Productivity growth in the UK economy is almost non-existent. Many people find this fact puzzling. However, there’s a simple reason why, and there’s a relatively simple solution too – if only we can bring ourselves to face up to it.
If we want to rebalance our economy, and get our productivity up, we need to make manufacturing profitable again. We need to create the conditions whereby it makes sense to site new manufacturing facilities in the UK instead of China or Germany or Holland.
But to do this, we need a much lower exchange rate. This would make the prices we charge for goods to be sold to world markets much more competitive. We might not all agree with this strategy but it is the only way we are ever going to crack the UK productivity puzzle.
The UK’s low productivity is the result of two factors. Economic growth stems very largely from investment. Currently, we invest a very small proportion of our national income compared to most other countries, and what we do invest in produces very small returns.
According to the World Bank, the global average percentage of GDP devoted to investment of all kinds is 26%. In China it is a whopping 45%. In the UK it is around 16% – well below the world average. If you take the return on investment, the world average is 14%, whereas the figure for the UK is 8%. This gives us a growth rate in the UK for the last decade or so of 1.4% per annum compared to a world average of 3.5% and around 9% a year in China.
This 1.4% per annum rate for the UK may look better than nothing, but by the time you factor in our population rising at about 0.6% a year, the proportion of GDP going to wages and salaries tending to fall, our increasingly large negative net income from abroad, which reduces the size of the total income pot, and the fact that those with sharp elbows commandeer most of what little increase in living standards there is, most people have stagnant incomes. This is our chronic national problem.
Why do we invest so little and get such a poor return on what we do put by for our future? The answer is clear. Only narrow ranges of investments produce economic growth and we spend far too little on them. Nearly all public sector investment – on roads, rail, schools, hospitals, public buildings and housing – however desirable they all may be in social terms, produces very little economic growth.
The same is true of private sector investment in office blocks, shopping malls, new restaurants and IT to support legal, financial and advertising services. What does produce high returns is investment in mechanisation, technology and power – and very little else.
Think of a bulldozer replacing a shovel, a combine harvester being used instead of a sickle, a 20-ton truck instead of a wheelbarrow. Think also of new machinery with far higher output rates for the same inputs as what it replaces. It is the huge increases in output per hour achieved by investments in these sorts of assets which produces economic growth. These are the investments the UK needs to grow and thrive.
The problem is that expenditure on these assets tends to be in the private sector, particularly light manufacturing, where profitability is the key touchstone. Unfortunately, successive governments over the last 40 years have allowed rampant deindustrialisation. This means that investment in this part of our economy is hopelessly unprofitable.
There is only one long-term solution to this. We have to make it profitable to invest in the types of assets which really do push up the growth rate, and to do this we must start actively managing our currency.
Our problems stem largely from our exchange rate: we have the world’s most overvalued currency. It is much too high, and consequently we charge out all the overhead costs involved in manufacturing to world markets at much too high a rate. A dollar fifty to the pound may work okay for services, where we have big natural advantages in our language, geography, legal system, universities and skill-base, but it is lethal for manufacturing which enjoys none of these special advantages.
Rather than ignoring the fact that right now it’s unprofitable to invest in the UK, we must face up to our biggest economic challenge, tackle our overvalued currency and start making manufacturing pay again.
John Mills is founder and Chairman of JML, the consumer goods company.
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