Sunday, September 24, 2006
Is Britain drifting, or sailing closer to the competition?
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

It was one of those moments when if you were Tony Blair you might be inclined to give up now, and if you were Gordon Brown you’d wonder whether it was worth taking over.

I was at the Institute of Directors (IoD), chairing a discussion on UK competitiveness, and I asked the four economists on the panel if they thought Britain’s competitiveness and productivity performance was improving or getting worse.

To a man, I have to report, they said things were deteriorating. Under the impact of rising taxes, an inefficient public sector and a red-tape burden growing faster than bindweed, Britain’s businesses are shackled in their efforts to take on the global competition, they argued.

Add in traditional UK shortcomings in skills, transport infrastructure, investment and innovation, and the picture starts to look bleak. Brown’s management, it seems, has condemned Britain to economic dotage, in which we struggle to compete with the “old” economies of North America and Europe, let alone take on China, India and other emerging economies.

Graeme Leach, the IoD’s chief economist, was not one of the four downbeat panellists, but did present a barrage of evidence on the UK’s competitive position, including a survey of the organisation’s members.

His conclusion, that “UK competitiveness is remarkable for its mediocrity”, chimed with the survey, which suggested firms suffer from a range of problems, including too much regulation; a high tax burden; waste in public spending; the complexity of the corporate tax system; the low quality of state education; a poor transport infrastructure and low levels of research and development (R & D) spending.

Leach’s central point was that the government, in naming the five drivers of productivity (and ultimately competitiveness) as innovation, enterprise, skills, investment and competition, left out a vital factor: the government itself, through public spending, taxation and regulation, plays a key role.

This, he argued, was the missing sixth factor, and perhaps the key to it. The IoD’s survey showed that firms wanted, in order of importance, less regulation, lower taxes and simpler taxes to restore Britain’s competitive position.

The debate over UK competitiveness is a long-standing one. Before the Great Exhibition of 1851, Prince Albert, its champion, observed: “The products of all quarters of the globe are placed at our disposal, and we have only to choose what is the cheapest and best for our purposes.”

He was right, and Britain’s manufacturers discovered, perhaps for the first time, that many German products were cheaper and better made.

Under the Tories, whose aim was to make Britain the “enterprise centre of Europe” (in which they probably succeeded) annual competitiveness white papers were published. Under Labour, not only have we had Brown’s productivity agenda and dozens of ministerial speeches, but the Department of Trade & Industry (DTI) publishes an annual set of productivity and competitiveness indicators.

Has it been in vain? Have all those initiatives and documents been for nothing? Are we, like Dickens’s Miss Havisham, condemned to genteel decline?

Perhaps not as much as we think. Ken Warwick, deputy chief economic adviser at the DTI and the driving force behind its productivity and competitiveness indicators, also spoke. Without overstating it he points out that on accepted measures the productivity gap has narrowed in the past decade. In 1995, output per hour in France, Germany and America was higher than in Britain by 37%, 26% and 20% respectively. Now the gap is 29% in the case of France and 16% for Germany and America. You may say, rightly, that the pace of relative improvement is glacial but it is occurring (though recent evidence suggests the US is moving away again).

We often beat ourselves up about low levels of UK business investment but, as Warwick pointed out, all advanced countries have seen investment drop as a share of the economy in recent years, because of falling prices of capital goods.

Nor have we given up on all the advantages we had in terms of de-regulation. The Organisation for Economic Co-operation and Development suggests Britain is the second lightest-regulated product market of its 30 members, making it more lightly regulated than America, which may come as a surprise.

Warwick does not minimise the problems. Britain has too many unskilled and low-skilled workers. International surveys suggest our management skills are not up to speed. We also don’t spend enough on R&D.

But in terms of pure productivity growth, there is evidence of a small improvement, above the 2% annual increase recorded in the last (pre- Labour) economic cycle, 1986-97.

It is not enough but when the economy has shifted towards services and a bigger public sector — both of which tend to have lower productivity growth than industry — it is mildly encouraging.

In the end, what matters more than the competitiveness of UK plc — always a nebulous concept — is the competitiveness of individual sectors and firms. It is often forgotten that there was nothing pre-ordained about the continued success of the City and Britain’s financial services more generally. In this year, the 20th anniversary of the Big Bang opening-up of the Square Mile, it should be remembered that the City, like the cosy gentlemen’s club it was, could now be whiling away its twilight years. It benefited from openness, liberalisation, investment and a low-tax environment.

English football, 20 years ago characterised by bad haircuts, hooliganism and falling attendances, is a highly successful industry, exporting its product (TV coverage) all over the world. The haircuts may still be bad but football, like the City, benefited from openness to foreigners, investment and new technology in the form of satellite television.

It can be done. With the right strategies, other sectors of the economy can become more competitive. The government, meanwhile, can do its bit by easing back on the tax hikes, improving appalling public-sector productivity and taking a large pair of scissors to red tape. That, however, may be too much to hope for.

PS The Bank of England is rightly concerned about public attitudes to inflation. If inflation expectations rise, and people seek compensation in higher pay settlements, the whole edifice of stable prices could begin to crumble. Last week’s news was therefore reassuring.

In the Bank’s latest survey of attitudes, carried out by NOP, the pollster, the median expectation is for prices to rise by 2.5% over the next 12 months. That is above the 2% inflation target but lower than the 2.7% recorded in February. It suggests low inflation is still well anchored in public expectations.

I wonder, however, how reassured the Bank should be. The public is not well informed on these matters. Only 40% know the Bank’s monetary policy committee (MPC) sets interest rates. Asked after the August hike what had happened to rates in the past 12 months, 55% said they had gone up. But 36% thought this in May, when the trend was still down.

The poll, too, asks what will happen to prices in the shops over the next 12 months. Given that much recent inflation has been in utility bills and non-shop spending, that may not give a reliable measure of true inflation expectations.

The good news is that wage pressures remain remarkably well contained. If this persists, the latest MPC minutes suggest that David “Danny” Blanchflower will vote at some stage to reverse the August hike. That and tumbling petrol prices give cause for optimism. The tone of the minutes suggested, however, that most MPC members are inclined towards higher rates.

From The Sunday Times, September 24 2006

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