The challenge of the century

In his seminal work, The Competitive Advantage of Nations, the Harvard economist Michael Porter argued that ‘The only meaningful concept of competitiveness at the national level is national productivity’.

Porter’s work on competitiveness has also suggested that certain characteristics of a nation’s political economy can create and sustain competitive advantage through a highly localised process of inter-firm and policy networking to achieve collective external economies of scale in innovation.

This process of networking for competitive advantage has depended for its success upon the willingness of institutions in both the public and private sectors to engage in a mutually beneficial partnership, where both risk-taking and profits are socialised to the benefit of the many, rather than privatised to the benefit of the few.

Consequently, debates about ‘re-balancing’ of the United Kingdom’s economy, and an enhancement of its performance in terms of innovation, investment or productivity, cannot be understood as a simplistic top-down, technocratic or econometric exercise in which the frontiers of the state are rolled back to make possible the rolling forward of the frontiers of market- and entrepreneur-led innovation and enterprise.

On the contrary, debates about re-balancing penetrate to the very heart of the political economy of the United Kingdom, and raise fundamental questions about in whose interests the Coalition’s economic policy choices are being pursued.

Admittedly, the present debates about competitiveness cannot be confined simply to questions of productivity for, as a study from the Institute for Fiscal Studies on Productivity and the Role of Government pointed out in 1998, while productivity may provide an effective measurement of the efficiency of a national economy, sector or individual business, it cannot measure either profitability or the welfare of society.

At the same time, the effectiveness of any agenda for growth and ‘rebalancing’ of the United Kingdom economy will be largely measured, economically, politically and socially, by its impact upon employment rather than productivity, especially amongst the million-plus unemployed under the age of 25, and upon total output and the living standards of those on or below average incomes.

Consequently, the Coalition cannot afford to repeat the economic mistakes of the Thatcher governments when, between 1979-1989, 51.6 per cent of the 4.7 per cent average annual increase in hourly productivity in UK manufacturing could be accounted for by lower employment (which fell in total by 26 per cent), and total manufacturing output expanded by a meagre 12.2 per cent.

In subsequent debates about international competitiveness, economic performance and productivity, it has been widely accepted in reports from government, parliamentary select committees, business organisation and economic historians that the United Kingdom’s economic performance reflects a significant competitive disadvantage, in institutional and policy terms, when compared with its major competitors.

The most recent official statistics on international comparisons of productivity for 2010 have largely supported this thesis. In its first estimates, the Office for National Statistics (ONS) has calculated that in 2010 UK GDP per worker fell relative to all G7 economies except Italy and Germany. Thus, in 2010 the G7 average performance for this particular measure of labour productivity was 114 per cent of the UK total, with US GDP per worker 34 per cent greater than in the UK (the widest productivity gap since 1994), French productivity ten per cent greater, and German productivity three per cent greater.

In terms of GDP per hour, in 2010 the UK’s performance was unchanged compared to the G7 average, being ten per cent behind that of the G7. On this measure of productivity, the UK was 23 per cent behind the US, 18 per cent behind France, and 16 per cent behind Germany.

Regrettably, this laggardly perform-ance, which is also applicable to other surrogate measures of innovation, such as total private business investment or total private capital expenditure on research and development, is nothing new. Such trends in competitive disadvantage have been maintained under successive Conservative and Labour administrations, during both periods of economic boom and bust.

For example, in 1991 a major report from the Confederation of British Industry noted that in UK manufacturing productivity in 1990 was around 30 per cent lower than that in Germany, 35 per cent lower than that in Japan, and 45 per cent lower than that in the US.

It was not ever thus. In 1791, in his Report on Manufactures presented to the House of Representatives, Alexander Hamilton had looked to the example of England when concluding that ‘not only the wealth but the independence and security of a country appear to be materially connected with the prosperity of manufactures’.

The economic performance of England had also demonstrated that ‘there is no purpose to which public money can be more beneficially applied than to the acquisition of a new and useful branch of industry’, for ‘there was no doubt of the power of the National Government to lend its direct aid on a comprehensive plan’.

