英国国家经济和社会研究所-生产力与投资：管理更新项目的时机（英）

National

Instituteof

Economicand

socialResearch

Productivity

andInvestment

TimetoManage

theProjectofRenewal

PaulFisher

March2024

PRODUCTIVITY

COMMISSION

PRODUCTIVITY

COMMISSION

TheUKProductivityCommission(TheCommission)wasestablishedbytheNationalInstituteof

EconomicandSocialResearch(NIESR)aspartofTheProductivityInstitute(TPI),whichisfundedbytheEconomicandSocialResearchCouncil(ESRC).TheCommission’smainpurposeistoexamine

theUK’spoorproductivityperformanceandprovidepolicysolutionstoaddresstheshortfall.

TheobjectivesofTheCommissionare:

.tohelpunderstandandcommunicatethepolicyimplicationsofnewacademicresearchrelatedtoUKproductivity;

.tocollectevidencefromkeystakeholdersandprovidesummariesofresearchandevidencewithanemphasisonregionsandthedevolvednations;

.toexaminetheimplicationofplannedpolicies,respondtopolicyinitiativesinWhitehall,elsewhereandoverseas,providepolicyadviceanddeveloppolicyproposals.

National

Instituteof

Economicand

sociaIResearch

NIESRisBritain’slongestestablishedindependentresearchinstitute.Weoperateasacharity,

independentofallparty-politicalinterestsandreceivenocorefundingfromgovernmentor

othersources.Itsmissionisto“carryoutresearchintotheeconomicandsocialforcesthataffectpeople’slives,toimprovetheunderstandingoftheseforces,andthewaysinwhichpolicycan

bringaboutchange”.

TPIisaUK-wideacademicresearchorganisationexploringwhatproductivitymeansforbusiness,forworkersandforcommunities–howitismeasuredandhowittrulycontributestoincreased

livingstandardsandwell-being.

TheProductivityInstituteisfundedbytheEconomic

andSocialResearchCouncil(grantnumberES/V002740/1)

Contents

1.Introduction6

2.WhenDoesthe(UK)SlowdownStart?11

3.WhatHasCausedtheSlowdownandWhyistheUKUnder-Performing?19

4.SlowdownintheGrowthofLivingStandards–Really?28

5.RegionalIssues31

6.StrategicConsiderationsinPromotingInvestment34

7.InvestmentinHealthandEducation42

8.InvestinginTheTransitiontoNetZero46

9.Conclusions55

AboutTheAuthor

Theauthorisoneofaround150volunteer‘Governors’ofNIESRandalsohasaffiliationsasavisitingprofessororfellowwithanumberofUKacademicinstitutionsincludingWarwickUniversityBusinessSchool;theLondonInstituteofBankingandFinance;Richmond,theAmericanInternationalUniversityinLondon;KingsCollegeBusinessSchool;andTheCambridgeInstituteforSustainabilityLeadership.

Acknowledgements

TheauthorwouldliketothankStephenAldridge,KateBarker,JagjitChadha,EileenHarkin-Jones,MaxHarvey,KonstantinaMavraki,StephenMillard,DirkPilat,BartvanArkandalltheparticipantsofaProductivityCommission/NIESRworkshopon11October2023forcommentsondraftsofthispaper.Notwithstandingtheirhelpfulinput,theviewsexpressedinthispaperareentirelythoseoftheauthorandshouldnotbeattributedtoNIESRoranyotherinstitutionorperson.

ProductivityandInvestment

TheFour

KeyPoints

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TheunderlyingslowdowningrowthandproductivityisaffectingalldevelopedeconomiesandhasbeenhappeningintheUKformuchlongerthanusuallyappreciated.Mostlikelythisslowdownisthenaturalconsequenceofthechangingeconomicstructureasmatureeconomiesde-industrialise.

Theunder-performanceoftheUKcouldbeaddressedinpartbyimprovingthegovernanceandstrategyassociatedwith

significantinvestmentprojects.

Policyshouldnowfocusonmaximisingwelfareratherthan

GDPgrowth,takingintoaccountthechangingstructureoftheeconomyasitcontinuestoevolve.Thatmeanssupportingmuchbroaderconceptsofinvestmentthanjustphysicalplantand

machinery,andreflectingthepositiveexternalitiesassociatedwithinvestment,particularlyinpeople.

