What no politician has mentioned during the UK General Election campaign so far: the UK’s weak, and worsening performance in the international economy.
As the quarterly rate of UK economic growth halves ahead of general election, and with the election coverage so much about short term, somewhat populist domestic issues, we are missing so many important issues relating to the UK’s actual economic performance on the world stage.
Now – which election candidates and parties have actually addressed this? Hardly any.
THE UK ECONOMY IS HEADING FOR RELEGATION TO THE SECOND DIVISION. WHILST UK POLITICIANS MAY BE SELF-CONGRATULATORY ABOUT THE UK’S ECONOMIC PERFORMANCE; IN INTERNATIONAL TERMS IT IS VERY AVERAGE, SOME MAY SAY MEDIOCRE
The election coverage focuses on domestic performance. However, when we compare the UK’s economic performance to other OECD countries, we find that, in fact, its performance has been distinctly average.
LONG-TERM, THE LOWER RATE OF PRODUCTIVITY AND INVESTMENT IN R&D WILL MEAN THAT THEY UK’S INTERNATIONAL PERFORMANCE WILL DIMINISH FURTHER
What is perhaps more shocking is the long-term prognosis for the economy. We are currently looking at a UK economy with low productivity; lower than average educational attainment; and very low R&D investment. This will only continue, and in the long-term this means that the UK’s economic performance, and crucially, its ability to raise productivity and create ‘value added’ products, services and jobs, will be diminished.
And get this, folks – the UK can’t compete internationally on cost. Going forward – small, advanced, open economies can only trade on quality, technological sophistication, engineering excellence and creativity. The Nordics have got this over the past 30 years. The UK government has made some fantastic noises about this, but it has not translated into policy.
On a personal level, when I was a postgrad student in the 1990s these were the ills which had bedevilled the UK economy in the post war era, which I studied at length. It seems that nothing much has changed?
So – how is the UK economy performing? Let’s start with its recent record on economic growth and generating jobs…
Recent economic performance
Referring to the OECD data on comparative international performance, the UK enjoyed a high economic growth rate of 2.6 per cent in 2014. Its certainly impressive, particularly compared to OECD and EU averages. But it’s not as impressive as Ireland’s 4.8 per cent growth rate, or South Korea’s growth rate of 3.3 per cent in 2014 (and the fact it has recorded strong growth in every year since 2010). Overall the UK ranked 11th out of 34 OECD countries for its 2014 growth rate.
Of course, the GDP growth rate is only one measure of performance. Another is to measure economic output per head. Bad news, folks. On GDP per head, the UK has consistently posted below the G7 average since 1995, and ranks 16th out of 34 OECD countries with a GVA per head of $38,300 in 2013 (current prices, PPP). Despite Ireland’s reputation getting a hammering after the great recession, it still enjoys a higher GDP per head thank the UK – at $45,600.
If we look at growth on aggregate over the entire period from 2010 to 2014, we can see that the UK did well out of its European peers – but still ranked 17th out of 34 OECD economies with 8.8 per cent economic growth over the period. However, the UK still remained behind Germany (10.1 per cent), the US (11.5 per cent), the Slovak Republic (13.5 per cent) and Poland (16.2 per cent).
Jobs
So the UK is leading the way on job creation, right? Wrong. In fact, since the jobs recovery began in 2010, the UK had experienced 2.7 per cent growth in full time jobs up to 2013. This placed the UK 21st out of 38 OECD countries. The UK’s 578,000 jobs seem impressive, when considered on their own merits. However, the US created 12.7 million FT jobs, resulting in 12.6 per cent growth in FT jobs. Since 2010 Turkey has created 2.4 million FT jobs (12.0 per cent growth). Estonia has over three times the jobs growth rate of the UK, at 9.3 per cent. And Germany, although similar at ranking (19th), experienced growth of just over 1 million jobs (3.4 per cent) between 2010 and 2013.
We could compared the UK to France, of course, and get all self-congratulory. But that would be wrong, and would mask the real facts – that UK jobs growth has been fairly mediocre in international terms.
Productivity
The UK’s GVA per hour worked was $51 (in current prices, PPP measure) in 2014. This placed it 18th out of 34 OECD countries for which data was available. This is almost half the rate of productivity of Luxembourg (top with $96 per hour worked); and well behind the US ($67), France ($62), and Germany ($62). Even the economies of Italy ($51) and Spain ($51) have the same productivity rate as the UK.
As we can see from the graph below: The UK’s productivity rate (measured by GVA per hour worked) has consistently been below the US and G7 average rates since 1970, with the gap widening even further since 2008.
