Sustainable Growth, Management, And Economic Productivity

SMP Pathway Blog

Hi Everyone  –

This is the first in a monthly blog post I will write for the SMP pathway. As we go along I hope that I can blog about things that that emerge from the dialogue and discussion in our pathway.

To get this discussion started I thought I’d focus in the third component of our pathway – “Economic Productivity”.

Here’s the OECD’s definition of economic productivity:

“Productivity is commonly defined as a ratio between the output volume and the volume of inputs. In other words, it measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output. Productivity is considered a key source of economic growth and competitiveness.”

Recently, you might have noticed that there has been a lot of discussion about how the UK has lower productivity than other advanced nations. Here’s an article in The Guardian asking why this is the case, and another in The Conversation ‘debunking the UK’s productivity problem‘.

The UK does not have “low” productivity in comparison with most countries in the world. Look at the 2016 list of comparative labour productivity in this article. The UK ranks 15/35 of the countries listed, but ahead of Italy, Spain, Canada, Japan and South Korea and considerably ahead of the emerging economies of India, China and others that don’t make the top 35 at all.

However, the UK does have a problem with “productivity growth” and is falling behind other advanced nations. As this BBC report states:

“Productivity – as measured by the amount of work produced per working hour – is the main driver of long-term economic growth and higher living standards. However, growth has been flat over the past decade as the UK economy has recovered from the downturn triggered by the financial crisis.”

Productivity matters to expectations of long-run economic success–and the UK economy has struggled to regain the momentum in productivity growth that it lost at the time of the 2008 financial crisis/recession.

There are lots of potential reasons for this:

“This might be due to a number of reasons: low capital investment, poor skills, the high employment rate and low interest rates keeping inefficient companies afloat.”

Those of you interested in economic theory might be interested in whether Baumol’s cost disease might be responsible, at least in part.  Or perhaps the type of jobs created in the UK economy might be to blame:

“The rapid expansion of mainly low-level service jobs that carry low levels of pay is another reason. In France and Germany, the coffee shop and online delivery culture is still in its infancy by comparison with the UK. These are businesses that provide a valued but unsophisticated service with limited room for productivity improvements. It means the UK has lower unemployment and a bigger workforce, with fewer people economically inactive than France – but lower productivity and lower pay.”

One recent academic study noted that the information technology changes of the last 20-30 years may not increase productivity at all. For a service oriented economy like the UK, that is potentially a serious problem. As, indeed, are the recent reports that the UK’s public finances are weak in comparative terms.

There are lots of questions that emerge from the foregoing discussion. What has cause the structural slowing in productivity growth in the UK economy? Has “austerity” in the UK economy worked? What is the right level of public and private investment in infrastructure? What is the role of the large financial services sector in shaping economic outcomes in the UK economy? Should the UK economy embrace low or even no growth as a solution to  environmental degradation to promote sustainability?

Recently the UK government has created an Industrial Strategy Council to oversee the UK’s industrial strategy, in part to try to solve the productivity puzzle. The ISC is to be headed by Andy Haldane, Chief Economist at the Bank of England.  Reflecting on his appointment, Haldane commented that:

“The Industrial Strategy is one of the most critical strands of work taking place across government and has the potential to raise living standards across the whole of the UK, boost people’s earning powers and put the UK at the forefront of future industries internationally.”

Central to this is the search for improvement in productivity. Mark Carney, Governor of the Bank of England stated that:

Productivity is an important determinant of the Monetary Policy Committee’s forecasts for economic growth and inflation. Understanding the impact of the Government’s policies on the outlook for productivity is therefore of great importance to the Bank’s work.”

Andy Haldane has previous identified bad management practices as one potential source of low productivity growth, though this doesn’t necessarily explain why there has been a deterioration since 2008. You can read more about his thoughts on productivity here.

Productivity–in line with the SMP pathway at the WRDTP–is one of the ESRC’s current research priorities:

“Raising productivity levels across the UK is a concern for many businesses and policy makers, but tackling it is a complex ‘wicked’ problem with no easy solutions. We are developing an ambitious, innovative, and impactful research agenda to fund productivity-related research over 2018-2023. Many of our investments are already delivering high quality knowledge about productivity and are engaging with government departments, devolved administrations, businesses and policy makers to practically address the challenge of low productivity.”

Over the coming years, perhaps your doctoral research will help address this research agenda.

Simon Mollan, October 2018.