Tomaximisethesustainablerateofwelfaregrowthgoing

forwards,policyshouldfocusonfacilitatingthedigital

transformation.Andinvestmentneedstobeboostedspecificallyinhealth,educationandinthetransitiontonetzerogreenhousegasemissions.Thatcouldbeprivateorpublicsectorled,buta

moreactivistandrationalpolicyapproachisneededeitherway.

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1.Introduction

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ThispaperwascommissionedbytheUKProductivityCommission(TheCommission)toaddressthepolicyquestionofhowtoraiseUKinvestmentinordertomeetthelong-standingchallengeofaslowinginproductivitygrowth.ThepaperfirstreflectsontheevidenceandanalysispreviouslysubmittedtoTheCommissionandthenproposessomeareasforpolicytoaddressinordertoenhanceinvestmentintheUKeconomy.

TheUKproductivityslowdownhasbeenafocusofeconomicanalysisforatleast15yearsandacommonconceptionoftheproblemhasdeveloped,someofwhichthispaperseekstochallenge.On28September2023,theBBCcarriedareport1byitseconomicseditorFaisalIslam,underthetitle2‘ProductivityPuzzle.Thedeep-rootedproblemholdingbacktheUKEconomy.’Thatreportnicelysummarisestheissuesfromapopularperspective:

“Thefutureoftheeconomyandprosperitydependsoninvestmentspending.TheUKhasanunderinvestmentcrisis,anditaffectsboththeprivateandthepublicsector…

“Britishbusinessdoesnotnowinvestasmuchasothermajoreconomieseither.TheUKwasinsecondplaceintheG7forprivateinvestment,asashareoftheeconomyinthemid1990s,buthasnowfallenbehindthemall.Thelong-termimpactofthisislowproductivity–wetakemoretimetoproducelessthanourrivals–whichresultsinlowgrowth,lowrealwages,andthenproblemsraisingmoneyforpublicservices.”

ThesecommentsarebroadlyconsistentwithmuchofthelargevolumeofevidencesubmittedtoTheCommission.Despitethatanalysis,andanextensiveacademicliteratureelsewhere,thereisnotyetanyagreedunderstandingofwhyproductivitygrowthhasslowedinternationally,norwhytheUKhasunderperformed(Goldinetal.,2022).

TheredoesseemtobeevidencethattheUKisinvestinglessthanothercountries,butnoconsensusonwhythatishappeningeither.Giventhat,thispapertakesastepbacktolookatsomeoftheunderlyingissuesafresh.

Section2addressestheissueofwhentheproductivityslowdownstarts.ManystudiessubmittedtoTheCommissionnaturallyfocusonthevisibleUKslowdowninoutputgrowthandproductivitysince2007/8,withsomelinkingitimplicitlyorexplicitlytotheGlobalFinancialCrisis(GFC)ofthattime.Incontrast,thispaperarguesthatthepreviousperiodfromaround2002-2007,sawastrong,demand-drivenupturnintheUKwhichmeansthat2007/8isnotanappropriatemid-cyclereferencepoint.

Interpretingthedatainalongerhistoricalcontextsuggeststhattheinternationalslowdownindevelopedeconomies,includingtheUK,isevidentfromatleastasfarbackastheyear2000andthatonecanidentifyamuchlongerandsmoothertrendgoingbackmuchfurtherwhichhasnofixedstartingpoint.Ifcorrect,thatwouldchallengesomeoftheevidenceandconclusionsofexistingresearch.

1https://www.bbc.co.uk/news/business-66937239

2OntheBBChomepagethelinkwastitled‘big’ratherthan‘deeprooted’.

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Sections3and4addressdeeperissuesabouttheslowdown–whatcausedit,anddoesitreallymeanslowergrowthinlivingstandards?First,thenatureofexponentialgrowthisexamined.Whyshouldthedefaultassumptionbethatoutputcangrowexponentiallyintotheinfinitefuture?

