1 The role of Government in fostering competitiveness and growth Ken Warwick Deputy Chief Economic Adviser UK Department of Trade and Industry

2 Structure of presentation Overall aim of competitiveness policy Role of Government UK experience Examples of policy interventions Conclusion and discussion

3 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.

4 Prosperity for All Relationship Between Objectives Main way the DTI 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.

5 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 under- provides: –Public goods – basic science –Transport and other network infrastructure Correct market failures

6 Classes of market failure Externalities Barriers to entry Imperfect information and uncertainty Public goods

7 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

8 Lessons of evaluation of DTI schemes Horizontal preferable to sectoral 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

9 DTI Business Support Review New business support system will: –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

10 The UK experience UK Competitiveness: moving to the next stage, Porter and Ketels 2003 Porter identified two periods of UK economic reform –1980s framework improvement –1990s/2000s – rebuilding the asset base

/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

s/2000 Asset building Major investments in UK national assets –Science base –£180bn transport programme –Education (significant improvements in literacy and numeracy) –Institutional reform

13 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

14 Breakdown of UK Growth Source: ONS

15 UK Productivity gap is longstanding

16 Accounting for the Gap by Sector (UK/US Comparison) Source: NIESR (1999) (per hour basis)

17 What Drives Productivity? The Government has identified five drivers of productivity: –Innovation –Enterprise –Skills –Investment –Competition

18 Michael Porter on the UK Source: Porter and Ketels (2003)

19 Innovation - strong science Source: OST (Period: 1995 – 2000)

20 Innovation - weak R&D Source: OECD

21 Enterprise – numbers involved Source: Global Entrepreneurship Monitor 2001

22 Enterprise - ease of setting up a business Minimum cost to establish (euros)Minimum delay to establish (weeks) Source: OECD (1998)

23 Skills – performance lags Skills account for part of the gap Relatively poor literacy and numeracy ‘Gap’ at intermediate level Perception of weak management performance Source: UK Competitiveness Indicators 2002

24 Investment - capital stock by sector Relative Capital per hour worked (UK = 100) Source: NIESR, 1999

25 Competitive markets - Business Environment Netherlands21 Canada32 USA13 UK44 Germany1513 France1616 Italy2323 Japan2726 EIU Competitiveness Ranking November 2002 Business Perceptions of How Government Supports Competitiveness Source: IMDSource: EIU

26 Accounting for the Gap by Factor Source: Porter and Ketels (2003)

27 EU productivity lags US….

28 As does TFP

29 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

30 Latest data encouraging

31 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.

32 The role of Government in fostering competitiveness and growth Ken Warwick Deputy Chief Economic Adviser UK Department of Trade and Industry