While incoming governments often bring optimism and new strategies, Thomas Aubrey argues that a bottom-up approach, where businesses collaborate with other firms in their sectors to identify opportunities and communicate their needs to government, would be more effective in boosting productivity.
Incoming governments tend to be full of optimism that their policy programmes are superior to those implemented by prior administrations. This is one reason why the UK has adopted so many different industrial strategies over the years in an attempt to improve the rate of productivity growth. However, these approaches seem to ignore that productivity growth takes place in firms, not in the corridors of Whitehall. Business leaders know how to run firms. But to create a competitive advantage through innovation or scaling up – which are two key drivers of productivity growth – is challenging. This is where the government can help by listening to firms across different sectors and supporting them. While this responsive approach might not grab the headlines, it is more likely to result in higher productivity growth rates – something that has been conspicuously slow in the UK for years.
The recent UK GDP growth figures have been more robust than the incoming Labour government likely anticipated, providing them with some breathing space. The ONS estimates real GDP increased by 0.6% in Q2 2024 following a 0.7% increase in growth in Q1 2024. Despite this, productivity growth remains weak.
A disaggregation of the latest sectoral labour productivity data published by ONS reveals the private sector is continuing to underperform. Since Q1 2019, labour productivity across the private sector has grown by just 0.7% or 0.14% per annum compared to 1.7% per annum between 1997 and 2006.
While 60% of the private sector is now contributing positively towards UK productivity growth, 35% continues to contribute negatively, including manufacturing, which critically remains a high-value-added sector. While productivity growth within the sector makes a positive contribution, this growth is insufficient to counter the shift in economic activity towards other industries with lower value-added. Contrast this with Information & Communication outperforming any negative reallocation effects.
Table 1: Sectoral productivity disaggregation Q1 2019 – Q1 2024[1]
Due to changes in the Labour Force Survey, ONS is currently unable to publish productivity data at a more detailed level to help diagnose which manufacturing subsectors are the main drivers of this overall negative contribution. It is possible, though, to assess the real gross value added (GVA) growth of each subsector which provides some insight into sectoral performance, although it is important to note that quarterly data can be quite volatile.
The data indicates that the growth of real GVA of manufacturing is slower than the overall economy. However, the data in Table 2 demonstrates a considerable divergence in performance of real GVA growth by manufacturing subsector.
Table 2: Real GVA growth by manufacturing sub-sector
While Transportation Equipment has finally experienced a significant bounce after a sustained period of decline, along with Pharmaceuticals and Food & Beverages, the Coking and Chemicals sectors – driven by a steep drop in petrochemicals output – have experienced substantial declines in real GVA.
The challenge for any incoming government faced with such widespread sectoral weakness in productivity, and bolstered by the confidence thanks to their electoral win, is determining what strategies will effectively boost productivity growth.
For ministers and their advisers looking at this challenging issue, it is important to recognise that productivity takes place in firms across the country. The notion that moving levers in Whitehall using a top-down approach might somehow change this dynamic needs to be challenged.
What ultimately matters is how firms across the UK can exploit the opportunities in the global marketplace. However, to exploit these opportunities is likely to require a number of different kinds of government support. Hence an industrial policy is far more likely to be successful when it is implemented from a bottom-up perspective.
To increase the rate of productivity growth, firms across all sectors need to identify where they see the opportunities, how they plan to exploit these opportunities, and critically what government support they need to be able to expand. However, each sector is likely to have different drivers and asks of government which may include policies related to regulation, public sector procurement, innovation and exports.
For example, following the exit of the UK from the EU, the Johnson Government created a new regulatory framework for Medical Technology firms. But there was little attempt to address what might have been the most appropriate regulatory framework for UK firms given that the UK accounts for just 3% of the global healthcare spend. The long-term effects of such a policy will most likely result in either firms not registering in the UK or deciding to go to the US or the EU to manufacture and market new products, thereby further accelerating the decline in the sector’s labour productivity. A bottom-up regulatory policy designed for growth might, for example, decide to accept both US and EU regulated products in the UK, which would encourage more firms to relocate and drive up labour productivity.
Another area of policy that could be focused on is how government can help to exploit innovation. As the aviation sector looks to reduce its carbon footprint, the industry, for instance, needs to figure out how it can develop and scale up the manufacturing of new sustainable fuels which might require government support in the R&D process.
The relationship between product testing and public procurement might also be an area to address for the growing UK cluster of biopharma firms. However, the decline in the UK clinical trial infrastructure has prompted concerns about the attractiveness of the UK for launching new drugs. Hence, focusing on this specific issue may help UK firms bring their products to market before scaling up internationally thereby increasing their GVA and the number of high value jobs.
With regards to boosting UK exports, while the Department for Business and Trade provides export advice, such advice can sometimes be insufficiently detailed. If, for example, a UK speciality polymer manufacturer is seeking new export markets to provide packaging for food and drink companies, it would benefit from talking to experts on the competitive landscape for speciality polymers including which international markets should be prioritised. Such advice typically requires many years of experience, whereas the UK civil service tends to move its personnel around regularly.
This is why many successful German exporters rely on trade advisers within their trade associations, supplemented by government personnel stationed in key export markets for additional support.
Running a business that can scale up, increase GVA and generate more high-value jobs, often requires different kinds of government support to exploit the existing opportunities across global markets. However, this kind of sustained support contrasts strongly with the approach of previous UK governments, which have often prioritised photo ops and press releases that give the impression of action.
What matters for productivity growth are detailed plans, developed by firms collaborating within their sectors. These plans should clearly outline the private sector’s strategies and specify the support they require from the government to achieve success.
[1] The sectoral disaggregation uses GEAD (Generalized Exactly Additive Decomposition) based on Tang & Wang (2004). The ‘within’ effect is productivity growth in activities within the sector whereas the ‘between’ effect measures the reallocation of labour between sectors. e = estimated as ONS does not currently publish these values.
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
