The UK’s top six productivity underperformers

The FT has been running a series of articles about the UK’s dreadful recent productivity performance, kicked off with this very helpful summary – Britain’s productivity crisis in eight charts. One important aspect of this was to focus on the (negative) contribution of formerly leading sectors of the economy which have, since the financial crisis, underperformed:

“Computer programming, energy, finance, mining, pharmaceuticals and telecoms — which together account for only one-fifth of the economy — generated three-fifths of the decline in productivity growth.”

The original source of this striking statistic is a paper by Rebecca Riley, Ana Rincon-Aznar and Lea Samek – Below the Aggregate: A Sectoral Account of the UK Productivity Puzzle.

What this should stress is that there’s no single answer to the productivity crisis. We need to look in detail at different industrial sectors, different regions of the UK, and identify the different problems they face before we can work out the appropriate policy responses.

So what can we say about what’s behind the underperformance of each of these six sectors, and what lessons should policy-makers learn in each case? Here are a few preliminary thoughts.

Mining. This is dominated by North Sea Oil. The oil is running out, and won’t be coming back – production peaked in 2000; what oil is left is more expensive and difficult to get out.
Lessons for policy makers: more recognition is needed that the UK’s prosperity in the 90’s and early 2000’s depended as much on the accident of North Sea oil as any particular strength of the policy framework.

Finance. It’s not clear to me how much of the apparent pre-crisis productivity boom was real, but post-crisis increased regulation and greater capital requirements have reduced apparent rates of return in financial services. This is as it should be.
Lessons for policy makers: this sector is the problem, not the solution, so calls to relax regulation should be resisted, and so-called “innovation” that in practise amounts to regulatory arbitrage discouraged.

The end of North Sea oil and the finance bubble cannot be reversed – these are headwinds that the economy has to overcome. We have to find new sources of productivity growth rather than looking back nostalgically at these former glories (for example, there’s a risk that the enthusiasm for fracking and fintech represent just such nostalgia).

Energy. Here, a post-privatisation dysfunctional pseudo-market has prioritised sweating existing assets rather than investing. Meanwhile there’s been an unclear and inconsistent government policy environment; sometimes the government has willed the ends without providing the means (e.g. nuclear new build), elsewhere it has introduced perverse and abrupt changes of tack (e.g. in its support for onshore wind and solar).
Lessons for policy makers: develop a rational, long-term energy strategy that will deliver the necessary decarbonisation of the energy economy. Then stick to it, driving innovation to support the strategy. For more details, read chapter 4 – Decarbonisation of the energy economy – of the Industrial Strategy Commission’s final report.

Computer programming. Here I find myself on less sure ground. Are we seeing the effects of increasing overseas outsourcing and competition, for example to India’s growing IT industry? Are we seeing the effect of more commoditisation of computer programming, with new business models such as “software as a service”?

Telecoms. Again, here I’m less certain of what’s been going on. Are we seeing the effect of lengthening product cycles as the growth in processor power slows? Is this the effect of overseas competition – for example, rapidly growing Chinese firms like Huawei – moving up the value chain? Here it’s also likely that measurement problems – in correctly accounting for improvements in quality – will be most acute.

Pharmaceuticals. As my last blogpost outlined, productivity growth in pharmaceuticals depends on new products being developed through formal R&D, their value being protected by patents. There has been a dramatic, long-term fall in the productivity of pharma R&D, so it is unsurprising that this is now feeding through into reduced labour productivity.
Lessons for policy makers: see the recent NESTA report “The Biomedical Bubble”.

Many of these issues were already discussed in my 2016 SPERI paper Innovation, research and the UK’s productivity crisis. Two years on, the productivity crisis seems even more pressing, and as the FT series illustrates, is receiving more attention from policy makers and economists (though still not enough, in view of its fundamental importance for living standards and fiscal stability). The lesson I would want to stress is that, to make progress, policy makers and economists need to go beyond generalities, and pay more attention to the detailed particulars of individual industries, sectors and regions, and the different way innovation takes place – or hasn’t being taking place – within them.

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