In June 2016 Labour International responded to the consultation on economic policy.

The NPF commission which deals with economic policy issued a prioity issues consultation which focussed on productivity.

Labour International members discussed the consultation document and a draft response prepared by Jos Gallacher. Several branches and individual members contributed to the revsion of the draft and on 7 June the LI response was posted to the Policy Forum website.

Set out below is the final text of the submission.

The market alone will not allocate high productivity activities to Britain

Labour International response to the priority consultation document, Building a Productive Economy

 

A Basic Question

Before answering the questions set out in the consultation documents it is worth taking time to clarify the basis for thinking about what a productive economy would look like. The consultation document contains elements of two competing perspectives and sound policy need to be built on a coherent base.

The first of these perspectives sees Britain in competition with other developed economies. The buzzword is competitiveness:” we face an increasingly complex and competitive global environment” and we need an economy that will “enable Britain to pay its way in the world”. To give this perspective a name, call it the merchant view. This view emphasises trading performance and the current account balance is seen as an indicator of success. It is a position taken by the current government, by many commentators and is widely shared in Europe especially by the centre right.

The alternative view emphasises the efficiency with which resources of capital and labour are used to produce the goods and services needed domestically as well as for export. The key word is productivity. As the document notes, investing in capital equipment, infrastructure, skills and innovation are necessary to raise productivity and increasing productivity is necessary for rising living standards. Call this perspective the industrial view. This view is favoured by academic economists and trade unions.

We prefer this second perspective. Britain is not in economic competition with the US or Germany or other countries. If their economy falters then channels of trade and investment mean that Britain’s does too. We win when they are winning. Firms compete and need to be competitive; countries are not engaged in a one dimensional competition with each other.

Exports are important, not to “pay our way” but to pay for imports. Imports provide benefits of cheaper goods, embedded technology and the opportunity to divert resources to more productive uses. Rising exports might reduce the current account deficit, but we also need inward investment which tends to increase the current account deficit.

Labour’s policy should be rooted in the industrial perspective. Putting productivity at the heart of Labour’s policy will mark a break from the Tories attempts to make Britain “competitive” which has led to economic weakness. The pursuit of competitiveness can mean wage repression which reduces the incentives for productivity enhancing investment. The industrial view favours long term value creation over short term profitability. A balanced economy will be one in which all regions have rising productivity, and in which there is a range of industries with high value added activities across the country.

 

Producing a proper industrial strategy: response to the questions

There are two ways to increase overall productivity. One is to enhance the productivity of existing firms. The second is to change the mix of industries to include more sectors whose output per worker is already high or which have opportunities for it to increase.

The first focus of an industrial strategy which aims to boost productivity should be the identification of sectors (and activities within sectors) which are high added value or have the potential for rising productivity. Increasing the proportion of such activities and sectors in the economy will increase the overall level of productivity. This task should be a core role of the BIS department making it a genuine department for economic development. Mariana Mazzucato has made the case for government leading with a vision of the kind of economy we want to see in the future[1]. High value added does not mean high tech; traditional industries may also have high productivity levels.

Support to these productivity growth centres should inform the strategies of the national investment bank, for using tax and other incentives and for decisions on infrastructure. The tools for implementing an industrial strategy, like subsidies and tax breaks, are too often dismissed as “corporate welfare”. Labour needs to review these incentives to ensure that they have not been captured by incumbent firms to subsidise their profits, but that each one genuinely contributes to expanding high productivity activities in Britain.

Lessons can be learned from existing schemes. For example, tax breaks for film production has helped to create a UK cluster of technically advanced, film-related businesses. The review should analyse this experience to draw lessons and to assess whether the measure needs to be continued or has already served its purpose.

New technologies, for example around knowledge, climate change and novel materials, offer opportunities for high growth business sectors. However every developed and emerging country will be seeking to exploit the same opportunities. Britain’s success will require specialising in different aspects of these technologies. Indeed, each region will need to develop its own comparative advantage through specialisation. The key point however is that the market alone will not allocate high productivity activities to Britain, it will take government support, through finance, R&D, innovation partnerships and other policy instrument to ensure that Britain will have a comparative advantage in high value added activities.

The role of the national investment bank needs to be clarified. Will it invest in public infrastructure, private businesses or both? Given that arrangements already exist to create infrastructure, then in order to make the case for change it is necessary to identify the benefits of creating new institutions.

Funding private sector investment is a more obvious need. An institution which is prepared to lend when commercial banks may not be, for example  to back counter-cyclical investment and longer term projects where payoffs are more distant. We would argue that the national investment bank should be the hub for a network of “regional development banks” with a mission to support investment in the regions and nations of the UK.

 

Ensuring prosperity reaches every corner of the country: response to questions

Regional development banks, as part of a network led by the national investment bank, should do more than provide loans to firms to finance investment. The banks need to be imbedded in the region and play a leading role with other players in the region’s economic development. These banks should adopt a “relationship model” to support their clients Alongside the provision of finance the banks should provide support to firms with a view to assisting the success of the venture, thereby reducing the risks of their investment.

• RDBs should help firms access support from business development services provided by local authorities, chambers of commerce, private consultancies and national government.
• RDBs should join or facilitate “innovation partnerships” together universities and other research centres, and their clients.
• RDBs should develop expertise in supporting cooperatives, social businesses and other forms of mutual enterprise, in partnership with existing agencies.
• RDBs could be the main channel for EU funding to the private sector.
• RDBs should be able to invest equity in firms where appropriate, eg in firms moving from start-up to maturity, or in support of management buyouts.

Boosting Productivity: response to the questions.

Boosting Productivity requires policies to encourage investment in capital equipment, infrastructure, skills and innovation.

Policies to encourage business investment should begin from reform of corporate governance and company law. Changes to company law are needed for a variety of reasons, not least to shift corporate culture from one which sees the purpose of any business the maximisation of return on equity. (Will Hutton has proposed a way of doing this by requiring company articles of association to declare a business purpose – the goods or services it intends to produce – and to report on how its purpose is achieved[2].)

In reforming company law measures which incentivise “patient capital” should be part of the mix. For example, company boards should include stakeholders, such as their own workers, who have an interest in the long term performance of the business. Stakeholders could include employees, representatives of communities and perhaps of “regional development banks” and innovation partners.

The tax system could also incentivise investment by giving an advantage to firms which invest in new projects over companies who keep their retained earnings in cash.

To encourage innovation, regional development banks should work with universities and research centres to create “innovation partnerships” with companies willing to take on the task of longer term development of new products and processes.

Finally innovation is not just the creation of new products or processes. It should also be understood to include the adoption of new techniques and their diffusion through the economy. Labour needs to develop an innovation strategy as a major element of its industrial strategy.

Conclusion

“Productivity isn’t everything, but in the long run, it’s almost everything.”[3]

Putting productivity at the heart of Labour’s policy will bring into focus the key questions of how to create rising prosperity. This paper sets out a small number of ideas on how to raise productivity. A government led industrial strategy which targets sectors, and activities within sectors, with high added value and potential for rising output per worker will increase productivity at the whole economy level. Next, increasing productivity at firm level should be the purpose of regional development banks with a remit which goes beyond the provision of finance to accessing various forms of support to business development. Finally, reform of corporate governance, including worker representation at board level, should reduce the incentives to short-term thinking and support investment in long term success.

[1] Mariana Mazzucato, The Entrepreneurial State, Anthem Press, 2013.

[2] Will Hutton, How Good Can We Be, Little, Brown, 2015, especially Ch 5.

[3] Paul Krugman, The Age of Diminishing Expectations, MIT Press, 1994