TCS Daily

Blame Politicians, Not Managers, for Productivity Gap

By Eamonn Butler - October 11, 2004 12:00 AM

Productivity in Britain is 20% behind that of France and Germany, according to a recent report. And in some sectors, like retailing, it is 40% behind that of America. So various pundits have been parading on the BBC and beating up British commerce, saying that its managers are obviously no good and are resisting the tide of modernization and mechanization.

The findings come from Britain's Economic and Social Research Council (ESRC), which gets a budget of £100m a year to fund academic studies of this sort of stuff. But it seems to me this is an enormous waste of money, if this productivity study is the best they can come up with. It's obviously wide of the mark: if France and Germany are so much more efficient, why are they in the economic doldrums while Britain's economy is steaming ahead? And why should anyone imagine that there is something peculiarly stupid about British managers that they just cant see, or vehemently resist, modernizing their production methods?

I've no doubt that Britain's productivity could be a lot better. But don't blame industry managers. Forty-plus percent of the British economy is its public sector, which is growing fast under the tax-and-spend policies of its Chancellor of the Exchequer, Gordon Brown. But in productivity, it is nowhere. In the past few years, for example, Brown has increased the budget of the state-run National Health Service (NHS) by 50%. Has that produced a 50% growth in what the NHS does for patients? No: according to recent figures from the Office of National Statistics, the Service's outputs have been growing at just 3.8% a year.

France has lots of government-run hospitals, but at least they compete for business with private ones, which keeps them efficient. But the NHS controls 90% of all the healthcare provision in Britain, so it has become a bloated monopoly.

Education is the same. There have been vast increases in budget, but teachers are still drowning in pointless paperwork. I'm a state-school governor. I see their despair. On the continent of Europe - Denmark, Netherlands, Sweden and elsewhere - the municipally-run school sector is much more productive because it faces competition from independent schools. If parents leave a municipal school and go to an independent one, state funding goes with them. It does not take many parents to leave before the municipal schools start getting their act together. In Britain, if you want to go private, you get no help at all - you have to pay the full fees, and you still have to pay tax to support state schools.

It's no wonder that productivity in Britain's state school sector is low - far behind the performance of the few independent schools. And the result of that is that, after eleven years of state education, about seven million British adults cannot even read well enough to understand the menu in a fish and chip shop. So when the ESRC says that Britain is behind France and Germany in terms of skills, perhaps it is not our managers who are to blame, but the material the schools give them to work on.

Planning and regulation hold back Britain's productivity too. All big building projects are resisted (what Britons call the 'NIMBY' syndrome - build things, but Not In My Back Yard). Its cities are surrounded by no-development 'green belts'. So commercial outlets - and their stock, staff and customers - are squeezed into more and more cramped and inefficient spaces. The British Chambers of Commerce say that regulation costs business over £20 billion a year. With that kind of overhead, it's remarkable that British firms can produce anything!

But: if you think all this burden of government is bad, you ought to see France and Germany. The social costs you have to add on to your payroll bill there are sky high. It's extremely expensive to hire people. So what happens? Easy. Firms only hire people who are incredibly productive. They have to be, to justify the cost. So it's no surprise if France's and Germany's productivity figures are higher than in countries where the social overheads are far lower.

And part of that social cost, of course, is that once you have hired someone in France or Germany, it's almost impossible to fire them. So you don't employ people if you can help it. You employ machines instead.

That means you have very efficient and mechanized production processes. But you also have unbearable levels of unemployment. In Britain, we have pretty well full employment, and we haven't had to over-invest in robots. On balance, I think we have the best of the deal.

Dr. Eamonn Butler is Director of the Adam Smith Institute.


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