Robert Colville on Britain's productivity problem

The biggest threat to prosperity, quality of life and good public services in Britain for the last ten years has not been Brexit, or the EU, nor international markest or any other external factor.

It is our anaemic growth in productivity.

Economists have been worrying about productivity in Britain for a long time, but although it has not risen as fast as we would like and sometimes lagged behind our competitors, it nevertheless grew steadily from the 1950's through the decades, through the Thatcher, Major and Blair, years, but dropped sharply following the 2008 crash, and has only gradually recovered since then. This graph from the Office of National Statistics shows the problem:



Earlier in my lifetime "The British Disease" was seen as strikes and industrial unrest: now the British disease is low growth in productivity.

Depending on which measure you look at, productivity did eventually surpass the level before the crash, but it took too long to recover to that point and has been growing only slowly and in fits and starts. During the last quarter of 2016 Britain had the highest productivity recorded to date but it fell back again in the first quarter of this year, because of a drop in the service industry (manufacturing productivity grew slightly over the same period.)

As the ONS said when it released the latest figures
  • UK labour productivity, as measured by output per hour, is estimated to have fallen by 0.5% from Quarter 4 (Oct to Dec) 2016 to Quarter 1 (Jan to Mar) 2017; over a longer time-period, labour productivity growth has been lower on average than prior to the economic downturn.
  • Labour productivity fell in services but rose in the manufacturing industries; services productivity fell by 0.6% on the previous quarter, while manufacturing productivity grew by 0.2% on the previous quarter.

This is NOT an issue which lends itself to party political analysis by any party or to simplistic explanations which try to blame everything on the EU or on Brexit.

Britain's growth was lower than it needed to be before we joined what was then called the EEC but was higher than it has been since 2008.

Britain's growth was periodically an issue during most of our membership of the EU, but during the 80's 90's and the first few years of this century was significantly higher than it has been since 2008.

It has been an issue while ministers from all the main parties have been in office. The worst ever drop was on Labour's watch but no party ought to be happy with the record on this issue while they were in power.

There is a good piece by Robert Colville on CAPX here which addresses the issue.

P.S.

Colville links to a blog article by Sandra Batten and Dena Jacobs. two Bank of England economists, about foreign investment, which you can read at 

https://bankunderground.co.uk/2017/08/17/foreign-owned-firms-and-productivity/

and which is called "Foreign owned firms and productivity."

I suspect this article may be more than a little controversial because it would be easy to oversimplify it's message and present it as an attack on British management. The article certainly makes a powerful case that British owned firms operating in Britain do not invest enough in R&D or generally.

As I've said in the comments below, it would be interesting to see a comparison between the relative efficiency and productivity of British owned versus domestically owned ones in foreign markets where UK companies operate. I strongly suspect that the points identified by Batten and Jacobs may not be so much indicative of a problem with all British companies as that the more innovative businesses which spend more on R&D and investment and are well managed are more likely to also be outward-looking and grow to operate on a global scale.

We certainly need to make sure government policies reward investment - which one of a number of reasons why adopting Labour's policy of higher corporation tax would be utterly stupid - and provide incentives and opportunity for more and better training for both young people and the work force as a whole.

Batten and Jacobs conclude:

"We find that foreign-owned firms are more productive than domestically-owned ones and there are several channels through which their presence can boost aggregate productivity. It is true that large productive foreign-owned firms are able to expand and invest in overseas branches located in the UK and this boosts UK productivity by simply raising the average. But this is only one part of the story. Foreign-owned firms also make a significant contribution to UK R&D spending and promote the diffusion of ideas through their collaborative activities. Continued foreign investment and the presence of foreign-owned firms will therefore be important for the UK’s productivity outcomes."

I agree that encouraging international trade and investment does far more good than harm, most particularly if efforts are made to ensure than the benefits are more widely and evenly spread, and the sort of economic nationalism sometimes observed on both left and right which resists such trade and investment can do a huge amount of harm to a country and to the living standards of ordinary people.

Comments

Anonymous said…
"The British Disease" isn't a disease of the workers it is a disease of management and the form of capitalism Britain is wedded to.
Jim said…
Chris, where you are coming from is a nice ideal, and yes productivity in the UK should be higher.

With that setiment I could not agree more.

However under the current monetary system it simply is not possible to achieve. There is alaways more debt in the system than there is currency to pay it, currency and debt are like matter and anti matter, to create one you create the other, and when they meet (i.e. when you pay off debt with currency) they annialate each other.

Every single pound in existance has to be borrowed into existance and borrowed into exsitence with the agreement to pay it back plus interest, so if you borrow into existance the very first pound, and agree to pay it back with interest then where do you get the second pound to pay the interest? - the only way is to borrow that one into existance and pay interest on that one as well.

The whole thing is a house of cards that absolutely has to crash, its a mathematical certainty.
Chris Whiteside said…
The post by Robert Colville which I linked to certainly does not suggest that Britain's productivity is a "disease of the workers" - it is particularly critical of a lack of R&D and of investment (a point which I very much agree with - hence the need to avoid taxes on business which discourage investment in plant or in R&D).

Colville also links to a blog post by two economists, Sandra Batten and Dena Jacobs, which argues that British-run firms in Britain have lower productivity than foreign-owned ones and looks at some of the possible reasons for this.

It would be interesting to see a comparison between the relative efficiency and productivity of British owned versus domestically owned ones in foreign markets where UK companies operate. I strongly suspect that the points identified by Batten and Jacobs may not be so entirely a matter with all British companies as that the more innovative businesses which spend more on R&D and investment and are well managed are more likely to also be outward-looking and grow to operate on a global scale.

But I certainly agree that management issues - and government policies under governments of all parties - are a significant part of the problem.

Afraid however, Jim, that I don't see a scintilla of evidence that Britain's monetary system is a major contributor to this particular problem. Every single OECD country has similar banking and currency arrangements to which your points would equally apply, including some which have performed better in terms of productivity and others which have performed worse.

And in my experience mathematical certainties only exist in mathematics. Sooner or later there is very likely to be another recession, maybe even a crash, but if there is it will have much more to do with excessive borrowing, or with either overcautious or irresponsible lending, than with the fact that we have a banking system.
Jim said…
My argument is not that the UK is not very productive because we have a banking system. It is that Britain is not so productive because we have a terrible banking system (this is global its just the UK and the USA and the EU are much further down the path than more productive countries.

Its really down to the fact that to have production you must have capital, and to have capital you need savings.

you cant borrow your way to prosperity, but if the only way to create money is to borrow it, then its quite a catch 22 isnt it.

Lets say the entire UK economy has only £100 in it, then for that £100 to exist (and to keep things simple lets say interest rates are 5%

then the national debt is £105, of course this debt needs to be paid off but, if we pay off £10 of it there is £90 in the system and the debt is £95, so, we dont tend to pay it off, this means there is money due from our £100 currency to service the debt each and every year, thus we reduce the supply of currency without paying the debt. the only answer is to increase the currency supply by borrowing so we can service the debt that already exists. in essense making things worse.

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