The Economist - USA (2022-06-11)

TheEconomistJune11th 2022 Britain 57

ryBritain’slabourproductivitywasbelow
thatofAmerica,FranceandGermany(see
chart1).AlthoughitmatchedFrance’sgdp
perhouratthebeginningofthe1970s,by
2000 it trailedbyover10%.
Thiscenturystartedpromisingly.Be­
tween 1997 and 2007 Britishproductivity
growthwassecondonlytoAmerica’swith­
intheg7 groupofcountries(seechart1);
outputperhourgrewatanannualaverage
rateof1.9%.Overthecourseofthatdecade
Britain’sgdpperhourgrewfrom88%of
Germany’sto93%.
Butthen,disastrously,theglobalfinan­
cialcrisisstruck.The productivityslow­
downthatfollowedwasglobal,butBrit­
ain’swasparticularlydramatic. Between
2009 and 2019 itsproductivitygrowthrate
wasthesecondslowestintheg7.Astudy
byNickCraftsattheUniversityofWarwick
andTerenceMillsofLoughboroughUni­
versitycalculated thatBritain’s shortfall
during this period, compared with the
pre­2008trend,wastheworstin 250 years.
Thereisnodoubtthatthecostofthis
lostdecadewashuge.HadBritain’spro­
ductivitygrowthratenotfallenafterthe
globalfinancialcrisis,gdpperpersonin
2019 would have been £6,700 ($8,380)
higherthanitturnedouttobe.Butthereis
fierce debate over what exactly went
wrong.DianeCoyle,a directorofthePro­
ductivityInstitute,a researchconsortium,
likensthesearchfora sourceofBritain’s
weakproductivitygrowthtotheconclu­
sionofanAgathaChristiemystery.“Every­
bodyturnsouttohavedoneit.”
SeveralenormousshockshittheBritish
economyoverthecourseofthatdecade,
evenbeforethepandemicdeliveredanoth­
er.Thefinancialcrisiscurbedtheflowof
credit.Onestudypublishedin 2020 found
thatcompanieswithweakerpre­crisisbal­
ance­sheetsthatfaceda particularlysevere
reductionincreditsawsharperreductions
intfpgrowth,partlybecausetheycutback
oninnovation.Droopingdemandcrimped
incentivestoinvestandinnovate:around
halfofEuropeaneconomistssurveyedin
February 2020 attributed Britain’sslow­

downtoweakdemandassociatedwiththe

financialcrisisorausteritypolicies.

AndthentherewasBrexit.Ononeesti­

mate,uncertaintycausedbyBritain’sde­

parturefromtheeudepressedbusinessin­

vestmentbyasmuchas11%in2019,rela­

tivetowhatitwouldhaveotherwisebeen.

ErectingtradebarrierswithBritain’sbig­

gesttradingpartnerhaseatenupmanag­

ers’time,madesupplychainslessefficient

andaddedcosts.Noneofthathashelped.

Industry­leveldatayieldfurtherclues

astowhatwentwrong.Theslowdownin

tfpgrowthwithinfinancialservicesand

insurancecontributedasmuchasa third

oftheeconomy­widedropbetween 2007

and2019,accordingtoJonathanHaskelof

ImperialCollegeLondonandPeterGood­

ridgeofManchesterUniversity.Informa­

tion­technologyservices,transport­equip­

mentmanufacturingandpharmaceuticals

alsocontributed—allindustriestypically

thoughtto beamongBritain’sstrengths.

Overall,theyfind thatintangibles­heavy

andtechnology­intensiveindustrieswere

harderhitduringthe2010s.

Therearevariouswaysofinterpreting

thesefindings.Oneisthatexcessiverisk­

taking inthefinancial­servicesindustry

artificiallyinflatedBritain’smeasuredpro­

ductivityinthe2000s.Nowthattheindus­

tryismoreheavilyregulated, itmaynot

seemasproductiveasitoncedidbutthe

riskofa financialcrashislower.Another

interpretationisthatthebenefitsoftech­

nological change are petering out for

everyone.Some,likeJohnFernaldofin-

seadBusinessSchoolandRobertInklaar

oftheUniversityofGroningen,arguethat

mostofBritain’stfpslowdowninthede­

cadebeforethepandemicreflectedweaker

performanceinAmerica,whichsetsthe

tempoofproductivityglobally.

Butevenif thefrontierisslowing,there

is noiron law that says Britaincannot

moveclosertoit.CatchingupwithAmeri­

ca’s level of labour productivity would

meanthatBritain’sgdpperpersonwould

be£6,600higher,forexample.Andevenif

itishardtopindowntheexactsourcesof

theproductivityslowdowninthe2010s,it

iseasiertoidentifyareaswhereBritainhas

todobetterinfuture.Theyfallintothree

bigcategories:investment,peopleandthe

spreadofknowledge.

Themostobviousweaknessisinvest­

ment. Britain consistently invests less

thanFrance,GermanyandAmerica;ithas

alsolongspentlessonresearchanddevel­

opment(seechart2).Adjustmentsforthe

capitalavailabletoworkersexplainalmost

allthegapbetweengdpperhourworkedin

BritainandFrance,andabouta thirdofthe

gapbetweenBritainandGermany.Uncer­

taintyaboutwhatisaroundthecornerfor

Britain’sfirmsisoneexplanationforthis

shortfall,butfarfromtheonlyone.

Financing isanother. AnnaValeroof

theLondonSchoolofEconomicssaysthat

partof theproblemrelative to America

maybethatinBritainitishardertoraise

theequitycapitalthatsupportsrisk­tak­

ing.ComparedwithGermany,wherelocal

bankshavelong­termrelationshipswith

firms,it ishardertofindpatientfinance.

Arelatedproblemisthatinvestmentis

stymiedbythedifficultyofgettingany­

thingbuiltinBritain.Accordingtoa recent

oecdindexofland­usegovernance,which

measureshowfragmentedplanningdeci­

sionsare, Britain’ssystemcamesecond

only to Latvia among 18 countries sur­

False economy

As % of GDP

Source:OECD

2

30

25

20

15

10

1982 2115100520009590

Investment

Germany France

Britain

UnitedStates

4

3

2

1

0

1982 2115100520009590

Research and development

France

Germany

Britain

United States

Losing ground

Source:OECD *Purchasing-power parity

1

80

70

60

50

40

20001997 05 10 1915

GDPperhourworkedatPPP*,$, 2015 prices

Italy

Germany

France

UnitedStates

Britain

G7average

Italy

Britain

UnitedStates

France

Canada

Germany

Japan

0 2.52.01.51.00.5

Output per hour worked, average annual % increase

199-200 2009-19