Economics: Britain languishes at the bottom of the class

IT IS easy for politicians to play games with statistics in order to argue that the British economy is whatever it suits them to make it. Careful selection of facts enables the Government to claim that the UK has undergone a renaissance and is leading Europe in output and employment growth. With a little less ingenuity, the Opposition can show that many of Britain's problems got worse in the 1980s and we are lagging further behind other countries than ever.

Behind the welter of competing statistics, however, certain facts do stand out. Most clearly, the UK has acute and growing problems that stem from a failure of our educational system. The Commission on Social Justice, set up by the late Labour leader John Smith, and due to report tomorrow, is bound to focus on this issue.

Nearly everyone knows by now that the UK's relative economic growth rate has been slow relative to most industrialised countries since the Second World War. In terms of income per head, we have slipped from number two in 1951 to barely in the top 20 now.

In fact, the UK's elevated position at the beginning of the 1950s owed a lot to the Second World War having wreaked greater havoc in countries such as Germany than it did on us.

The relative rot had set in a great deal earlier. The great Victorian economist Alfred Marshall (whose textbook was still in use in British universities only 30 years ago) made some prophetic remarks before the 19th century drew to a close - when British power and prosperity were still at their zenith. He had noticed that American and German capital goods were often of higher quality than their British equivalents. And he observed that if those countries continued to turn out dozens of trained engineers for every one who graduated in the UK, Britain's relative decline was certain.

In the subsequent century, the pattern has indeed continued and, on many measures, the UK has fallen further behind other countries in terms of the educational accomplishments and qualifications of its population. There is little short-term correlation between spending on education, or national educational attainment, and economic growth. But the evidence is that over long periods of time - decades perhaps - education was always a good investment.

Now, however, there is a plausible argument that the association between education and growth is even closer than it used to be. That is a thesis associated with the US Employment Secretary and former Harvard academic, Robert Reich. In his book, Work of Nations, he pointed out that the opening up of world capital markets had had dramatic consequences. A company was no longer bound to site production in 'its' country or in the country where it sold its output. As technology reduced transport costs and the world opened up to capital, it could put its plant wherever in the world was best and cheapest. Similarly, a country did not need to save to invest; it could borrow foreign savings via a capital inflow to finance capital formation.

The thing that made a country 'rich' was not its capital stock but the skills of its people. Those, too, were the reason why hi-tech companies offering highly paid jobs would situate themselves in one country rather than another.

Certainly, technical progress, declining transport costs and liberalised capital markets everywhere (especially in formerly communist parts of the world) have raised the premium on human skills. That is evident from what has happened to the relative pay of unskilled and skilled workers. In 1977, unskilled workers in the UK earned about 85 per cent of the pay of workers with intermediate qualifications and about 55 per cent of the pay of graduates. Having a degree pretty nearly doubled your money. In 1992, unskilled workers still earned more than 80 per cent of the pay of those with intermediate qualifications, but as a proportion of the average earnings of graduates their pay had fallen to about 40 per cent. Now a degree multiplies your expected income by two and a half.

But that is far from the whole story. Even the big drop in relative earnings that the unskilled have experienced has not been sufficient to keep them in employment. The first chart shows that back in 1977 nearly 90 per cent of unskilled men of working age in the UK had a full-time job. An even higher proportion of graduates were in work. In 1992, more than 90 per cent of male graduates of working age still had a job, but the proportion of unskilled men in work had crashed catastrophically. Now in this country, about one man in three without qualifications does not have a job.

These figures strongly suggest that there is no future at all in an industrial or economic policy of simply keeping wages down and hoping that people will price themselves into jobs. On the contrary, it is crucial to educate everyone in the country to the limit of his or her potential if they and the country are to enjoy prosperity. Because the catch is this: even those graduates and others in work suffer from the existing situation. The 'tax-cutting' Tories have presided over a steady rise in the burden on the average family since those in work have to pay more to support the growing numbers in involuntary idleness.

It is grim news, then, that for all the expansion of higher education in the UK in recent years, it still lags in that area and, indeed, is falling further behind.

The second chart shows the proportion of young people entering higher education in different countries. The UK with 28 per cent is bottom of the league. That we lag behind the US and Germany would have been wearily familiar to Marshall.

And the fast-growing countries of the Pacific rim have got the message. In Korea, for example, they look across the straits at Japan and are determined to catch up. That is to say they want some 90 per cent of their children to have an 18-plus qualification, and nearly 60 per cent to go on to higher education. There is little doubt they will get there in due course. At the moment, young Filipino women are ready to come to Britain to work as lowly paid domestic servants. At the present rate, the UK will be exporting its young women to skivvy in Korea before too many decades have passed.

The Commission on Social Justice must be aware that the justice it seeks is easier to obtain in a successful economy. And economic success requires nothing less than a crusade to reform our education system and make sure that it serves everyone in the country.

That is not simply a question of money. Indeed, Japan, for example, does not spend a particularly high proportion of its GNP on education. The education system must be reformed and curricula made more suitable. Graduates must be asked to pay a higher proportion of the costs of their degrees, perhaps via a graduate tax, releasing state resources to boost other areas. But it is also true that, from where we are at present, greater state expenditure overall will almost surely be needed.

With the middle classes unwilling to pay more tax and the Government already borrowing more than 5 per cent of GDP to finance its deficit, where can the necessary resources come from? Clearly some brutal choices must be made in the years ahead. The country cannot afford to duck them.

Gerry Holtham is the director of the Institute for Public Policy Research.

(Graphs omitted) Robert Chote is on holiday.