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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.