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Labour's decade, the best and worst of times

Sun, 29th Apr 2007

 Anyone looking at New Labour's decade through a macroeconomic lens might conclude it was the best of times. 

After an uninterrupted run of growth, employment is consistently high and inflation (despite the recent blip) is low. The UK rates as one of the most market-oriented, business-friendly economies in the world, with (whatever the CBI says) a favourable tax regime and the lowest levels of product and labour market regulation in the OECD. The stock market is booming. For proof of the strength of the economy, look no further than sterling which, apart from a brief moment in the early Nineties, was last worth $2 in Mrs Thatcher's day.

Yet reverse the lens and the New Labour decade looks very different. Since 1997 manufacturing has lost a million jobs, including those of the last British volume car manufacturer - a symbolic demise if ever there was one. Record company profitability notwithstanding, fewer people can look forward to a secure old age most will have to work longer, and harder, for their retire ment. Levels of engagement and trust at work are obstinately low. Since real salary increases have been hogged by the best paid, inequality with even medium earners has grown by leaps and bounds. The country is running the biggest trade deficit since records began. Meanwhile, much of the public sector is in disarray.

Most strikingly, despite being the focus of intense government effort, relative to traditional rivals the productivity performance of UK firms is mediocre - in terms of output per hour, free-market Britain still lags not only the United States but regulated Germany and even supposedly sclerotic France. It was, in fact, the worst of times.

How can two such different accounts apply to the same economy? Clues can be gleaned from a series of studies being carried out by the Advanced Institute of Management Research (AIM) which suggest that ministers' views of management are naive. Broadly, the government thinks that improving company performance is about supply-side economics and best practice. To this end, the Treasury has singled out five 'levers' of productivity - competition, innovation, enterprise, investment and skills - and subjected each to major programmes of reform.

But both these concepts are problematic. Productivity, the researchers suggest, is not primarily about inputs but the messy, complex, human process of turning them into usable outputs - ie, management, not economics. Since the Treasury's levers are unconnected with what happens inside the firm, supply-side push has little effect: the supply of skills may have increased, but employers' ability to use them hasn't the world is awash with credit, yet companies still refuse to invest as much as counterparts abroad competition pushes companies on to the 'low road' of cutting costs and competing on price rather than changing strategy to move up the value chain.

This is bad enough. But there is more to come. AIM's work on UK companies' notorious reluctance to take up advanced management practices shows that the idea that there is something called 'best practice' that can be bodily transferred from one context to another is simplistic. Instead, companies need to look within themselves as much as outside to develop their own unique 'signature' processes. This is why Toyota remains way out in front of other car firms, despite all attempts to imitate it.

Establishing such processes involves building human and organisational capital - patient, painstaking work. But today's institutional context might have been designed to make such long-term organisation-building impossible. The havoc visited on the public sector in the name of competition is the government's deliberate attempt to match today's deal-making frenzy in the City, and both make good practice harder.

The AIM research shows that, disquietingly, the UK productivity gap is even wider in services than in manufacturing. But what price Boots or Sainsbury's developing distinctive processes when they are being turned upside down by private equity, or the threat of it or the NHS when it is being reorganised every two years by a government that doesn't understand what management is?

The tale of the two economies is thus not just that they are growing apart. The two are increasingly at odds, with the function of what used to be thought of as the 'real' one more and more to supply the raw material for the bids, deals and exotic instruments keep the weightless one miraculously aloft. As Anthony Hilton wrote in the Evening Standard last week, 'the entire UK economy has become, in effect, a giant hedge fund with a massive one-way bet on financial services - and no Plan B for the day when the City goes off the boil.' If and when it does, the costs of the government's failure to understand the managerial economy will be high - for all of us.

The Observer, 29 April 2007


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