THE HILLENBRAND EFFECT

Why UK productivity growth is still a problem (Nicholas Crafts, June 1 2003, Financial Times)

[T]his is where doubts about Labour's productivity agenda surface. Some are generic to democratic government, in that policies to raise productivity are often politically unattractive. Partly, this is because strong productivity growth relies on the exit of the inefficient and outmoded. Partly, it is because productivity boosting policies conflict with other objectives or upset influential interest groups. Under the present government, this has clearly undermined attempts to invest effectively in transport infrastructure or to reform planning restrictions, measures recommended to the Treasury by the McKinsey Institute in its diagnosis of Britain's productivity problem.

Other problems are more specific to the Labour party, whose instincts are often the opposite of what is required to promote strong productivity
performance according to endogenous growth theory. These include a reluctance to accept that government regulation potentially acts both as a disincentive to innovative effort and as a barrier to entry, a failure to acknowledge that economies with large public sectors financed by direct taxation suffer a significant growth handicap, a faith in monolithic state provision of public services - which undermines their potential contribution to private sector productivity because of the prevalence of principal-agent problems - and a reluctance to take cost-benefit analysis seriously in the public sector. Indeed, according to figures compiled by the Office of National Statistics, productivity in the public sector has been falling in the recent past. This implies that private sector productivity performance faces the double whammy of ever less adequate public services together with higher direct taxes raised to finance an inexorable rise in public expenditure.

None of this is to deny that the Treasury cares deeply about productivity and has tried hard to raise the UK's performance. It has access to much better economic theory than was available 25 years ago and has tried conscientiously to heed some of its messages. The lesson seems to be that improving productivity growth is much harder than is commonly supposed, especially under the auspices of a Labour party that does not really understand microeconomics and cares too much about the short-term reaction of focus groups.

Note that it is not improving productivity growth that is difficult, but summoning the political will to accept the limited government policies that such growth requires. Posted by Orrin Judd at June 2, 2003 8:17 AM