AfterreviewingtheevidencesubmittedtoTheCommission,thispapersupportsthehypothesisthattheobservedslowdowninproductivityandhenceGDPgrowthobservedinmanydevelopedcountriesisconsistentwiththefundamentalpatternofdevelopmentofalladvancedeconomiesastheyfullymature.Inparticularaseconomiesde-industrialiseandmovetowardsbeingservicesbased,productivitygrowthnaturallyslows.ThedifferencebetweenproductivitygrowthinmanufacturingandserviceshasbeenwelldocumentedineconomictheorywiththeBaumoleffectexplainingthathigherpricesandwagesinproductivesectorstendtodriveupwagesandpricesinlessproductivesectors,andtheBalassa-Samuelsoneffectexplaininglargeinternationaldifferencesinnon-tradeableprices.

Productivitygrowthinmanufacturingmayalsonaturallyslowasthesectormatures.Productionprocessesbecomeincreasinglyautomated,leavinglessscopeforfurtherproductivityimprovements,whileagreatershareofvalue-addedwithinmanufacturingfirmscomesinthecontributionofservicessuchasdesign,marketing,sales,financeandlogistics.Onemightcomparewhatishappeninginmanufacturingindustrywithwhathistoricallyhappenedtoagriculture–whichbecamehighlymechanisedbutaverysmallshareofUKGDP.

ThepropositionthatthedevelopedeconomyproductivityslowdownisaconsequenceofeconomicmaturityhasbeenmadebyVollrath(2020)amongstothers,butintheUKthatprocessmayhavebeenobscuredbyademandboombeforetheGFC.

Section4askshowtheslowdowncanhavehappenedatthesametimeastheinternet/smartphonerevolutionhastransformedhowweallliveandwork.Thepapersupportstheviewthatasaneconomyshiftstowardsdigitalservices,GDPisdiminishingnotonlyinitsgrowthratebutalsoinitsvalueasaproxyforwelfare.Vollrathexpressesitmorepositivelyinarguingthattheslowingdownisasignofasuccessfuleconomy,inwhichthereisagrowingfocusonnon-productionrelatedwelfare.

Conceptsofinvestmentandproductivityaremorecomplexinaservices-dominatedeconomy,andevenmoresoinadigitaleconomy.ThisisalsoaconclusionfromstudiessuchasBrynjolfssonetal.,(2019),whichgoesasfarastosuggestanewmeasuretoreflectthewelfarefromdigitalservices.Butmanyexperiencedobserversnaturallythinkintermsofthevolumeofoutput,asrepresentedbytheBBCarticlewhichincludesthefollowingstatementabouttheUK:

“…wetakemoretimetoproducelessthanourrivals...”.

ThatobservationmayberelevanttoUKmanufacturingprocessesbutnottomanyservices(considerpersonalservicessuchasrestaurantmeals,haircutsetc).Manyofournormaleconomicindicators–includingpriceindices–areunabletocapturetheimprovementsinwelfaregeneratedbythenewlyevolvingstructureofoutputandincome.Ineconomictermsonemightsuggestthattheeconomicrentofconsumersmusthaverisenmuchfasterthantheirmeasuredrealincomes.3

3Abstractingfromtheeffectsofthepandemicandtherecentcost-of-livingcrisiswhichunfortunatelyservetoobscurethelonger-termtrends.

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Takingtheseanalysestogether,a‘slowdown’inmeasuredproductivitywouldbeaninevitableconsequenceofstructuralchangeandwouldnotnecessarilyindicateaslowdowninthegrowthoflivingstandards.Evenso,slowinggrowthdoescausepublicpolicyproblems,includingtheunfulfilledexpectationsofrisingmonetaryincomesanddifficultiesinmanagingthepublicfinances.Inaddition,inequalitiesinincomeandwealthseemtobebecomingatleastmorevisible,potentiallymorepronounced,andcertainlymorepoliticallysensitive.

Aspartoftheseconsiderations,thepapersuggeststhattheunder-performanceoftheUKmaynotbequiteasgreatassomeofthesubmissionstoTheCommissionassert.Thereiscertainlyameasuredgaptothe‘frontier’asrepresentedbytheUSeconomy,andthatgapcoulddoubtlessbeatleastpartiallyclosed.ButslowingmeasuredGDP/productivity/investmentgrowthislikelytocontinuetobethefuturelong-termtrendforeverydevelopedcountry.

RatherthanpoliciesemulatingKingCnut,policyshouldbefocussedconstructivelyonexaminingtheconsequencesofthechangingeconomictidesandhowtomakethebestoutofthenewandevolvingeconomicstructure.Thatmayrequiredifferentmeasuresofwelfare,ratherthansolelyfocussingonGDP.

