Diane Coyle: Only farmers are making hay

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If asked to guess which sectors of the UK economy were the most productive relative to their US equivalents, few people would get the right answer: agriculture and construction. Both these sectors, along with the utilities, showed rapid growth in total factor productivity (a measure of the productivity of both capital and labour) from 1973 to 1995. In both cases there is little difference between the two countries.

It would be much less of a surprise to hear that on this side of the Atlantic we are relatively highly inefficient in manufacturing, where the productivity gap in 1995 stood at 42 per cent. But perhaps more so to learn that we do not compare well with the US in our efficiency in financial services or the distributive trades, including retailing: both showed lamentable produc- tivity growth over that 22-year period.

It's always exhilarating to discover facts that shed fresh light on a familiar subject. These particular ones come from an essay by Stephen Nickell, a member of the Bank of England's Monetary Policy Committee, and John van Reenen in a new book* about technology and economic performance. Clearly neither agriculture nor construction in the UK has the reputation it deserves for efficiency, though of course a lot has gone wrong in farming since the latest year for which these figures are available.

Sadly, a lot of the rest of the British economy has exactly the reputation it deserves for lagging behind the US and, to a lesser extent, other leading economies like Germany and France. (It's little consolation that the Japanese productivity performance now looks worse than ours.) The gap exists not only in manufacturing but in most services, something about which commentators and policy-makers tend to be dangerously complacent.

The authors explore statistics on a variety of potential explanations for this now-familiar British weakness. One candidate they rule out is any shortfall in the UK's technological capacity or basic science. On the contrary, the science base – measured by indicators like research publications and prizes – is relatively strong. In addition, a high proportion of UK graduates specialise in science and engineering. And the education system performs very well for the top third of the general ability range.

Sadly, there is a list of other requirements for technologically innovative economic performance which shows us faring dismally in cross-country comparisons. Take the education of all the rest of the ability range: while 7 per cent of the German workforce displays the lowest level of quantitative literacy (being able to check change in a shop), the figure is 23 per cent in the UK (and 21 per cent in the US).

The quality of managers in the UK is lower than in other countries. A comparison of value-added created in UK-owned and managed factories here, compared with US-owned equivalents in the UK, showed nearly half the 32 per cent advantage of the latter to be due to better management.

A striking difference between the UK and everywhere else is spending on research and development. About two-fifths of our very low national R&D spen- ding is done by the pharmaceuticals industry, which means almost every other sector just doesn't bother. The UK is also one of the few countries to have seen declines in business R&D expenditure since the early 1980s, from a position in the early 1970s when British companies were second only to American ones in their focus on developing practical innovations.

What's more, it is big companies that have given up; small ones in Britain do about as much R&D spending as their counterparts in the other big economies. No doubt partly as a result, the UK has a lower share of patents than the other countries, and this share has declined over time. This is a scandal on which the whistle needs to be blown, and about which shareholders should be raising questions at AGMs. A majority of big British businesses do not sow the seeds for their future, our future, by spending adequately on R&D.

That there is an exception to the rule of British mediocrity – pharmaceuticals and the thriving biotechnology sector – makes this broad picture all the more depressing. It means there is nothing inevitable about the rest of UK industry lagging behind.

Sadly, there are all too few surprises in the list of weaknesses. We have sorted out some past problems such as chronic macro- economic instability and appalling indus- trial relations. All we need do next to catch up with the US at the technology and productivity frontier is educate the masses as well as the élite; train our managers (an MBA is commonplace now among American managers); and persuade businesses to spend more on investment and in particular R&D. Only parts of this will be down to government; business has a lot to do for itself. As the authors conclude, what we still suffer from is "an inability to absorb best-practice technology and methods into wide swaths" of the economy.

It might not be saying much that our farmers and building workers match the best in the world, these being notoriously sheltered and inefficient sectors of every economy. But they do make up for the laggards in British finance and industry. Without them, our economy would compare even less favourably with the US.

* 'Technological Innovation and Economic Performance' is edited by Benn Steil, David Victor and Richard Nelson and published by Princeton University Press for the Council on Foreign Relations.

Diane Coyle runs the consultancy Enlightenment Economics and is the author of 'Paradoxes of Prosperity'. Diane@enlightenmenteconomics.com