Examination of Witnesses (Questions 149-159)|
TUESDAY 26 FEBRUARY 2002
149. Mr Hutton, would you like to introduce
yourself and your colleagues?
(Mr Hutton) I am Will Hutton, chief executive
of The Industrial Society. On my left and your right is Rebecca
Harding who is just joining us as our chief economist, and Andy
Westwood is deputy director of our research department and specialist
in labour market skills acquisition. Rebecca: institutional structures,
R&D, DTI, government interventions.
150. Could I ask about New Jerusalem? Some of
us like the title because of its historical connotations. The
strategy in New Jerusalem, as I understand it, is pretty critical
of the preoccupation with macroeconomics and says that more attention
should be given to micro initiatives. Could you start off by indicating
what evidence there is for that approach?
(Mr Hutton) This debate about productivity is enormously
longstanding. If you go back in your records, you will find committees
on this in the 1880s and 1890s. It has always been defined as
a debate between, on the one hand, statists who say the answer
is to mobilise resources, and sometimes those come from the right;
sometimes from the left. The counter argument has come from the
anti-statists who have said the way forward is less regulation,
more market forces. What we are trying to do is to redefine it.
New Jerusalem is part of that intellectual attempt. The one thing
that cannot be said about Britain's lack of productivity in manufacturing
is that it has much to do with regulation or over-regulation.
We have the least regulated labour market in the OECD. Looking
around at corporate governance standards, health and safety, we
are at the low end of the range. No one is in favour of cumbersome
or bureaucratic regulation but the notion that the reason why
manufacturing is held back by regulation is very difficult to
stand up. You then have to say why. One answer is that low productivity
is a rational response to the array of prices that manufacturers
face. Broadly, capital is expensive and labour is cheap. Consequently,
our manufacturers use less capital and more labour. The labour
they use tends to be unskilled or semi-skilled. That pattern has
reproduced itself over a period of decades. What we think lies
behind that is the institutional structure that throws up that
array of costs to the manufacturing sector and the business sector
generally. What we are trying to argue is that we need to look
behind the institutions that throw up the array of prices and
incentive signals that have persisted over time. There is one
cluster of institutions around determining the cost of capital,
hurdle roads, pay-backs, which I am happy to talk about. There
is another cluster of ideas around institutions, around the way
skills get formed, and there is another cluster of institutions
around governmental intervention and that is where New Jerusalem
locates in our overall thinking and our overall programme of publication
of research in the next 18 months to two years. It is not quite
micro; it is more looking at institutional structures.
(Ms Harding) I would support that 110 per cent. What
we wanted to do with New Jerusalem was move the debate away from
what we view as a kind of complacency about British macroeconomic
performance. We have comparatively high growth and low unemployment
and we felt that this was masking some of the very real problems
that were existing at the micro level in the economy. We wanted
to look at the productivity problem in terms of its longstanding
nature. We wanted to look at productivity as a manifestation of
institutional failures rather than market failures. We wanted
to look at where the origins of that productivity gap were in
terms of the institutional structure of the British economy at
a very micro level. We were perfectly open, I hope, in New Jerusalem
in saying that some of the microeconomic initiatives like an R&D
tax credit, for example, to try and improve productivity are to
be welcomed. They are necessary but they are not sufficient. One
of the problems with the economy and in closing the productivity
gap which is a very longstanding institutional one is that we
do need better structures of bridging institutions, particularly
in research and development, education and training and skills,
in order to be able to improve the performance of industry at
a micro level. What we are trying to do is identify those as institutional
problems and move the debate away from markets to look at some
of the structures of the economy that are causing that very long
term productivity problem.
151. There are economists that we all know who
would say that the bottom line is that you get a high rate of
growth, a high rate of investment, capital accumulation and that
drives productivity growth and it is simply an argument that says
the macro framework, at the end of the day, is the key determinant
of productivity growth and not what is happening in individual
clusters or whatever. I was trying to tease out of you any evidence
you have that suggests that that approach is wrong and that it
really is looking at a more disaggregated level at what is going
on in the economy.
(Ms Harding) It is a necessary but not sufficient
condition. If you look at countries where productivity is higher
and where there has been a faster catch up in productivitymy
particular expertise is in eastern Germany, looking at how eastern
German states have caught up in terms of productivitywhat
they have done is try and develop an institutional structure that
is right for innovation, education and training, which is very
closely networked, which is very sector specific and specialised
and very regionally focused. Those are the areas that we identified
in New Jerusalem as being the lessons that we can learn from America,
Germany, Denmark and a lot of the Nordic countries as being the
areas which have driven productivity to higher levels in those
countries. What we were saying was, yes, you should have stable
macroeconomic conditions; yes, you should have R&D tax credits
and micro interventions, fiscal interventions, to make markets
work efficiently, but what we wanted to say was that those are
the domain of the Treasury. Those are the sorts of things that
the Treasury should be doing but the Department of Trade and Industry
should be focusing on some of the more normative aspects of productivity,
some of the more institutional factors which are not so readily
measurable and identifiable. What we did in New Jerusalem was
begin to think about ways in which those institutional factors
might be measured. That is quite different in terms of the economics
of productivity because unless you come from an institutional
economics background, which I do, it is quite difficult to see
the institutional failures as underpinning market failure.
