One of the factors mentioned by a number of ‘commentators’ that affect productivity is investment. That is investment in assets, technology and people (through training and enhancing skills). It is easy to think that investment in technology will aid productivity. At the start of the 19th century investment in new technology (threshing machines and spinning jennys) revolutionised their industries with huge leaps in productivity. It also marked the start of ‘industrial action’, with the Luddite riots protesting at the introduction of the spinning jenny in 1816. The ‘Luddite’ mentality is still there today and rears its ugly head at the mention of new technology and job losses (Think no guards on trains). Although interestingly enough reactions are often mixed. Don’t assume a Trades Union will go against every new piece technology (and sometimes they are the first to complain about lack of investment).
A look at comparative investment across several nations (Germany, USA, France UK and Japan) between 2000 and 2015 years shows the UK consistently at the bottom of the heap (for investment as a percentage of GDP) with the gap varying between 8.5 and 6.7 percentage points between the UK and the highest. In UK money terms, that is as much as £127 billion in 2015 - about the same as the current NHS budget! A similar time series comparing productivity has the UK well behind the USA and the Euro zone as a whole.
This raises two issues. What is the cause and effect link and why, if investment helps productivity, is it so much lower in the UK?
At one level there is some clear logic that the right kind of investment will lead to productivity gains. I listened to a Radio 4 programme last month, where an apple producing company had invested in technology to sort, grade and pack apples. Four men now oversaw the process that previously employed hundreds (which as well as raising productivity has solved the Brexit issue of seasonal farm workers). However, at the opposite end of the scale you have something like NPfIT (the National Programme for IT). This was started in 2003 with a view to introducing a comprehensive IT system across the whole of the NHS. It would save lives, improve quality and significantly enhance productivity. Except it didn’t. The project was largely dropped by the coalition government in 2011 with little, if any, tangible benefit and at times actually reducing productivity. Not all investment works.
So perhaps the problem is about how good the UK is in making wise investments that actually increase productivity. The car industry in the UK has gone from strength to strength and is the most productive in Europe – not least due to the significant investment over the last decade.
Based on a loose hypothesis that wise investment will increase productivity and add value to business, employees and the nation why does the UK (overall) seem so reluctant? Since the financial crisis ten years ago interest rates have been steadfastly low, making borrowing cheap. The pressures on large corporations for quarterly results (therefore perhaps inhibiting the desire to invest) are no less in the US and much of Europe, but these countries are investing much more than the UK.
Here’s one possible reason – share buyback. In times of uncertainty (like after the crash) when share prices are down and companies undervalued, one quick way of making the company look good is to buy back shares. This improve EPS (Earnings Per Share) which will lift the share price and also make it more expensive for predators to buy your company. Of course it also makes the company look good and often ticks many boxes when it comes to executive bonus time!
Compared to the effort required to plan and execute major investment at a time of big uncertainty, a buy back looks very tempting. Research from HSBC indicated that $2.1 trillion had been spent in the USA on share buy backs over five years from the middle of 2011. Think what that might have done for productivity if it had been spent on investment instead? The rights and wrongs of share buyback is a big topic in itself, but the reality is you can’t spend the money twice. If a company has a share buyback, it can’t use the same money to invest!
The UK is enjoying the highest rate of employment for many years. However, a lot of these jobs are at the low wage end of the spectrum. If there is cheap labour, why invest? It can make sense at the corporate level (until the high employment rates drive up wages), but it does nothing for productivity. If individuals and the nation as a whole want to enjoy a wealthier life the value added per head has to rise. A low wage (and therefore low tax revenue) economy is not going to bail out the NHS or raise the standard of living (accepting that moving people out of no job to employment is a step forward but not a big one if you are on a basic wage with a big family and were historically enjoying significant state benefits).
So where has all of this got us to? The UK invests less, share buy backs are an easy option in turbulent times, as is employing lots of cheap labour (where you can). But none of this improves productivity. There are undoubtedly organisations that have swum against the stream and done well, others that have failed.
It seems to me that when it comes to productivity, the UK is risk averse – buy back shares rather than invest, short termist – employ more cheap labour, pessimistic – who knows if the investment will get utilised, lacking in will – for all sorts of reasons, but above all else does not seem to realise how fundamental productivity is to the long term health of any organisation, enterprise or nation!
So the verdict. Wise investment helps, but the UK seems rather shy overall about this. Perhaps if management were better trained and we had a more skilled workforce they would begin to think differently. That’s for next time!