Unit 4 Macro: A Manifesto for Growth - the LSE Growth Commission Report

On Thursday 31st of January 2013, the long-awaited LSE Growth Commission Report was published and launched in London. The document itself is available for download from this link and I urge all teachers and students interested in growth, competitiveness and the fairness agenda to have a look at it. It is full of rewarding and important insights into the drivers of balanced growth in a modern advanced economy.I will be adding new resources and links to this blog following the launch eventKey Points from LSE Growth ReportExisting StrengthsStrong rule of lawGenerally competitive product marketsFlexible labour marketA world-class university systemOpenness to foreign investors and migrantsIndependent regulators including competition authoritiesStrengths in many key sectors including high end manufacturingLSE Commission Growth AgendaEducationGreater autonomy for schools, tackle the long tail of under-performance. Conditional cash transfers for families to pupil attendance and performance. Focus league tables less on % attaining 5 A-C grades. Reveal performance at the bottom end.Concentrating on skills (improving human capital) gives people the resilience to recover from global shifts in the division of labourInfrastructureCritical infrastructure essential for competitiveness in modern economy. For the UK, transport and energy are infrastructure areas with biggest issues; there has been a lack of clear strategy and lots of dithering / political delays. Huge opportunities for UK - industrial revolution driven by search for low-carbon technologies driving innovation - can the UK keep up?LSE Commission proposes: 1) Strategy Board (for planning)2) Planning Commission (for delivery) 3) Infrastructure Bank (for funding)InnovationInnovation is the third channel for increased growthProblems in UK capital markets mean innovation is not properly funded - short-termism remains a structural weakness of the marketsBanking/ FinanceMore competition in retail bankingBusiness bank that prioritises lending to SMEs and innovative firmsChanging the compass of economic performanceCommission suggests that focus on GDP is not helpfulGDP misses out on who gets the growth and measures production not income Need more focus on Median Household IncomeMedian household income and GDP per capita have been decoupled since about 2002. GDP no longer tracks itOverallUK trend growth rate can be lifted by 0.5% with effective structural reforms - large compound effect on incomes over the long runInstitutions and incentives matter for growth. Macro stability important too. UK politics too short term and adversarial. Fundamental weakness is the failure to create a stable policy framework.More focus needed on evidence based policy making to make government smarter.Here Professor John Van Reenen, Director of CEP and co-chair of the LSE Growth Commission, presents a 'manifesto for growth' for the UK economy over the next 50 years, backed up by the Growth Commission's report.

Growth Commission Press Release

Skills, infrastructure and innovation are the essential drivers of the productivity growth on which the UK’s future prosperity depends. So while there are understandable concerns about the currently flat-lining economy, it is even more important to focus on vital long-term investments in these three areas. That requires stable and well-informed policy frameworks anchored in a broad political consensus on a new vision for growth.

These are among the conclusions of the London School of Economics (LSE) Growth Commission, which publishes its final report today. Investing in Prosperity: Skills, Infrastructure and Innovation is based on evidence taken in a series of public sessions from leading researchers, business people, policy-makers and UK citizens.

The LSE Growth Commissioners are Philippe Aghion, Tim Besley, John Browne, Francesco Caselli, Richard Lambert, Rachel Lomax, Chris Pissarides, Nick Stern and John Van Reenen.

The UK has major strengths, which, from 1980 onwards, helped to reverse a century-long relative decline. But the Commissioners note that a failure to invest – notably in skills, infrastructure and innovation – has long been a drag on the UK's ability to achieve sustainable growth. They propose an integrated set of solutions:

Education for growth

The quality of compulsory schooling in the UK is a fundamental growth issue. Evidence suggests that increasing UK school standards even moderately – say to the level of Australia or Germany – could put the country on a growth path that would more than double long-run average incomes compared with current trends.

Better buildings, smaller class sizes, higher wages for teachers and greater provision of information technology will all help. But their effects are modest compared with the large potential benefits from increasing the quality of teachers.

Achieving this requires greater flexibility in the UK school system, with increased autonomy and the ability to grow within a national accountability framework that places a premium on radically raising the standards and aspirations of low achieving groups. Improved education for the disadvantaged has a double dividend as it both improves growth and reduces inequality, an endemic UK problem.

On vocational skills, apprenticeships are a key way to tackle low basic and intermediate skills. Employers need to be more involved in training, through a mixture of carrots – such as devolving more of the skills budget to them – and sticks – such as industry-specific training levies.

Infrastructure for growth

The UK’s infrastructure of transport, energy, telecoms and housing are essential facilities for growth. Substantial investment is needed in all these areas as well as determined efforts to address the problems that have constrained growth in the past.

Political procrastination and the absence of a strategic framework have created ‘policy risk’, which deters investors from making long-term commitments. Decisions are rarely based on the best evidence and the planning system does not properly share the benefits of development, so that people who are adversely affected by new developments do not receive compensation and have little incentive to support them.

The UK needs a new institutional architecture to provide better delivery and funding of major infrastructure projects. This requires the right balance between democratic accountability and long-term strategic decision-making, so as to reduce policy risk and provide investors with the right incentives to support badly needed improvements in the UK’s infrastructure. A new Infrastructure Bank would facilitate the provision of the stable long-term finance that the economy needs.

Innovation for growth

Investment in equipment and new ideas are crucial engines of growth. UK investment as a share of GDP has historically been lower than in France and Germany. This largely accounts for the country’s lower GDP per hour worked. Moreover, the make-up of UK investment is heavily skewed towards property and buildings, rather than equipment, innovation and new technologies.

UK investment performance has been weakened by a series of problems in the functioning of capital markets. These include an inadequate supply of finance to young firms and small and medium enterprises (SMEs); ‘short-termism’ by managers and investors; insufficient competition in the banking system; a bias towards debt rather than equity in company finance; and the lack of a long-term industrial strategy.

The UK would benefit from a stable and coherent policy framework to encourage long-term investment and thereby generate higher productivity and increased prosperity. Two key policies aregreater competition in retail banking and a business bank that prioritises lending to SMEs and innovative firms.