The Business World: Hurdles on the road to sustained growth

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The Independent Online
POLITICIANS ARE notorious for having difficulty looking beyond the next election. This is why most research finds economies perform better when interest rates are set by an independent central bank. Central bankers not only tend to stay in the job longer than their chancellors, they are also free from most of the short-term pressures.

But politicians sometimes raise their eyes to the distant horizon. For example, many of the productivity measures in Gordon Brown's Pre-Budget Report yesterday can have an impact only after many years. Boosting productivity growth is a slow and painstaking struggle.

It is worth the effort. Real GDP per hour worked in the UK has grown at an average of more than 1.5 per cent a year since the early Seventies. That growth rate implies output per worker hour doubles every 45 years. If the growth rate could be boosted to 2.5 per cent, the level of productivity would double in more like 25 years. It would take one generation to double living standards as opposed to something closer to two generations with the higher rate of productivity growth.

Encouragingly, there are more and more signs of long-termism in the corridors of power. One bit of the government engaged in thinking about the next 10 to 15 years rather than the next two or five is the Performance and Innovation Unit in the Cabinet Office. It has been focusing on the impact of technological change and its interim conclusions will be published early next year.

The Organisation for Economic Co-operation and Development (OECD) has taken an even longer perspective in a publication from its Forum for the Future, Towards a Long Boom. One chapter, by DeAnne Julius of the Monetary Policy Committee, notes that despite rapid technical change, world growth slowed in the Eighties and Nineties compared to the previous two decades. In fact, economic performance in the OECD has never recaptured the golden-age of growth of the first 25 or 30 years after the end of the second world war.

Drawing on her experience of scenario planning in industry, Dr Julius looks at what might return growth to long boom rates during the next 25 years, arguing that the policies needed might be different from conventional prescriptions.

Over very long periods, growth in GDP can be attributed to growth in the input of capital, growth in the input of labour, and productivity growth - where that is "total factor productivity" including the efficiency of capital as well as labour.

There is scope in the OECD countries to increase labour supply - many countries have a large proportion of their population outside the workforce. But the developed world is ageing and population growth very slow, so it is unlikely this source of growth will deliver much. Similarly, many countries could boost investment to higher levels. Again, this is unlikely to be dramatic. What's more, the lesson of the recent financial crisis is that there is such a thing as over-investment. Capital needs opportunities offering a high enough return to make additional investment worthwhile. So the best hope for a long boom lies in boosting productivity. Total factor productivity has been the biggest contributor to economic growth in most countries at most times. And there certainly seems to be a rapid pace of technological innovation.

The trouble for policymakers in most countries is that all the action in new technology - along with any boost it is giving to productivity - is in the US. Nowhere else has yet shown any sign at all of an upturn in the productivity trend. "The US economy blazes into the millennium at cyberspeed," rejoiced one analyst when the Commerce Department published the latest growth and productivity figures last week.

Unless other countries can catch up on America's technological leadership, any Long Boom is going to be confined to the other side of the Atlantic. One of the scenarios in the chapter suggests the way to share in some of the fruits of technical progress is through the development of successful high-tech clusters in particular cities. The government has committed itself to this strategy. Professor Michael Porter, the Harvard Business School expert on clusters, gave Gordon Brown a refresher pre-Pre Budget briefing on the subject last month.

The policy implications are radical and difficult. Creating a successful cluster builds on mutual dependence and tries to turn existing successes into a self-reinforcing virtuous circle of growth. Taking this on requires co-ordination between private businesses, local and national government, and institutions such as universities and enterprise agencies. Almost every local initiative or decision ought to involve a public-private partnership.

There can also be difficult choices. It is hard to turn a failure into a success, no matter how close to the hearts of the city fathers it might be. It is next to impossible to develop a new thriving cluster next to an already established one - the clustering approach to economic success creates losers as well as winners.

This path to a Long Boom also requires a very different sort of national economic policy than we are used to. As well as all the obvious points about a stable macro-economy and a flexible business environment, competition policy, standard-setting and international regulatory agreements will loom large.

It might well turn out that European co-operation on technical standards for mobile telephony, taking Europe ahead of the US in this one particular area, is the appropriate model for future economic policy.

Governments can not boost productivity directly, but they have to try to create an environment in which a high- productivity culture will thrive.