The problem with British inefficiency

Labour should be aware that the more restrictions placed on business, the less productive it will be
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The Independent Online
TESCO, SAINSBURY'S and the other big supermarket groups are feeling particularly sorry for themselves. We are only trying to do our best, they complain, so why is everyone being so beastly to us?

In recent months, they've become the butt of unprecedented public criticism. The charge sheet reads thus; that they wilfully rip off their customers and suppliers, that they destroy jobs in agriculture and reduce livestock farmers to poverty, that they concrete our open spaces, destroy our high streets and cornershops, stifle enterprise, clog up our roads and homogenise our eating and drinking habits. And that's just for starters.

It ought to be said that all this hostility doesn't seem to make people shop at supermarkets any less than they used to, but even so, it's not nice to be hated.

Now along comes salvation in the shape of a Government-sponsored report on UK productivity by McKinsey & Company. The supermarkets can hardly believe their luck.

Suddenly they are being held up as a shining example to others, one of the few industries in Britain that is a world leader in terms of productivity and efficiency.

How have the supermarkets achieved this? The consultants reckon it is because of heavy investment in new stores and technology, because supermarkets have "defined global best practices in logistics and space management", and because they have led the way in training, skill transfer and management development. And finally it is because they have "innovated their way to growth".

It is hard to imagine a more glowing tribute, so much so that it occurs, perhaps unkindly, that McKinsey might have had its judgement coloured just a little over the years by the odd fee or two. But there's more. The main cause of Britain's poor record of productivity, the consultants say, is overregulation, lack of competition and most important of all, land-use restrictions.

So here's the ultimate justification for what the supermarkets have been doing. Had there been no planning permissions needed, had all industries been given unfettered access to our meadows, hill tops and valleys, had our industries been allowed unhindered to pursue the highest returns in a fully competitive, unrestricted market place, then they would by now all be adopting "global best practice" and be up there with the Americans, the Japanese or whoever else is setting the pace.

That the supermarkets, almost alone in British commerce, have come close to doing this, has assured them that their position among the best in the world.

The implications of this analysis are self evidently quite disturbing. Certainly many of McKinsey's findings will not be particularly welcome news at 11 Downing Street. Gordon Brown, the Chancellor, is making it a personal crusade to achieve the right policy framework for a sustained improvement in levels of British productivity.

As McKinsey points out, the prize is a considerable one. If Britain had the same level of GDP per capita as the United States, we would all be up to 15 per cent better off, equivalent to pounds 2,500 per household. Alternatively, if the productivity improvements went into lower prices, then the cost of the average car would fall by pounds 1,000. Or using the benefit in a third way, public spending on health and education could be more than doubled.

But is Mr Brown prepared to pay the price? Unfortunately, large parts of the McKinsey report point to a policy response that would conflict sharply with the Government's other objectives for social and environmental improvement.

Mr Brown is going to have no difficulty with the idea of breaking down cartels and barriers of entry, of sweeping out the cobwebs of restrictive practice, but is he also going to want to see "unproductive" inner-city sites abandoned for the open pastures and hillsides of the British countryside?

And what also is he going to do about Labour's policy of social inclusion? Take the example of telecommunications. Thanks, presumably, to privatisation and deregulation, levels of productivity in the telecommunications industry are now generally higher than they are on the Continent, but they are still streets behind the US. One of the causes of this, McKinsey suggests, is universal charging, the principle that tariff structures are the same for all, regardless of location or economies of scale.

Does Mr Brown really want a telecoms free for all, where there is no universal service obligation and where charges are levied according to economic cost. It may be that New Labour has indeed moved this far towards free market libertarian economics, but somehow I doubt it.

It is nonetheless true that productivity is a many headed beast. Germany continues to have much higher levels of productivity, not because it is a deregulated and unrestricted economy, far from it, but because capital spending per worker is so much greater than it is in Britain.

You don't have to be an economist to figure out why this is so. German business doesn't need to achieve such a high return on its capital as its British counterparts because since the 1950s inflation has consistently been lower and economic growth higher.

Mr Brown has already put in place some of the building blocks necessary to bring about a comparable degree of price and economic stability - an independent Bank of England and the medium term financial strategy being the most important.

The next stage of the process - achieving a fully competitive business environment - is going to be much more difficult. As McKinsey implies, it requires a deregulating, "American" approach to the problem. Essentially it is about allowing business and enterprise to do what it wants, free of vested interest or Government interference.

It is obviously not realistic to expect Labour to fully embrace such a laissez faire outlook on the world. The Government nonetheless ought to be aware that the more social and environmental obligations and restrictions centrally imposed on business, the less productive it is likely to be.