152. I am reminded that the report was written
before the General Election. Has there been any evidence for greater
hope in terms of policy initiatives since the election or not?
(Mr Hutton) Patricia Hewitt has announced a reorganisation
of the DTI which was partially informed by New Jerusalem.
(Ms Harding) The language that is coming out of the
DTI now would suggest that the message that the more normative,
institutional structure of the British economy needs to be taken
into account. Personally, I welcome the view that science and
technology and innovation should be at the heart of any industrial
policy, rather than bunkering it on one side. I feel from that
point of view that the language is appropriate and, yes, there
are some changes that are to be welcomed since the election.
153. In your New Jerusalem you say, very critically
if I might say so, of the DTI, it has long been regarded as being
a second rank ministry of state and somewhere you say, "Today's
DTI has all of the strategic coherence of Dad's Army and Marks
& Spencer." Does it generate some more confidence that
the Department is going in the right direction? You also suggested
a new name for the Department: Productivity Employment Office.
Does it matter what name it has, because in the end it is the
structure changes which are required. How much confidence does
that generate? You may want to expand on what you were saying.
(Ms Harding) The view that we wanted to put across
was that in the British economy generally but in the DTI in particular
there is some confusion over what the real issues are and what
needs to be addressed at this institutional level in the economy.
Defining what you are looking at in terms of the institutional
basis of productivity is extremely hard to do. I think there was
a very real frustration that some of the initiatives that had
come out of the DTI before the election were somewhat vague and
lacking in strategic direction. We felt that there was no real
end goal. The debate on the competitive position of Britain was
not being couched in terms that would enhance productivity in
the first instance and competitiveness in the long term. We felt
very strongly that there were a number of areas that needed to
be dealt with: regional policy, science and technology, education
and skills and so on. We felt that by being rude, I suppose, it
would shock the Department into doing something. Okay, I do not
want to take too much credit for it because I am sure I am not
the only person who has said things like that, but what we did
was to say, "These are the areas that are fundamental to
improving productivity. These are the sources of innovation. These
are the sources of productivity in the institutional structures."
A lot of the language that has come out of the DTI since then
has been a review of whether or not those structures are the appropriate
ones. It has actually been very positive since. I think the issue
is dealing with the institutional structures of the economy, the
name in a sense is immaterial and has been superceded by events
since the election, but I think the issue is dealing with the
institutional structures and certainly I welcome the changes that
are coming out of the DTI now, it is creating clear blue water
which is what the Treasury stands for and what the DTI stands
for. I think the Treasury quite rightly stands for macro economic
stability, micro economic stability and trying to address the
issues around market failure. The DTI has a quite distinct role.
If you look at all of our competitor nations they have a distinct
ministry which deals with these institutional structures. It is
the Ministry for Research and Technology and Education and Training
in Germany, BNBF. There are similar structures in Finland, Denmark:
Denmark has just set up a Ministry of Science and Technology.
There are these types of ministerial structures elsewhere and
recognising that we do need to be dealing with the economy from
an institutional perspective as well as from a market perspective
is what we are really trying to drive at and that is where the
clear blue water is between DTI and the Treasury.
Mr Berry: We never adopt the tack of being rude
which is why we are so shocked.
154. I would like to ask you in a second about
the regional and local angle of this.
(Ms Harding) Yes.
155. Just staying on central Government for
a moment. One of the things you say in the New Jerusalem
is that one of the problems with Britain is it characterises network
animosity rather than network reciprocity.
(Ms Harding) Yes.
156. Whilst in no way wanting to suggest you
are suggesting any network animosity between, say, different Government
departments, you say that there have got to be distinct roles
for DTI on the one hand which will be distinct from the Treasury.
Both have got valid roles, valid perspectives but they are different.
How would you want to ensure that the interrelationship between
those two departments is characterised by network reciprocity?
(Ms Harding) What we meant by that phrase was that
if you look abroad there are very clear delineations of what responsibilities
are at a departmental level and at the level of individual actors
within the whole economic system, institutional system of an economy.
What we wanted to do was get away from this competitive view that
we tend to have in British public life and also in British industrial
structures of "This is my backyard and don't you play in
it unless I let you". The way that you actually get around
that problem is by developing expertise within departments and
ministries which are distinct and unique and very clearly defined
and which then allow that body of information, that knowledge
base to be respected and to be plugged in to by outside actors.
So the Treasury will go to the DTI and say "Look, you are
the experts on institutional economics, you are the people who
understand the market failure in terms of institutions, tell us
a little bit. Write some papers and tell us a little bit about
where the institutional failures are and then we can start to
think about how we might address those from the market failure
perspective as well". Conversely, the DTI would say to the
Treasury "Well, you are the people who deal with market failure
from the point of view of fiscal measures and so on and so forth
so we have identified this as an area but you need to think about
how that can be addressed from the fiscal perspective". It
is actually collaborating and creating cultural reciprocity which
maybe is about defining what each of the Government departments
is about and where the clear blue water is but where there is
scope also for creating synergies.
