Minding the gap

Chris Humphries, director general of the British Chambers of Commerce, says the productivity gap between the UK and its rivals is the joint responsibility of government and business. He spoke to HELEN BEASLEY

The chancellor, Gordon Brown, recently warned British industry that it was failing to bridge the productivity gap with overseas competitors. He said annual UK productivity growth has been just over 2.5% for 50 years, compared to between 3.5% and 4% among the country’s main European rivals.

Chris Humphries, director general of the British Chambers of Commerce, accepts that UK manufacturers need to improve, but says the government also has a significant role to play.

Humphries, who was awarded a CBE for services to training and enterprise in 1998, is also chairman of the government’s National Skills Task Force.

Is there any danger of the government talking down manufacturing by being too negative about the economic climate?

No, I don’t think so. There are serious problems facing the manufacturing base in Britain at the moment, and the pound and interest rates play a key role. But I have yet to witness any downturn in the economy where anyone could show that talking was the cause.

Gordon Brown argues for greater productivity and, of course, that is vital. However, UK productivity rose overall by 5.1% last year, and by 8% in the engineering sector, yet the impact of the differential between the euro and the pound alone caused an 11% increase in manufacturing costs. It doesn’t matter how productive you are, no country can realistically expect an 11% year-on-year improvement.

Do you think the chancellor is ignoring the achievements industry has made?

No, I don’t think he is. We do have a productivity gap with Germany and the US. But it is not caused by one single factor. Roughly a third of the gap is because US employees work longer hours and have shorter holidays. In Britain we often take four weeks more holiday than our US counterparts.

Another third is down to under-investment. We’ve under-invested in our infrastructure, our manufacturing facilities and our technology. And the fundamental reason for that is widespread short-termism, which has caused the boom-bust economic cycle that we have been put through.

Since 1995 we’ve had economic stability, and already business investment has increased dramatically. By 1998, levels of investment in the UK had already surpassed the G8 nations’ average and we’ve now got the fastest growing rate of investment among the G8. But you can’t overcome 30 years of strategic infrastructure under-investment overnight – it’s going to take another five to 10 years at least.

What accounts for the other third of the productivity gap?

The third issue is skills, and here we have a big problem, and one that is a combined government and business responsibility. One in five members of the workforce is functionally illiterate; one in four is functionally innumerate; and one third doesn’t have GCSEs at the most basic level. Added to that we only have half the number of qualified people at technician level that Germany has.

We had an education system that was creating graduates, we did not have an education system that was creating engineers or technicians. And we are paying for it now with our hugely under-skilled workforce.

So, yes, Brown is right that we have to raise productivity, but government has to recognise its responsibilities. If we are going to solve it, it needs long-term commitment by government and business working together.

Why are the US and Germany ahead?

The US has more liberal investment policies, much better tax incentives to encourage investment and a much larger portfolio of investment funds available for business. If you just take the Small Business Administration, the US government provides a total port-folio of grants, loans and underwritings valued at $49bn for small businesses with less than 250 employees. Taking population into account, if they’ve got $50bn then we should have about $10bn (£7bn) available, but we’ve only got a couple of hundred million.

The skills gap is less significant between us and the US, whereas the German skills base is better, but their access to finance isn’t as good as in the US. You need the right mix of workforce flexibility, investment and skills to get your productivity right and we’re weak on all three.

Can companies benefit from the strong pound by making cost savings?

The Japanese yen was an over-valued currency for years, and contributed to the dramatic improvements in productivity of Japanese companies in the 1980s and 1990s. But with the Japanese currency there was fairly level and continuous growth, so business had time to adapt. The interventionist policies of the trade and industry ministry were legendary – it made huge investments in infrastructure.

Businesses’ response has to be in part to get on with it and find every way to increase its effectiveness, efficiency and reduce its cost base. Of course, businesses will benefit from cost-cutting and, when the pound settles, will see a profitable return. But that doesn’t address the problem of companies which at this moment are in danger of going out of business.