giant. Britain also made big strides in the 1980s, largely as a result of the labour-market flexibility achieved by reducing the power of the unions under Margaret Thatcher.

Since then, however, US productivity growth has undergone a “structural shift” upwards, from just over 1% a year to well over 2%, conservatively estimated. And Europe, and Britain, have failed to respond. The productivity revolution, on the back of new technology, has remained largely a US phenomenon.

Why hasn’t Britain, with most of the flexibilities of the 1980s still in place, and a 12-year run of continual, non-inflationary growth, done better? The gap with France and Germany can largely be explained by two factors, according to the ESRC. One is that we have under-invested over decades; investment per worker is 40% higher in France and 60% greater in Germany than in Britain. The other is that we suffer from a lack of skilled workers. Whereas 20% of German workers and a third of those in France are characterised as having low skills, this applies to 55% of the UK workforce.

As for America, the big gap is partly due to under-investment — US capital per worker is 25% higher than in Britain — but mainly due to the “x factor” known as total factor productivity. And this, put bluntly, is code for management. It is often the great unsaid in the productivity debate. Ministers go out of their way not so say it. But the fact is, as the research shows, that a large part of our enduring productivity gap is due to inferior management.

This cannot be explained either by the fact that all the smart people go into accountancy, the City or banking, rather than manufacturing. Compared with America, Britain is well behind in terms of productivity in financial and business services, as well as areas such as retailing.

On the day the new productivity research was presented at the Treasury, coincidentally, official figures were released showing an upturn in productivity — from 2% annual growth in the first quarter to 2.9% in the second. That may just be a flash in the pan. Let’s hope not. On Brown’s central question, of whether we can compete with China and India, the jury is very much out.

PS My promise at the end of last week’s column to examine our future energy needs, and whether this will inevitably mean a much bigger role for nuclear power, will be fulfilled very soon. With oil at more than $50 a barrel it needs to be. In the meantime, a brief progress report. Mere mention of the word “nuclear” produced a flood of responses.

They were split roughly 50-50 between those arguing that there is no alternative to a nuclear future and those who think we should not touch it with a very long bargepole. Amid the usual arguments against on the grounds of cost (particularly decommissioning costs) and risk in an era of global terrorism, there were a couple of new ones on me.

The first is that, like oil, nuclear energy is a finite resource. According to a paper, Nuclear Power: the Energy Balance, by Jan-Willem Storm van Leeuwen and Philip Smith, the world’s known resources of rich uranium would last for only three years if the entire world’s electricity needs were supplied by nuclear power stations. At present only 2%-3% of global electricity supplies are nuclear.

The second argument is that nuclear power is not emission-free, particularly when poorer grades of uranium are used. The construction, operation and decommissioning of nuclear power plants mean significant CO2 emissions. In some instances, say Van Leeuwen and Smith, these will be as high over the lifetime of the plant as a gas-fired power station. Such claims have, inevitably, produced a fierce response from the nuclear industry. They do, however, show that the search for a painless, post-oil energy future is probably a vain one.

From The Sunday Times, October 3 2004

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