Something needs to turn up to lift our feeble growth rate Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. It would be easy at this moment to despair. Political stability is something we usually take for granted in this country; governments acting in the national interest and most politicians supporting them in that aim. It is one of the hidden but important components of economic stability and success. But Brexit, as well as casting a long shadow over business and the economy, is breaking British politics. The Tories, who once described themselves as the party of business, are now fatally divided and have done much to damage business over the past three years. The
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Something needs to turn up to lift our feeble growth rate
My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
It would be easy at this moment to despair. Political stability is something we usually take for granted in this country; governments acting in the national interest and most politicians supporting them in that aim. It is one of the hidden but important components of economic stability and success.
But Brexit, as well as casting a long shadow over business and the economy, is breaking British politics. The Tories, who once described themselves as the party of business, are now fatally divided and have done much to damage business over the past three years. The prospect of a coming to power of Labour, also badly divided, is regarded with barely-disguised horror by many people I come across.
When President George H W Bush died recently, he was described as the last of the greatest generation, those who had served in the second world war and then devoted themselves to public service. In Britain, we have a different and far-from-great generation of politicians, too many of whom think they are still fighting the second world war, though they would probably have been spared on the grounds of flat feet, and know little of public service.
We should not despair too much. An old Treasury hand reminded me the other day that we do get through these things, however difficult and intractable they seem at the time. As a fully signed-up member of the “something will turn up” school, this is a view I happily endorse, though the fact that neither of us could quite see the way through the current mess was a touch worrying.
In this spirit of looking beyond the current turmoil I will not dwell this week on the pall that has descended on the economy with markedly weaker fourth quarter growth figures (though a surprisingly sprightly labour market) and a moribund housing market. Exasperation and uncertainty are the dominant sentiments among business people as we head towards the year-end.
Instead it is time, as promised, to look forward, and there is a good excuse to do so. I have not yet written about the IPPR economics prize, under the auspices of the Institute for Public Policy Research. The prize money, totalling £150,000, is underwritten by John Mills, the founder of JML, and is the world’s third biggest economic prize after the Nobel (the Bank of Sweden award) and the Wolfson prize.
I like the idea of prizes like this. They remind us of a time when solving problems like longitude, as John Harrison’s marine chronometer helped do in the 18th century, could be facilitated by the offer of a prize. There is a modern version of the longitude prize running now, awarded to scientists for their work on tackling the problem of antibiotic resistance.
The IPPR prize consists of a main award of £100,000, runners-up prizes totalling £25,000 and a separate £25,000 prize for under-25s. Initial 5,000 word submissions are due in by Sunday January 6; offering an opportunity to fill in the downtime over Christmas. They should be sent, not to me, but to [email protected]
The aim is straightforward, if ambitious. The prize will be awarded to the best proposal for raising Britain’s sustainable growth rate from its current 1.5% to between 3% and 4%. The judging panel will be headed by Stephanie Flanders and will include, as well as Mills, of Lord John Eatwell of Cambridge University, Dame Helena Morrissey, head of personal investing at Legal & General and Shriti Vadera, chair of Santander UK.
Many economists would say that achieving a sustainable growth rate of 3% to 4% for Britain is a much harder task than anything Harrison faced 300 years ago. Though growth touched a little more than 3% on a quarterly basis just over three years ago, it has since slowed to half that, at best, with the risks to the downside we all know about.
Though growth regularly exceeded 3%, sometimes by a wide margin, in the “golden age” for the world economy between 1948 and 1973, doing so on 14 occasions, sightings of 3%-plus growth have become rarer. The last annual growth rate above 3% was in 2005, one of only three this century. Britain’s average growth rate in the 21st century has been 1.8%, including the big recession of 2008-9, a percentage point below the 2.8% average in the second half of the 20th century.
How could higher sustainable growth be achieved? I disagree fundamentally with Mills, a lifetime Brexiteer, that it should be via what he describes as a competitive exchange rate strategy. A lower pound is not a route to permanently stronger growth. If currency devaluation and depreciation were the keys to growth, Britain would be a world champion.
He does, however, set out some useful parameters about what else is needed. One of the most depressing recent comparisons, produced by the Office for National Statistics, was that over the 1997-2017 period Britain had the lowest investment, combining private and public, of any of the 30-plus OECD (Organisation for the Economic Co-operation and Development) countries. Raising Britain’s investment rate from 16% to 26% of gross domestic product, split between high technology private investment and infrastructure, would transform Britain’s prospects.
To boost growth, you need to be at the cutting-edge, and in important respects Britain is not. Another comparison, from the International Federation of Robotics, highlighted recently by the CBI, showed this country lagging near the bottom of the global league table for take-up of manufacturing robots. On a comparable basis – robots installed per 10,000 employees – South Korea and Singapore are miles ahead, with six or seven times the number of robots in Britain, followed by Germany and Japan.
This appears to be part of a more general problem with technology. A study by the management consultants McKinsey, highlighted by Be the Business, the organisation devoted to raising productivity, found that take-up of customer relations management (CRM) and enterprise resource planning software, is much lower in the UK than, for example, Germany. In too many small end medium-sized businesses, in particular, technology is something to be feared, not embraced.
There are other things we should be doing, again highlighted by Be the Business. If management quality in domestically-owned firms could be raised to the level of that in foreign-owned firms operating in Britain, their performance, and that of the economy would improve. Similarly, family-owned firms tend to lag behind others. Britain has a longer tail of poorly-performing businesses than competitor countries.
There is no magic bullet. Raising the growth rate, if it could be achieved, would be through a cocktail of factors including stronger demand, more investment, better skills, better management and so on.
I nevertheless await the IPPR prize process with interest, and the ideas it attracts. £150,000 is a decent amount of money in anybody’s book. Nobody would seriously expect anybody to come up with something that doubles the growth rate, even though that was Donald Trump’s election pledge in America two years ago (he won’t). But anything that raised Britain’s growth rate even a smidgen is worth at least £150,000 of anybody’s money.