New economic miracle takes great leap of faith

Remember the British economic miracle? When the lame British economy picked up its bed and ran. When Tory billboards showed the British bulldog baring his teeth at the French and Germans, proclaiming the turnaround. It was too good to be true, but with consumption booming and house prices soaring, the story was at least plausible at the time - not least to the electorate.

You would have thought that the recession of the early 1990s would have put paid to such talk, but now the cheerleaders are daring to show their faces again. We may be in the middle of a too-good-to-feel-good recovery which the Chancellor, for one, believes is too fragile to threaten with another rise in interest rates. But some economists are beginning to claim that the economic miracle that died lives again, and will transcend the first.

At a seminar organised by the National Institute and the Economic and Social Research Council earlier this week, some striking evidence was presented on the continuing underlying improvement in manufacturing productivity , for long the Cinderella of the economy. In a week that saw the launch of the Government's second White Paper on competitiveness, Michael Heseltine's chief economic adviser, Walter Eltis, claimed that three quarters of the productivity gap between Britain and France and Germany in manufacturing had been closed in the past 15 years or so. Productivity levels in French and German manufacturing were now only 10 per cent higher than in Britain.

Dr Eltis could easily be accused as trumpeting His Master's Voice - indeed one observer described his account as Panglossian - but a similar story was told by Nicholas Oulton, who studies productivity at the National Institute. Between 1979 and 1992, manufacturing output per hour had grown in Britain at two and a half times the rate in Germany. Britain had also managed to outperform Japan.

So British manufacturing, still largely held in contempt by the Ugly Sisters who count in society, has turned into a ballroom princess? Not quite. Manufacturing may be perfectly shaped now, according to the optimists, but at little over a fifth of GDP it is also small. Its productivity may be growing by leaps and bounds, but output has barely risen since 1979. And as the White Paper admits, the UK has a much bigger tail of poor-performing companies than Germany or the Netherlands.

Furthermore, much of the improvement has come through foreign direct investment. According to Dr Eltis, foreign-owned companies are responsible for a third of all capital investment in manufacturing - double the level per head in the British-owned sector. Foreign owned companies now account for 35 per cent of total manufacturing exports. They add 40 per cent more value per employee than their British counterparts.

This capacity of foreigners to find opportunities to which British businessmen and financiers are blind speaks of our weakness rather than strength. This point was made by Professor Michael Porter, the doyen of competitiveness, in his book, The Competitive Advantage of Nations. He argued that widespread foreign investment usually indicated the economy was not sufficiently competitive "because domestic firms in many industries lack the capabilities to defend their market positions against foreign firms".

On balance, foreign direct investment into the UK has almost certainly helped to boost productivity, particularly through the introduction of new ways of working that have spread through entire sectors, such as the car and components industry. But the influx of foreign capital has not necessarily helped total investment, which remained undesirably low as a proportion of output in the 1980s and since.

This is the more disappointing since, as Dr Oulton pointed out, one of the principal causes for the continuing improvement in manufacturing productivity is that investment costs have fallen. The destruction of Britain's paralysing crafts-based industrial relations system - one of Mrs Thatcher's lasting legacies - means employees no longer hijack the benefits of new investment: so there should be more of it.

Britain's unsatisfactory record on investment is all the more important in the light of new growth theories, which cast investment, including improvements in labour skills, as the principal means for incorporating productivity advances into economic growth.

Few would dispute nowadays the need to define capital formation in this broad manner to include human skills. Here, too, the cheerleaders had some encouraging news. Staying-on rates have jumped and the percentage of young people who leave education or training without any qualification at all has fallen sharply.

A more pertinent question is just how valuable many of these qualifications are. NVQs, in particular, are held in low regard, if not scorn, by many employers. Furthermore, any successes have occurred despite rather than because of government policy, which persists intrying to graft a German- style training system - witness the launch of the modern apprenticeship scheme at a cost of pounds 1.25bn over the next three years - onto a host body that rejects it.

Whatever improvements are now coming through to young people joining the labour force, we are left with the existing stock of workers, whose formal qualifications compare woefully with their counterparts. While it is likely that the informal gap in expertise is less marked because of experience gained at work, the need to upgrade skills throughout the labour force remains paramount.

To hear from Dr Eltis that the proportion of employees receiving job- related training rose from 10 per cent in the middle 1980s to about 15 per cent in 1994, is simply to confirm how far behind we are in tackling this problem.

For the DTI, the sudden rush of blood to the head about Britain's economic prospects may be a necessary antidote to the unnecessary gloom that currently envelops our perception of the economy. The truth is that the underlying state of the British economy was neither as good in the late 1980s nor as bad in the early 1990s as it was generally portrayed. One thing is clear: the resurrection of the British economic miracle won't be taken on trust this time - and neither should it be.

PROMOTED VIDEO
News
Dawkins: 'There’s a very interesting reason why a prince could not turn into a frog – it's statistically too improbable'
newsThat's Richard Dawkins on babies with Down Syndrome
Sport
Malky Mackay salutes the Cardiff fans after the 3-1 defeat at Liverpool on Sunday
footballFormer Cardiff boss accused of sending homophobic, racist and messages
Sport
Rodgers showered praise on Balotelli last week, which led to speculation he could sign the AC Milan front man
transfers
Life and Style
life – it's not, says Rachel McKinnon
Arts and Entertainment
Eye of the beholder? 'Concrete lasagne' Preston bus station
architectureWhich monstrosities should be nominated for the Dead Prize?
News
Lizards, such as Iguanas (pictured), have a unique pattern of tissue growth
science
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
Arctic Monkeys headline this year's Reading and Leeds festivals, but there's a whole host of other bands to check out too
music(who aren't Arctic Monkeys)
Extras
indybest
News
Anna Nicole Smith died of an accidental overdose in 2007
people
Life and Style
food + drink
Arts and Entertainment
'The Great British Bake Off' showcases food at its most sumptuous
tvReview: Bread-making skills of the Bake Off hopefuls put to the test
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Test Lead (C#, Java, HTML, SQL) Kingston Finance

£40000 - £55000 per annum: Harrington Starr: A Global Financial Service Organi...

Access/Teradata Developer, Banking, Bristol £400pd

£375 - £400 per day: Orgtel: Access / Teradata Developer - Banking - Bristol -...

Quantitative Analyst (Financial Services, Graduate, SQL, VBA)

£45000 per annum: Harrington Starr: Quantitative Analyst (Financial Services, ...

Day In a Page

Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

eBay's enduring appeal

The online auction site is still the UK's most popular e-commerce site
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

Magic circles: Artist Olafur Eliasson

Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

Greggs gives lesson in crisis management

After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

Matthew McConaughey sings the praises of bumbags

Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
7 best quadcopters and drones

Flying fun: 7 best quadcopters and drones

From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
Joey Barton: ‘I’ve been guilty of getting a bit irate’

Joey Barton: ‘I’ve been guilty of getting a bit irate’

The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
Andy Murray: I quit while I’m ahead too often

Andy Murray: I quit while I’m ahead too often

British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home