Lookingforwards,werequireamuchbroaderviewofinvestment,beyondphysicalassetssuchasplantandmachinery.Inaservices-dominated,digitaleconomy,thenatureoftheeconomicinvestmentrequiredischanging.Therewillstillneedtobeinvestmentininfrastructureandsustainableproductionprocesses.Butinvestmentinpeopleisthekeyformanyservice-sectorbusinesses.Andinfrastructureinvestmentshouldprioritisethedigitaleconomythroughtherapiddevelopmentofdigitalnetworks.

Thatsuggestedfocusofpolicy,andofresearchtosupportpolicy,shouldnotbetakenasunderminingthearguments,evidenceandproposalspresentedtoTheCommissionforinvestinginhealth,education,theregionsandinagreeneconomy,allofwhicharedesirableforthedirectbenefitstheybring,regardlessoftheirmeasuredimpactonmacroproductivitydata.

GivenitsprevalenceinsubmissionstoTheCommission,theissueofregionaldifferencesinproductivityisspecificallyreviewedinSection5.ManyofthesubmissionstoTheCommissionargueforgreaterinvestmentinorviatheregions.Thispaperagreesthatagoodsocial,politicalandeconomiccasecanbemadeforaddressingregionalinequalities.Similarly,onecanmakethecaseforinvestinginhealth,education,andthenetzerotransitionandatleastsomeofthatinvestmentmaybemosteffectiveifdriventhroughproactiveregionalpolicies.

Andyet,thepapernotesthatthereisnoevidenceoranalysistosuggestthatregionaldifferencesaretherootcauseofthenationalslowdown,northattheyareresponsiblefortheUK’srelativeunderperformance.Andalthoughthescaleandnatureofregionaldifferencesareverywelldocumented,theexplanationsforthemarelessconvincing.Withoutcausalanalysis,itisdifficulttobesurethatpolicyproposalsarealwaysaddressingtherightproblems.Asimplemodelisusedtodemonstratethatpoint.

InSection6,thispaperthenaddressesthegeneralapproachtoimplementingstrategiestoimproveproductivityandinvestment,arguingforaclearer,moreactiviststrategyandmoreformalorganisationthancurrentlyexists.Applyingnormalprojectdisciplinestoaportfolioofnationalprojectswouldhelp,aswouldapoliticallybi-partisanapproach.

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Inordertomakeconstructiveproposalsforinvestmentpolicygoingforward,thepaperproposesthatgovernmentandregionalauthoritiesshouldfocusonwherethesocialandeconomicbenefitsofchangearegreatest,inthecontextofthenewandevolvingeconomy,ratherthantryingtoturnbacktheclock.

Section7directlyaddressesthepoliticallycontentiousissuesofinvestmentinhealthandeducation.Theanalysisacknowledgesthattherearedifferentparty-politicalviewsonwhethersuchinvestmentspendingshouldbeledbytheprivatesector,publicsectorordifferentbalancesinamixedapproach.Butthepaperarguesthatnopositivestrategyofanykindisbeingclearlypursued,resultinginasqueezeoninvestmentinthesekeysectors.Amoreactivistapproachwouldbewarranted,whateverone’spreferencesoverpublicspending.

Section8ofthepapermakesspecificargumentsforinvestmentinthetransitiontonetzero.ThelargestshareofthestockofGreenhouseGases(GHGs)intheatmospherehavecomefromthedevelopedworld,especiallytheUS,theUKandtherestofEurope.TheUK,asthefirsttoembraceanIndustrialRevolution,hasamajorhistoricalresponsibilityforthecurrentstockofGHGsintheatmosphere.UKemissionshavebeenfallingformanyyearsbutarestillhighandpositiveandthereforeasignificantongoingcontributiontoclimatechange.InmanydevelopingcountriestheflowofGHGemissionsisstillrisinganddevelopingAsiaisnowthelargestgeographicalsource.ThatisinpartbecausewesterneconomieshaveeffectivelyoutsourcedalotoftheirmanufacturinganditsassociatedemissionstoAsianeconomies,wheremanufacturingprocessesaremoreemissionsintensive.