Similar conclusions were identified from England half a century later by the German political economist Friedrich List in his 1841 work,  The National System of Political Economy. Here List had identified the key role of the English developmental state, which had ‘obtained political power by means of her navigation laws; and by means of political power she has been placed in a position to extend her manufacturing power over other nations’.

List rejected Adam Smith’s thesis that the political economy of the individual and pursuit of the individual self-interest in open markets were synonymous with the national interest
and political economy of the nation. Rather than embracing the idea that public intervention would crowd out private investment, enterprise and innovation, List had concluded from the English model that ‘in a thousand cases the power of the State is compelled to impose restrictions on private industry’ in order for the productive power of the nation to be maximised.

Thereafter, from the mid-nineteenth century until the present day, the debate about national productivity and compar-ative economic performance has switched from one focused upon the superiority of England’s manufacturing industries to one preoccupied with the United Kingdom’s relative economic decline, and the urgent need to embrace lessons from continental European or American best practice.

Within months of the 1851 Great Exhibition, Dr Lyon Playfair had warned that British industry would be overtaken by its European competitors unless it radically amended its outlook and methods. Following a raft of similar conclusions from a series of official inquiries which punctuated the latter half of the nineteenth century, in 1896 E.E. Williams best-selling book, Made in Germany, warned of the threat  posed by ‘the German Industrial State’. Williams advocated a state-led programme of industrial modernisation, including the overhauling of the British consular system abroad to make its primary objective the promotion of British trade and commerce, and the expansion and upgrading of technical education — in the face of what Williams saw as the collapse of the apprenticeship system.

At the end of the Second World War, an Anglo-American Council on Productivity was established. Its work yielded no fewer than sixty-six reports about a diversity of manufacturing industries in which a plethora of obstacles to greater industrial efficiency were identified, including the limitations of British management.

In the event, this was but the first of a series of ineffectual civil industrial policy initiatives, whose scale and ambition paled into insignificance when compared with the scale of resources and strategic intervention that was devoted, during the latter half of the twentieth century, to the nurturing both of the military industries and advanced technologies of the British warfare state, and the commercial interests of the City of London’s financial markets.

More recently, in opposition, David Cameron approached the question of national competitiveness in terms of a simple matter of constructing a hybrid economic model composed of a combination of ‘the best of these islands’ and six other components drawn from ‘the best of some of the places in the world that I most admire’.

Cameron’s hybrid economic model was to include ‘the progressive, family-friendly culture of Scandinavia’; ‘the creativity and dynamism of Silicon Valley’; ‘the savings culture of Japan’; ‘Germany’s apprenticeships and manufacturing strength’; ‘France’s high-speed rail system’; and ‘America’s strong mayors giving their cities real economic leadership’. At no point did this à la carte agenda for future economic policy acknowledge that every national political economy is the product of a unique political and institutional history, as is the trajectory of development of different sectors, businesses and corporations.

During the Coalition’s first twenty months in government, the debate among and between the front benches of the Coalition parties and the Labour Party, about the necessity of ‘re-balancing’ the United Kingdom’s economy and economic model away from ‘unsustainable private and public debt’ towards George Osborne’s ‘new model of economic growth that is rooted in more investment, more savings and higher exports’, has remained largely divorced from this rich, complex and problematic historical and industrial policy context.

If there is to be any meaningful ‘re-balancing’ of the United Kingdom economy, then an early New Year’s resolution for all interested parties at Westminster should be to acknowledge that the task of building new industries and sources of national competitive advantage constitutes the biggest peacetime challenge confronted by British politics since the Great Depression.

It would also be helpful if our politicians and business leaders could remember that in earlier periods of history, as the work of Hamilton and List reminds us, England’s governing class and business elites had the confidence to think and act strategically for the long term, and to make the development of the nation’s productive powers the primary role of the state.

Dr Simon Lee is Senior Lecturer in Politics and Director of the Centre for Democratic Governance, University of Hull. With Dr Matt Beech, he has co-edited ‘The Cameron-Clegg Government: Coalition Politics in an Age of Austerity’ (London: Palgrave Macmillan: April 2011), and is the author of ‘The State of England: The Nation We’re In’ (London: Palgrave Macmillan, 2012).