Examination of Witness (Questions 80 -
WEDNESDAY 25 SEPTEMBER 2002
80. Productivity across the whole economy, manufacturing,
service. (Sir Andrew Large) I am aware, as we all are,
that the productivity performance in manufacturing has been lower
and disappointing compared with that in services and that is one
of the areas of imbalance.
81. What about the aggregate for the whole economy? (Sir
Andrew Large) Well, services plus manufacturing again has
been disappointing compared with what we would all like.
82. What is your favourite measure of aggregate
productivity growth? Which one do you favourtotal factor
productivity or other measures? (Sir Andrew Large)
I have no particular favourite.
83. I ask because obviously the big idea of
this Parliament for the current Chancellor, quite admirable in
his ambition, is to raise productivity growth and I am asking
this question because obviously it has quite an impact on price
levels. What would you say has been the trend over the last five
years for aggregate productivity growth over the whole economy? (Sir
Andrew Large) Over the last five years, I do not have all
the figures to my fingertips, but, if I am not mistaken, the rate
of increase in productivity has declined, but trying to be careful
about it, I cannot recall precisely where it was five years ago,
but certainly over the last two or three years I think it has
84. When you sit on the Monetary Policy Committee
you will obviously have to look at a lot of factors and one will
be productivity growth. You say in the questionnaire, question
"The future [of UK productivity growth] is difficult to predict."
Well, I think we can agree with all that, but when you are sitting
on the MPC, what sort of assumptions are you going to be making
from now on about future productivity growth bearing in mind that
the Chancellor has set in place quite a few policies to try and
improve the fairly dismal performance over the last five years?
What are your assumptions when you are coming to a judgment on
setting monetary policy?
(Sir Andrew Large) Are you asking for
(Sir Andrew Large) I cannot give you
86. But you do look at the trends because this
is quite important when determining what the general
(Sir Andrew Large) I understand the drift
of your question and I absolutely agree with the importance of
it and I also agree that it is very important to consider what
possible changes there will be in productivity when coming to
a decision, but what I am trying to say is that I cannot at the
moment tell you what the numbers going into my assumptions are
going to be.
87. You say in the second part of your answer
to question 11, "The promised gains from the IT revolution
are in my view probable, and indeed empirically in various work
environments they have been plain to see. But there is considerable
uncertainty about how long it will take to see an improvement
in the aggregate data." You have obviously given it some
thought and you are properly being cautious in that reply, but
I would like to try and understand what your views are. Do you
think the "new paradigm", so-called, can yet be realised?
(Sir Andrew Large) As I put in my written
reply, this is a very, very difficult area.
88. We understand that.
(Sir Andrew Large) Well, okay, I will
not repeat that then.
89. You are going to be making decisions and
you are going to be making serious judgment calls in this committee.
Do not say that it is a difficult question because you get no
prizes for that. What I am trying to understand is what your professional
judgment is of the outlook for productivity, a number if possible,
but if not a number, then at least some sense of how that is going
to affect inflation, let's say, in the next two years?
(Sir Andrew Large) Are you still asking
the question about the new paradigm or have you moved?
90. It is the same point.
(Sir Andrew Large) I think the new economy,
the information technology revolution and the speed with which
it will work its way through to productivity improvements, one
is going to need to be looking at all kinds of indicators that
I have not been able to look at yet in order to see where, to
what extent and how the productivity benefits are actually being
transmitted into the way people are behaving and the decisions
they make. That is one of the areas that is going to require judgment
and I have not as yet looked at all the information in such a
way that I can give you a cast-iron view on either the speed with
which it is going to happen or the quantum. I appreciate your
point and I agree with it that there are no prizes for saying
it is very complex. I was merely trying to point out that, as
with other, if you like, more or less discrete, but important
changes in the economic environment throughout history, it is
extremely difficult when they burst upon the scene to be able
to predict quite what that is going to do and how it is going
to affect people's behaviour in terms of productivity improvement.
Now, I know that is not what you are looking for and you are wanting
me to tell you something more concrete. I hope I will be able
to do that when I have been able to look at all the different
areas where productivity might be improved as a result of the
IT revolution and the extent to which productivity does appear
to have improved as a result of it.
91. Would it surprise you to know that the Governor
of the Bank of England, who is excellent in almost all other respects,
is relatively uninterested in the impact of ICT on productivity
numbers as it affects the price level? When you do get your feet
under the table and are doing work inside the Bank, could I ask
you whether you will ensure that some more serious work is done
on this because in previous questioning of the MPC it is quite
clear to me at least that this is not taken as seriously as it
should be, so could I have your undertaking, Sir Andrew, that
this is something you will look at? Perhaps when you come back
and see us again you will have some better answers than have been
provided hitherto, not by you, but by your now colleagues.
(Sir Andrew Large) I have not. The answer
to your question is obviously when I am in the Bank, I will keep
on eye on the various areas I will look at and of course I will
look at the one you have just asked about. Whether I will form
a view that it is in any way different from the things they said,
I do not know. I have not seen the details of what they said,
but of course I will look at it and I think the area that has
raised your questions is one that is extremely important. The
difficulty is in actually knowing quite how you reach decisions
as to what the productivity gains in that area are which have
come about as a result of the IT revolution, but of course I will
look at it.
92. Well, we have all been wrestling with this
issue, Sir Andrew, and in fact the Committee is looking into the
productivity element in this coming Session, so if you are able
to provide real clarity to us in the future, you will be the first,
but there you are. (Sir Andrew Large) Well, that is
a challenge you have laid down for me, Chairman!
93. Sir Andrew, you will be attending soon your
first MPC meeting. (Sir Andrew Large) Yes.
94. And you will be aware that over the last
few months there has really been a change and a concern within
the MPC about economic outlook and, in particular, a greater worry
about the downside risks to the UK economy. How do you at the
moment see the risks to the UK economy over the months ahead? (Sir
Andrew Large) Well, I did read of course the last minutes
that were produced last week and I picked up exactly the same
point that you have just made. If one is trying at the moment
to look at the factors which are capable of influencing consumer
spending, there are a number where, for one reason or another,
the confidence that people have in the future may affect the way
that their expenditure patterns take place. Already cited have
been questions of house prices, for example, or levels of indebtedness,
and there are many others, some of them in the international scene,
the Stock Market, et cetera. Clearly one needs to make some sort
of assessment as to collectively what all these different influences
are going to do to behaviour, and behavioural judgments or judgments
about how people will behave are ones which the MPC has to try
to make. I hope that gives you some
95. Well, can I perhaps follow that up, which
was very helpful, by saying that you obviously have seen the latest
minutes of the September meeting of the MPC? (Sir Andrew
96. At the end of that the Committee as a group
unanimously signed off on the view that they wanted to keep interest
rates obviously on hold. (Sir Andrew Large) Yes.
97. But they were ready to take further action
by reducing rates if and when any additional demand was necessary. (Sir
Andrew Large) Yes.
98. Do you agree with that view of the Committee
as a whole, that the next move in interest rates is more likely
to be down than up? (Sir Andrew Large) Well, I read
the minutes and I asked myself the question, "On the basis
of just reading that," which is all I have been able to do,
"what would I have done?" I came to the conclusion that
I would have made the same decision.
99. And you say you agree with the Committee's
view that in terms of the risks of the next move in interest rates,
and what they were saying is that they believe that the rates
should remain on hold for the time being, but they think they
need to be very conscious of the need to cut rates if the economy
weakens and you would agree with that? (Sir Andrew Large)
With the qualification that I have not been privy to all the information
that led them to that decision. All I have seen is what you have
seen and the answer is yes.
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