IftheUKdoesn’tinvestinglobalclimatechangemitigationasamatterofurgency,includinginitsoverseassupplychains,thenmostlikelymuchofthedevelopingworldwillnoteither.Thatoutcomewouldgenerateasignificantriskofeventualglobaleconomiccollapse.Achievingnet-zerointheUKmayormaynotboostgrowthrelativetothepast,butfailuretoachievenetzerogloballycouldbedisastrousforgrowtheverywhereinthelongterm.

Againtherearepublicandprivatesectorstrategies,andaspectrumtochoosefromin-between,butcurrentUKpolicydoesnotseemtobedeliveringthedecisive,comprehensiveandgalvanisingapproachthatthiscountry–andtheworld–needs.

Finally,wenotethatthispaperisnotanti-growth,norisitintendedasacounselofdespair.Theconstructiverecommendationisthatpolicyneedstofocusonthemaximumsustainablerateofgrowthgoingforwards,nottryingtorecreateorevencomparewiththepast.Weneedtoconsidertheever-changingnatureofthemoderneconomyandencouragebroaderconceptsofinvestmenttosupportthat:morerelianceonsafedigitaltechnologies,andmoresustainableandhealthyeconomicgrowth,focussedonimprovingwelfareratherthantheproductionof‘things’.

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2.WhenDoesthe(UK)SlowdownStart?

2.1TheSlowdownisGlobal

TheanalysessubmittedtoTheCommissiondonotallagreeoneverydetail,buttherearesomebroadconclusionsonecandraw.Itisanagreed,observedfactthattherehasbeenaslowdowninproductivitygrowthamongsttheworld’smostdevelopedcountriesoveraperiodofatleast25yearsorso.

Figure1ProductivityslowdownfromTheCommission2022summaryofevidence

Source:Bergeaudetal.,(2016).

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Figure2Comparisonofproductivityinlogs

Source:Bergeaudetal.,(2016).

Figure2transformsthedatausingalogscale.

Figure1recreatesachartfromTheCommission’sfirstevidencereview(PC2022).1TheUK’srelativeproductivityslowdownlooksverysevereandmarked,mostobviouslysincethestartoftheGFCin2007.Butsuchchartsneedtobeinterpretedcautiously.Figure2inthispapershowsthesamedatatransformedusinglogs,tocomparethelong-termtrendsmoreappropriately.2

InFigure1,theuseoflevelsplacesvisualemphasisonabsolutedifferencesandrecentdevelopments.Figure2placesemphasisonpercentagedifferencesandinthatsensetreatseachpointintimeequally.TheslowdownintheUS,oftenseenasoperatingclosesttothe‘frontier’ofproductivity,looksquitedifferent.Thepeakinproductivitygrowthnowseemstooccurinthelate60s.

Inbothfigures,someoftheunderlyingtrendsarecomplicatedbysignificanthistoricalevents.ThetrendsinGermanyandFranceareseverelyaffectedbyboththeFirstandtheSecondWorldWars(WWI,WWII),butFigure2showsacleanerpictureofthechanginggrowthrateacross

1ChartrecreatedhereusingdatafromthecurrentversionofthedatabasepublishedonlinebyBergeaudetal.whichhasbeenupdatedsincethePC2022report.

2Sothat1ppdifferenceisthesamescaleeverywhereonthechart.

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thoseevents.Inparticular,bothFranceandGermanyenteracatch-upphaseafterWWIIandslowdownbeginsastheygetclosetothefrontierrepresentedbytheUS.TheUKtrendisaversionofthatalthoughwithalevelsgappersisting.

Itisquiteplausibletodeducefromthischartthattheunderlyingglobalslowdownhasbeenacontinuousprocesssincethe1960swithnospecificbreakpoint.

2.2TheUKUnder-Performance

ItwouldappearthataproductivitygapfirstopenedupbetweentheUKanditsEuropeanneighboursinthe1970satthetimeoftheOPEC-inducedoilpricecrises.ThoseshockscertainlyseemedtohittheUKharderthanpeers.ThesubsequentexploitationofNorthSeaoil,whilstitmadetheUKricher,alsohelpedcatalysetheUK’sde-industrialisation,partlythroughthe‘DutchDisease’mechanism.

DespitethosechallengesandtheUKbeingdescribedbythemediaas‘thesickmanofEurope’inthe1970s,thepercentagedifferencefrom1970to2000wasrelativelyconstantandsmallbylonger-termhistoricstandards,totheextentthatthedataaretrulycomparable.

