Solving the UK’s ‘Productivity Puzzle’

Vince Cable set out two “overlapping” problems for the UK at the Social Market Foundation today: productivity and exports.

Now that the economy is recovering, the question is whether economic growth can be sustained. So far, growth has been accompanied by a rise in consumer spending at home, but there’s a limit to how much more our debt-laden households can do to keep the economy afloat. Meanwhile, our productivity growth is poor: we are working more but producing less, and lagging behind other major economies. The explanation for the so-called “productivity puzzle” is looking increasingly likely to be structural, meaning it won’t go away as the economy recovers.

Mr Cable highlighted a key problem: lack of investment by businesses. On exports, he highlighted the difficulties that firms are having now that the pound is appreciating. But, as he pointed out, the effect of exchange rate movements aren’t as clear-cut as they used to be, in a world of global supply chains where a lot of our exports use imports as inputs. So, the two policy responses from policy-makers are to firstly, ensure we have a long-term industrial strategy that boosts productivity and makes our exports competitive abroad, and secondly, supporting firms to export more, for example through UKTI.

Beyond this, I would add two key points. Firstly, the export problem and productivity problem are not just overlapping: they are fundamentally linked. The export problem is in many ways a symptom of the productivity problem. Data shows that productivity growth and export growth go together. Firms that are more productive go onto export their goods and services. The emerging markets will soon start to compete with the UK even in areas where it currently has a strong advantage: areas like pharmaceuticals, luxury goods and high tech products. We will need to continually innovate to keep up.

Secondly, there are areas where we already have a strong advantage, but we are not making the most of it. We have an advantage in services. But unlike goods, we don’t have a truly single market in services across the EU. Whilst some services are necessarily location-based, others do not necessarily have to be: professional services for example, can be traded across borders as long as regulatory barriers are taken away. We need to push much harder to make sure this happens. And, we should also be aware that for many of our services firms – and some UK firms that produce goods too – the best way of accessing new markets may not be straightforward exporting; it may be direct investment in new markets, such as setting up a branch or joint venture. Firms should be provided to with the support to sell abroad in this fashion too.

Finally, it is hard to have any discussion about economics without a complaint about lack of data. Professor Jonathan Haskel, a co-respondent to Vince Cable’s speech, raised the point that we are not very good at measuring investment, now that so much investment relates to intangibles such as software and R&D. That’s vital, because if we don’t fully understand the causes of our productivity and export problems, then they will be very hard to solve.

Download a copy of the Business Secretary’s speech


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