Britain faces crises in energy and productivity, both of which have been crushing people’s living standards. Anna Valero and John Van Reenen write that the endemic short-termism of the public and private sectors needs to be reversed, so that barriers to investment can be addressed. For them, the UK is in urgent need of a new economic strategy for stronger, fairer, and sustainable growth. Extracts from their article follow
The long-burning crisis for the UK (and other G7 nations) is the stagnation of productivity and pay. Britain’s productivity growth was about five times faster in the three decades before the 2008 global financial crisis than it has been since then. So, it should be no surprise that wages after inflation are lower than they were when Tony Blair left office – the worst pay performance this century. The low growth of the past 15 years and high inequality of the past four decades make the UK a stagnation nation.
Fundamentally, the UK is in urgent need of a new economic strategy for stronger, fairer and sustainable growth. Our long-run productivity problem is pervasive across sectors, and lies in a systemic failure to make adequate investments in productive assets – particularly in skills and innovation.
There are reasons to be optimistic about what is possible
Innovation is at the heart of productivity growth and the good news is that we actually know a lot about what policies work. Moreover, there are many underlying strengths that can be built upon. The UK specialises in a number of high value (and knowledge intensive) tradeable sectors.
Yes, we are a services exporting superpower, but our enduring strengths in services extend beyond finance, and include business services and the creative industries. Some parts of manufacturing such as pharmaceuticals, beverages and aerospace are also world leading.
Experiences during the pandemic have shown what is possible in a crisis. The rapid development and deployment of COVID-19 vaccines highlighted the UK’s strengths in the bio-medical sector and the key role of research taking place in our world-class universities and broader research system. Many organisations responded quickly to disruption caused by the pandemic by accelerating the adoption of digital technologies and better managerial practices. And government responded quickly to the economic crisis by developing the furlough scheme and other support mechanisms to protect viable businesses and jobs.
The energy crisis only heightens the urgency of decarbonising the economy. Over and above the imperative to meet net zero commitments in response to the climate crisis, high energy prices show how important increased investment in ever cheaper zero carbon energy and energy efficiency is in terms of national security and ensuring affordability beyond this current time.
Moreover, harnessing our comparative advantages in “clean” technologies, such as offshore wind, tidal energy and carbon capture usage and storage will generate growth opportunities and good jobs across the country. Strong and coordinated policies are required to make a successful transition and capture associated opportunities.
We need to be realistic about the UK’s strengths and weaknesses, and how evidence-based policies can help seize and spread opportunities in face of significant change this decade and beyond.
Britain needs a robust growth (and broader economic) strategy and a home-grown Marshall Plan to re-build the economic foundations of our shared home.
As optimists, we can see that such a strategy is possible.
The authors are directors of LSE’s Programme On Innovation and Diffusion (POID).