Thereshouldbelargeconfidenceintervalsaroundalloftheseproductivityestimates,notleastbecausetheyarebasedonestimatedPurchasingPowerParityexchangeratesanduseconstant2010prices,aswellastheusualproblemsofmeasuringeconomicstatisticsoveraverylongperiodofstructuralchange.

Figure2doesconfirmawideninggapbetweentheUKandothercountriessince2000,especiallyinjustthepastfewyears.Inpartthisoverallproductivityslowdowncanbeaccountedforbyaslowdownintotalfactorproductivitygrowth(TFP).

Figure3,takenfromFigure1inFernaldandInklaar(2022),3showsthecomparativeslowdowninTFPtrends.Althoughnotaltogetherclearjustfromvisualinspection,thatslowdownisevidentfromatleastasearlyas2000intheUKandUS,andperhapsfromaround1990inthetop5EUcountriesasagroup.ThisseemstobeconsistentwiththehypothesisthattheslowdownstartedfurtherbackthanmostUKstudiesconsider.

TotheextentthatthenumbersshowninFigures1,2and3arethebestcentralestimates,thenthedifferencesrecordedbetweentheUKandthemostadvancedwesterneconomiesarequantitativelyandqualitativelyimportant.Buttheymightnotbequiteashistoricallysignificantaspeople(wantto)believe.

3DataforFigure3waskindlymadeavailablebytheauthors.

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Figure3TFPrelativitiesasshownbyFernaldandInklaar(2022)

Originalnotes:SourceisPWT10.0(Feenstra,InklaarandTimmer,2015).EU-5coversGermany,France,Netherlands,BelgiumandFinland(orderedbysizeofGDPin2010).EU-5TFPisdefinedasaTörnquistindexofTFP,variableRTPNA,weightedbynominalPPP-adjustedGDP,variableCGDPo.Trendsarecalculatedwithabiweightfilterwithbandwidthof12years.

2.3ChangingthePointofComparison

TheproblemoflowproductivityandUKunder-performancehascertainlybeenrecognisedasanissueforpolicyformanyyears.Fromtheauthor’spersonalexperienceasamemberoftheBankofEngland'sMonetaryPolicyCommittee(MPC)2009-14,monetarypolicywasmademuchmorecomplicatedbytheunexpectedlyslowrecoveryinoutputandproductivitygrowthaftertheGFC.TheevidenceofthesediscussionscanbefoundinpublishedminutesofMPCmeetings.

FromanearlydateaftertheGFC,fractionsoftheapparentundershoot–inbothoutputandproductivity–couldbeattributedtomanydifferentfactors.

UKeconomicperformancefrom2002to2007hadbeenconsideredatthetime,perhapswrongly,tobeexceptionallyandhistoricallystrongandwasbelievedtoreflectimprovedsupply-sideperformance.Butinhindsightitwasalmostcertainlyreflectingexcessdemandexpansionand,ifso,early2007representsapeak-cyclepointnotamid-cyclepoint.Arguably,theGDPgrowthratefrom2002-2007wasneversustainable.Itwasa(fiscal)demand-inducedboomwhichboostedoutputandmeasuredproductivitytemporarily,withtheinflationconsequenceskeptincheckbythenewlyindependentMPC.

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TheMPCtookactiontokeepinflationundercontrolbymaintainingrelativelyhighinterestrates.TheUKhadthehighestnominalinterestratesintheG7formuchofthatperiod.Thatdeliveredastrongexchangeratedrivenbythe“carrytrade”.4Ratherthaninflation,excessdemandresultedinadeterioratingexternalaccountandcorrespondingimbalancesinthefinancialsectorresultingfromcapitalinflows.From1994-1998,theUKcurrentaccountwasroughlyinbalance,averysmallnegative.By2008itwas-3.9percentofGDP.By2016itwas-5.4percent.5

Partofthepolicyproblemin2002-7wasamisinterpretationoftheUK’sperformanceasstemmingfromanimprovedsupply-side.Thegovernmentandmanyindependentcommentatorsatthetimecertainlythoughttherehadbeen,butitcanbehardtodistinguishbetweenademand-ledboomandasupply-sideimpr