1

The role of Government in fostering competitiveness

and growth

Ken Warwick

Deputy Chief Economic Adviser

UK Department of Trade and Industry

2

Structure of presentation

• Overall aim of competitiveness policy

• Role of Government• UK experience• Examples of policy interventions• Conclusion and discussion

3

Overall policy aim

………to increase prosperity for

all…………• by driving up productivity and competitiveness

through:

– successful business;

– world class science and innovation; and

– fair markets.

4

Prosperity for AllRelationship Between Objectives

• Main way the DTI pursues its vision of

‘prosperity for all’ through its aim of raising

productivity. But others factors also contribute,

e.g.

– Quality of the Environment.

– Distributional issues (e.g. regions and gender)

• Environmental and distributional improvements

can affect productivity.

– But they are also policy objectives in their own right.

5

Role of government – key principles

• Government role limited but crucial• Set the framework:

– Stable macroeconomic environment– Establish and enforce property rights and

contract– Company, consumer and employment law

• Invest in assets where the market under-provides:– Public goods – basic science– Transport and other network infrastructure

• Correct market failures

6

Classes of market failure

• Externalities• Barriers to entry• Imperfect information and

uncertainty• Public goods

7

Framework for Intervention• Work with the grain of the market• Market failure rationale necessary

though not sufficient…• Allocate resources where most effective

– Where there are the biggest opportunities– Where Government has effective levers

• Research and evaluation needs to be used more systematically so limited resources used where impact is greatest

8

Lessons of evaluation of DTI schemes

• Horizontal preferable to sectoral• Strength of scheme rationale is key• Promotion of collaboration brings

benefits• Additionality greater for SMEs• Support most effective for long-term,

innovative schemes, with strategic commitment

• Well specified schemes with clear objectives score best

9

DTI Business Support Review• New business support system will:

– Have clear market failure rationale– Be more focused on investments to drive up

productivity– Focus on improved delivery & customer relationships

• Smaller range of products• Customer access through Business Links, DTI

relationship managers or delivery partners such as banks

• Improved monitoring and evaluation to ensure ongoing improvement in impact

10

The UK experience

• UK Competitiveness: moving to the next stage, Porter and Ketels 2003

• Porter identified two periods of UK economic reform– 1980s framework improvement– 1990s/2000s – rebuilding the asset

base

11

1980/90s – framework reform

• 1980s - Injection of market mechanisms– De-regulation, privatisation, labour market

reform• 1990s reform of macro environment

– Inflation targeting post ERM, independent central bank/fiscal rules post 1997

• Late 90s – Reform of competition policy, company law, corporate governance

12

1990s/2000 Asset building

• Major investments in UK national assets– Science base– £180bn transport programme– Education (significant improvements

in literacy and numeracy)– Institutional reform

13

How successful has it been?

• UK now has GDP per head similar to Germany, France, and above EU average

• Recent performance largely driven by labour market – highest employment in G7

• Productivity performance in 1990s still lags US and EU

14

Breakdown of UK Growth

-4%

-2%

0%

2%

4%

6%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

GVA Grow th due to Productivity (per w orker)

GVA Grow th due to Jobs

Source: ONS

15

UK Productivity gap is longstanding

0

20

40

60

80

100

120

140

160

180

200

1870 1913 1950 1973 1979 1989 2000

US

France

Germany

Note: 1870 - 1973, Maddison (1991). 1979-1999, DTI calculations using OECD data

17

What Drives Productivity?• The Government has identified five

drivers of productivity:

– Innovation– Enterprise– Skills– Investment– Competition

18

Michael Porter on the UK

Source: Porter and Ketels (2003)

19

Innovation - strong sciencePapers and citations per head of population (UK = 100)

0

20

40

60

80

100

US France Germany

Papers per head

Citations per head

Source: OST (Period: 1995 – 2000)

20

Innovation - weak R&DBusiness R&D per worker

0

200

400

600

800

1,000

1,200

US Germany France UK

1995 US Dollars (PPP)

1990 1995 2000

Source: OECD

21

Enterprise – numbers involvedPercentage of Workforce engaged in Enterprise

0%

2%

4%

6%

8%

10%

12%

US Canada Italy UK France Germany Japan

Source: Global Entrepreneurship Monitor 2001

22

Enterprise - ease of setting up a business

0 10 20 30

US

Germany

UK

France

Japan

Italy

05,00010,000

Minimum cost to establish (euros) Minimum delay to establish (weeks)

Source: OECD (1998)

23

Skills – performance lagsSkills account for part of the

gapRelatively poor literacy and numeracy

‘Gap’ at intermediate level

Perception of weak management performance

Source: UK Competitiveness Indicators 2002

0%10%20%30%40%50%60%70%80%90%

100%

France Germany

SkillsCapitalTFP

Adults with literacy and numeracy skills at the lowest levelSelected OECD country comparison, 1997

0

10

20

30

40

50

Poland

Irish

Rep

ublic UK US

New Z

ealan

d

Switzer

land

Belgium

Austra

lia

Canad

a

Ger

man

y

Nethe

rland

s

Sweden

Per cent of adult population

Percentage of adults w ith literacy skills at the low est level Percentage of adults w ith numeracy skills at the low est level

Source: Literacy Skills for the Know ledge Society, OECD

Business executive perceptions of quality of managementG7 comparison, 1996-2002Average survey score, 0-10 scale

0

2

4

6

8

10

USA Germany Canada France UK Italy Japan

1996 & 1997 2001 & 2002

Source: IMD

24

Investment - capital stock by sector

0 50 100 150 200 250

Mining

Gas, Electricity & water

Manufacturing

Construction

Distributive trades

Financial & business services

P ersonal services

US France Germany

Relative Capital per hour worked (UK = 100)

Source: NIESR, 1999

25

Competitive markets - Business Environment

1998-02 2003-07

Netherlands 2 1

Canada 3 2

USA 1 3

UK 4 4

Germany 15 13

France 16 16

Italy 23 23

Japan 27 26

EIU Competitiveness Ranking November 2002

0

2

4

6

8

US UK Germany France

Survey Score (0-10)

1996 & 1997

2001 & 2002

Business Perceptions of How Government Supports Competitiveness

Source: IMD Source: EIU

26

Accounting for the Gap by Factor

Source: Porter and Ketels (2003)

27

EU productivity lags US….

0

50

100

150

200

250

US

Austri

a

Belgium

Denm

ark

Finlan

d

Franc

e

Germany

Greece

Irelan

dIta

lyLux

Nethe

rland

s

Portuga

l

Spain

Sweden UK

28

As does TFP

0

50

100

150

200

250

US EU Austria Belgium Denmark Finland France Germany Greece Ireland Italy Lux Neth Portugal Spain Sweden UK

ProductivityTFP

29

Assessment

• UK framework conditions are supportive

• But more needs to be done to build assets– Increase factor accumulation

• And combine assets together better– TFP and innovation

• This is common across the EU

30

Latest data encouraging

0

20

40

60

80

100

120

140

1997 1998 1999 2000 2001 2002

US France Germany

Productivity per worker (UK = 100)

31

Role of government – recap• Indicators provide a useful way of benchmarking UK

performance on the ‘drivers’ against other countries.• But they do not necessarily indicate where policy

interventions will be most effective.• Preference for market-based solutions:

– Identify market or institutional failures– Ensure that interventions help to correct for that failure

• Government has a key role in setting the macroeconomic, institutional and regulatory framework in which business operates.– And improving public sector productivity.

32

The role of Government in fostering competitiveness

and growth

Ken Warwick

Deputy Chief Economic Adviser

UK Department of Trade and Industry