R&D
Anyone reading the website of UK government’s department for Business, Innovation and Skills (the one responsible for R&D) over the past ten years would think that the UK was a technological paradise at the forefront of the global tech economy. However, the truth is that this probably only applies to a narrow range of industries and technological specialisms rather than a defining feature and dynamic driver of the future of the UK economy.
On aggregate economic terms, the UK is a R&D backwater. In 2012, gross expenditure on R&D expressed as a percentage of GDP was 1.6 per cent – nearly half of the rate of expenditure in Japan (3.4 per cent), Germany (2.8 per cent), and the US (2.8 per cent). The UK ranked 19th out of 31 OECD countries (for which there was data available) in 2012 for investment in R&D.
On another measure of R&D performance – research staff per 1,000 in employment – the UK does similarly poorly, being in the bottom half of the OECD performance league. With 7.95 research staff per 1,000 in employment, the UK ranks 20th out of 34 OECD countries.
Uneven performance
As can be seen from the table below – in 2011 London accounted for 22.3 per cent of the total value of the UK’s economy (GVA). London ranks in the top 10 out of 333 OECD regions for GVA per worker. Apart from South East England (79th), none of the other UK regions make it into the top 100. In fact, some are well below the mid-ranking places in the table, including North East England (217th), and Wales (221st).
I think we can conclude that the UK economy is losing advantage and influence on the world stage?
There is no longer a general capacity for leadership in terms of growth policies, innovation and productivity. In fact, far from it.
Implications for long term prosperity
The implications are very serious for long-term prosperity. High rates of growth, and high rates of productivity translate into more highly skilled and highly paid jobs, which translate into household incomes and spending. So far the UK economic recovery has been fuelled by consumer spending and ever increasing house prices. However, in the international context, these will not drive a dynamic, long term growth trend. Future economic problems will bedevil the UK economy. We will continue to find it difficult to raise our standards of living and raise the tax income we need to support our public services.
So what are the policies?
Now – which election candidates and parties have actually addressed this? What are the policies which will make a step-change to how the UK competes on the world stage? I haven’t got a clue, because I’ve not actually heard about any in this election campaign.
IF THERE ARE NO POLICIES TO BOOST THE UK ECONOMY’S INTERNATIONAL GROWTH PROSPECTS, THEN THERE ARE NO REAL POLICIES TO ENSURE A HIGH QUALITY OF LIFE FOR UK RESIDENTS IN THE LONG-TERM.
So far the election has been very focused on the average economy of the household – on issues such as wages, house prices, disposable incomes, inheritance tax. Ignoring the fact that, if the economy’s international standing continues to slide, our standards of living will not keep pace with the rest of the advanced economies in the world. This matters because it will discourage international investment in our economy and will encourage our skilled workers to seek out opportunities in more advanced industries, and countries where they can enjoy a much better standard of life. There is a relationship between productivity growth and wage growth, and its been unsurprising that as productivity has declined post-recession, so has wage growth.
If the UK is worried about public finances the long-term solution is economic growth. We are a small economy on the fringes of Europe. We can only grow through international trade. And we can only achieve this internationally through competing on quality, skills, productivity and creativity. We cannot compete on cost alone. Without strong rates of long-term economic growth, we will see only see our standards of living, and public finances, deteriorate further.
So what could we do?
- Well for one thing, we could stop with the meaningless targets, start putting in place actions that actually might work. For example, the UK government put out a target to ‘double’ the value of UK exports by 2020. But they didn’t actually say how they were going to achieve it, nor really put in place any fundamental policy shifts in resources. So it’s a meaningless policy, without and actions or resources to support it.
- We need to emphasise EU markets as much as the emerging markets. As Lord Heseltine said at the LEP conference a few years ago – there’s no point trying to export to China if you can’t compete with the Germans in Europe, because you’ll be competing with the Germans in China too.
- We need redouble efforts to turn the capacities and talents in our research communities and universities into an economic growth dividend. That doesn’t mean diverting cash from original scientific research. It means adding more funding to commercialisation research. It means strengthening the University role in the economy and not having it as a ‘nice to have’ add-on, which is tangiential to the University’s core business.
- There’s got to be a big role for non-profits or some kind of public-private collaboration – think industry or technology associations with teeth and resources. I’ve always thought that Fundacion Chile offers an interesting example in a similar economic context to Britain. Similarly, Forfas in Ireland offers an excellent private-sector led Foresight role for the Irish economy and industries. Fundamentally, we need some public institutions with ambition, the ability to connect different communities and sectors, and with longevity – i.e. they are not dropped after 5 or 10 years due to the electoral cycle.
- We desperately need an effective policy for business growth, and to produce our next global firms. This needs to be a full effort from government and industry, and not just a few business coaching initiatives
- We’ve got to stop thinking central government in the UK can do all of this. There’s a role for cities and regions.
- Lastly – we’ve got to think and do long term.
