The quick profit syndrome has to go if the UK is to prosper, says Roger Eglin.
Talking recently about how to improve the country's industrial performance, one university science professor's prescription was simple: "Find out how the Germans do it and copy them." In a new study, the National Economic Development Office has done just this - though it has gone one better.
The paper prepared by Dr Walter Eltis, the director general of NEDO, is on superior economic performance, and looks at how Japan and Germany consistently achieve the sort of industrial success we find so elusive.
There is no disputing the outside position of Japan and Germany as role models for economic success. Measured by national income per head, Germany overtook Britain in the late 1960s and Japan caught up in the early 1980s. Talking productivity, Germany passed Britain in the early 1970s, and Japan will do the same within the next few years - and would have done it a lot sooner without the incumbrance of its inefficient agriculture sector.
Taking into account other conventional measures - share of world trade, employment and capital formation - Eltis's paper only emphasises the gulf between Britain and her two great industrial rivals. Much of this we already know. But what is particularly interesting is Eltis's examination of the financial and economic context within which the companies in the three economies operate.
His conclusion is that British companies are significantly less profitable than their German and Japanese counterparts. Both of these countries have been achieving a greater rate of return on capital investment for many years: since the 1970s Britain has never managed better than 10%, compared with over 20% in Japan and slightly better than 15% in Germany.
The consequence of this, as the chairmen of NEDO's sector groups and working parties point out in their memorandum accompanying Eltis's report, is British industry's uneasy relationship with the financial sector.
"Investments have to earn prospective rates of return that exceed interest costs and the real interest rates British companies have had to pay have been just as high as those in Japan and Germany. Because of faster inflation, British nominal interest rates have been higher still. There has therefore been a general lack of headroom between industry's prospective profits and the interest that the finance sector has required, which has led to conflict and controversy in the relationship between industry and finance," says the office.
It is a conclusion that goes right to the heart of debate on short-termism. Such low rates of return mean that the financial sector cannot afford to take a long-term view on investment in British industry. With the near certainty that inflation will wipe out any real profit, the risk is simply too great. The financial sector will inevitably focus on short-term projects with the likelihood of a surer, inflation-proof return.
What also emerges from Eltis's study is that financiers are not the only ones "guilty" of short-termism. The failure of successive governments to achieve a stable economic framework within which industry can operate has made short-termists of all of us. "A United Kingdom business", says Eltis, "knows an acceleration of inflation of the kind that we have frequently suffered in the last 25 years will inevitably be followed by government deflationary policies within two to four years. This may take the form of far higher interest rates, increased taxation or public expenditure cuts, which will include curtailments of government orders and contracts.
"The knowledge that one or more of these is inevitable within two to four years means that, once inflation rises, companies recognise that government-inspired stop-go is inevitable. In Germany and France, in contrast, where inflation was generally lower, business had no reason to expect that governments would have to act to remove the economic foundation of their markets. They could therefore plan ahead far more effectively."
While the typical British firm is focused on the need to make a quick profit, its Japanese and German rivals are "planning ahead", investing in training, innovation and more efficient plant, secure in the knowledge that the anticipated returns will not be wiped out overnight.
The current state of the motor industry is an example of British "short termism" at its worst. After a good spell with sales running at around two million cars a year, a fall of something like 25% to around 1.5 million seems certain this year.
Most of this fall is the consequence of the Government's anti-inflationary policy. It is proper that getting inflation under control should be one of the Government's most important priorities - and it is necessary to avoid damaging swings in policy. But until we have demonstrated that we have a tight grip on inflation it is going to be hard to convince any rational multinational motor manufacturer to base investments in this country or to adopt a long-term development strategy based on the UK.
The NEDO council meeting in July called on the Chancellor, Norman Lamont, to embrace a policy of achieving zero inflation. But while that undoubtedly remains his ultimate aim, he preferred to commit himself for the time being to the more practical goal of achieving 4%, though he welcomed the employer-union consensus on the importance of getting inflation down.
Meeting even the 4% target would be a breakthrough. But to do it means achieving a hitherto undreamed of consistency on economic policy. Yet it is the key if we are to shed our destructive short-termism. But the professor's advice was sound. The time is long past when we should have taken a lead from Germany.