The role of Government in fostering competitiveness and growth

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.

Prosperity for All

Relationship Between Objectives

Government should 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.
3

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 underprovides:

Public goods basic science Transport and other network infrastructure

Correct market failures

4

Classes of market failure

Externalities Barriers to entry Imperfect information and uncertainty Public goods

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
6

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
7

Business support system should:

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
8

The UK experience

Porter identified two periods of UK economic reform

1980s framework improvement 1990s/2000s rebuilding the asset base

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

10

1990s/2000 Asset building

Major investments in UK national assets

Science base 180bn transport programme Education (significant improvements in literacy and numeracy) Institutional reform

11

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
12

Breakdown of UK Growth
6% 4%

2%

0%

-2% GVA Grow th due to Productivity (per w orker) -4% GVA Grow th due to Jobs

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: ONS 13

UK Productivity gap is longstanding

200 180 160 140 120 100 80 60 40 20 0 1870 1913 1950 1973 1979 1989 2000

US France Germany

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

14

What Drives Productivity?

Innovation Enterprise Skills Investment Competition

15

Michael Porter on the UK

16 Source: Porter and Ketels (2003)

Innovation - weak R&D

1995 US Dollars (PPP)

Business R&D per worker

1,200 1,000 800 600 400 200 0

US Germany France
Source: OECD

1990

1995

2000

UK
17

Enterprise numbers involved

Percentage of Workforce engaged in Enterprise 12% 10% 8% 6% 4% 2% 0% US Canada Italy UK France Germany Japan

Source: Global Entrepreneurship Monitor18 2001

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

19

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.
20