157. If we move on to the more local and regional
level. Again, going back to the network reciprocity/animosity
issue, you have a table in the New Jerusalem, table one,
where you outline some of what you see as the differences between
the UK, Germany and America. In practical terms, how would you
see some of the virtuous circles that are outlined in there being
developed in the UK? What does it mean in terms of what you do
with RDAs, the Chambers of Commerce and so on?
(Ms Harding) Again, I can talk about this for hours
and be incredibly boring about it. The important thing that you
see, again, in the United States and Germanyand the interesting
thing is just how similar the United States and Germany are at
an institutional level. The responsibilities of the regions in
relation to national structures are quite clear and quite distinct.
In terms of economic governance there are regional bodies which
have responsibility for funding education and training, for identifying
the regional innovation strengths of a regional economy for developing
the technological focus and making bids for the national government
and to the European Union about particular technological areas
where the expertise is within a region. Effectively it is about
developing clusters at a regional level, I use the word clusters
with some hesitance. It is about developing networks at a regional
level which are based in regionally identified strengths, sectoral
strengths. That could be in terms of technology. If you look at
the way the Eastern German regions have developed their economic
strategies, it is in terms of identifying clear innovative areas,
areas of innovation and technology where the whole system can
bring something to the party. So you are talking about the universities
having expertise in a particular area, attracting inward investment
from, say, the intermediate technology transfer institutes so
that they will come in and locate in that particular region and
set up expertise in particular technological areas but where there
is not technology it is saying also "Oh, well, we have an
expertise in this service" or "We have an expertise
in this particular industry". It is about getting that defined
at a regional level and then translating that into resources and
networks so that everybody is pulling in the same direction so
that everybody knows what the goals are and can manage that in
a strategic sense.
(Mr Hutton) I was in the East Midlands recently at
a summit on manufacturing that was held in Nottinghamshire. There
is in Nottingham and Derbyshire, of course, a potential great
cluster of aerospace companies. There is a bit of BA Systems there,
there is Rolls Royce, of course, and there are bits of Marconi,
a company in some trouble but supplying the aerospace industry
from its factories there. It is actually a potential regional
cluster. Then you start looking at what institutional structure
would support it. Does the university system there in Nottingham
and Leicester really specialise in aerospace and engine building?
No. What about the financial system, does it support that? No.
What about research institutes that might be based there and might
have world class people working at the frontier of technology
in that part of the world? Nothing. What about building a really
fantastic airport there, airports are pretty important centres
of all high tech clusters at the moment because you bring the
kit in in enormous wide bodied jets. You would want that particularly
for the aerospace industry. Any chance of that? Well, not much.
What about the East Midlands Development Authority having the
capacity to knock some heads together and some energy to harness
local entrepreneurs? It is a shame, it is a terrible, terrible
shame. You just see on the ground the institutional structure
which does not support potential, and I think BA Systems and notwithstanding
its problems Marconi, and Rolls Royce are great world class companies.
They have got their backs against the wall. Not just that, of
course, there is a whole lot of other things which we have not
talked about which is the degree to which all those companies
find they are getting term finance because you have specialist
banks in Germany. The irony, as Rebecca says, is you get specialist
banks in the States. There are 10,000 banks in the States. If
you go to a particular State like North Carolina, North Carolina
three or four years back, the banks there are locally owned and
they specialise in lending to the high tech companies in the North
Carolina growth triangle. They have autonomy decision making and
they can lend enormous sums of money for five and ten year periods
in a way that the local clearing banks in the East Midlands simply
cannot. Decisions have to get referred back to headquarters and
of course all the London clearers are under the cosh about generating
this systematic growth in earnings and profits and dividends to
satisfy institutional shareholders with again, no institutional
matrix to protect them. The whole system undermines our aerospace
industry which is in my view one of the areas where we still retain
technological manufacturing excellence. What we are trying to
do at the Society is to try and take it away from the argument
"Oh, we suffer from burdensome regulation" which, if
you talk to any of them, is the case. "We do not even talk
about it. It is ridiculous. Ridiculous conception. It is not the
core of it". The exchange rate, although important, is not
fundamental because if you get a buyer, what is the value added,
the technological quality. There is a degree of price sensitivity
but over valuation and the exchange rate is not the core of the
aerospace industry's problems although it is one of the factors.
When you look at it closely and go on the ground, it just leaps
up. If the Committee went and spent some time just looking at
that corner of our manufacturing I think you would come back with
some very similar conclusions to the ones we have got.
158. In order to develop the institutional matrix
which you say is not there in the UK?
(Mr Hutton) It is like a sweet shop, it is so sad.
159. That is how it is. You tend to move incrementally
to swiftly develop that matrix. What would you see to be the key
(Ms Harding) Intermediate technology transfer.