How to solve Britain’s productivity puzzle

Andy Haldane, chief economist at the Bank of England, is one of the UK’s most original of thinkers. He has one of those brains – rare in the UK right now – who likes to not only think outside the box but to ask what shape the box might take.

So the decision to make Haldane the first chairman of the new Industry Strategy Council is a good thing. The Council, set up by the Prime Minister and Business Secretary, Greg Clarke, is one of the government’s latest creations aimed at that most lofty of ambitions: to help boost the UK’s innovation and productivity, improve the business environment and all that jazz.

Haldane has been working on the UK’s productivity puzzle for some time now, and has many interesting thoughts on what can be done to improve productivity which, as everyone knows, is way below most comparative G7 countries and one of the lowest in the Western world.

Our low levels of productivity compared to industrial neighbours in France, Germany, Norway, Canada and Ireland has been called a puzzle – rather than a problem – because that is precisely what it is. It’s a puzzle because the low level does not quite make sense and does not reflect the whole country: the UK has many companies which are brilliantly productive, scoring way above the very best in the world.

But we also have masses of small and medium sized businesses – often family run – which are hopelessly behind the times, which have not invested in even some of the basic modern technology and – according to Haldane – are still stuck in Victorian times.

Haldane, as the Bank’s chief puzzle solver, has made it his business to focus on cracking the productivity problem – one of the reasons he has been chosen to head up this new body. As he explained to me in an interview last year: “The British are brilliant. Brilliant at ideas, innovation and creativity. I would go as far as to say the British are geniuses at discovering new ideas in every area from manufacturing to machine learning to AI. In fact, he said: “We are great at the R in R&D.” Then came the proviso: “But we are not so good at the D: the development and the dissemination of those ideas.”

He went on: “This is a tale of two companies. There are companies which are good at both R&D. They include a high number of exporters and foreign-based companies which invest in the future. Then you have the gold-rush companies in places such as Cambridge, where productivity is as high as 40 per cent.

“They are the frontier companies, on the high road, but they make up only a small number of companies, perhaps about 10 per cent. But the rest, the long tail, are on the low road. Many companies have not improved productivity levels this century while others have not shifted since the 1970s.”

“Here’s why: over the past decade the average productivity per worker has been negative, and you have to go back to the 18th century to see a similar period of stagnant productivity. It’s been flatlining. This is not only unusual but unique. The UK is an outlier.”

But why is the UK an outlier? There are many explanations for this, ranging from the cultural to the social to the political. Many go back to our rigid class system, which fostered a way of thinking which still permeates our business and industrial base as well as our tax system.

For decades now, small to medium company owners have not been encouraged to invest in the future of their employees, either by investing in skills or training. There’s another reason which can be traced back to the Victorian era: many of today’s great businessmen and industrialists, as well as financiers, have been far too eager to sell their businesses off to usually overseas buyers in exchange for vast dollops of cash to buy their landed estates rather than keep building their empires.

Luckily, Haldane understands most of the bits of the puzzle, and has been given a once in a lifetime chance to work out how to put together those bits which might help fix productivity on a national level.

But I fear he has another problem: the 19 new council members, who were announced yesterday by government, to join him on the board may not be up to the job at hand.

Frankly, those chosen for this huge task are a gigantic disappointment. The list of new members lacks imagination, and looks as though it has been dug out of the archives at the Business Department at the last minute before midnight. Don’t get me wrong. All the 19 members are the great and the good in their specialist fields: either hugely successful business men and women like Archie Norman, chairman of Marks & Spencer or Emma Bridgewater, of ceramics fame, as well as a sprinkling of well-known academics and economists.

Yet, other than Bridgewater and Hayley Parsons, a Welsh investor and founder of GoCompare, there is not a single serious British industrialist, engineer or manufacturer or indeed, representative of the UK’s most dynamic entrepreneurs who make up the ‘vital’ 6% of the country’s 5.8 million SMEs.

There is no one from the hi-tech or AI field  or from the UK’s most innovative industrial sectors – FinTech, life sciences, agri-business or biotechnology. The choice of council members is a devastating indictment of the government’s view of Britain today, and more pertinently, how short-sighted ministers and civil servants are about the future potential.

Yes, there are fine minds on the board who have thought long and deep about productivity: two examples being Sir Charlie Mayfield, chair of the John Lewis Partnership and Jurgen Maier, head of Germany’s Siemens operations in the UK.

Sure, it’s great to have the views of Dame Nancy Rothwell, President and Vice-Chancellor of the University of Manchester and Professor of Physiology and Dame Vivian Hunt, managing partner of the UK and Ireland for McKinsey, and chair of the CBI London Council.

But why are Lady Nicola Mendelsohn, an advertising executive and vice-President for Europe for Facebook or Rupert Harrison, ex No 11 and Blackrock, or another government adviser Rohan Silva, Co-founder of Second Home, seen as essential to working out how the UK ticks?

Where are the great industrialists and inventors or, crucially, the angel investors and venture capitalist specialists who are the ones with the dosh to invest in the UK’s next round of small companies? They are the men and women who are talking to and investing in the next generation of business founders. Why are they not represented on the council?

Why isn’t Lord Bamford, founder and chairman of JCB, one of the world’s biggest manufacturers of diggers, on the board? Or James Dyson, of hoover fame, who walked away from talks with BEIS about setting up a new university/training centre because he was so appalled that government was not interested in working with him?

Why isn’t Mike Cherry, head of the Federation of Small Businesses, or Marcus Stuttard, the head of Aim, the LSE’s small companies market, or anybody else running one of the City’s small brokers who work on helping the next brood of small companies onto the UK’s public market on board? Or someone like Oliver Hemsley, the former Numis stockbroker who recently bought the small companies market, NEX, and knows more young company founders than anyone in the City? I could go on. But you get my drift. Haldane needs dynamic, and entrepreneurial people like these if he is to solve the puzzle.