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.

Start your day with The Independent, sign up for daily news emails
Life and Style
Baroness Lane-Fox warned that large companies such as have become so powerful that governments and regulators are left behind
techTech giants have left governments and regulators behind
News
Keith Fraser says we should give Isis sympathises free flights to join Isis (AFP)
news
Life and Style
'Prison Architect' players decide the fate of inmates
tech
Life and Style
A picture taken on February 11, 2014 at people walking at sunrise on the Trocadero Esplanade, also known as the Parvis des droits de l'homme (Parvis of Human Rights), in front of the Eiffel Tower in Paris.
techGoogle celebrates Paris's iconic landmark, which opened to the public 126 years ago today
News
Cleopatra the tortoise suffers from a painful disease that causes her shell to disintegrate; her new prosthetic one has been custom-made for her using 3D printing technology
newsCleopatra had been suffering from 'pyramiding'
News
people
Arts and Entertainment
Coachella and Lollapalooza festivals have both listed the selfie stick devices as “prohibited items”
music
Sport
Nigel Owens was targeted on Twitter because of his sexuality during the Six Nations finale between England and France earlier this month
rugbyReferee Nigel Owens on coming out, and homophobic Twitter abuse
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
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

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Ashdown Group: Trainee Consultant - Surrey/ South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Recruitment Genius: Client Services Assistant

£18000 - £20000 per annum: Recruitment Genius: A Client Services Assistant is ...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor