Govt. Policies & Competitiveness

7/28/2019 Govt. Policies & Competitiveness

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The role of Government in

fostering competitiveness and

growth



2

Overall policy aim

………to increase prosperity for all………… • by driving up productivity and competitiveness

through:

– successful business;

– world class science and innovation; and

– fair markets.



3

Prosperity for AllRelationship Between Objectives

• Government should pursues its vision of ‘prosperity

for all’ through its aim of raising productivity. But

others factors also contribute, e.g.

– Quality of the Environment.

– Distributional issues (e.g. regions and gender)

• Environmental and distributional improvements canaffect productivity.

– But they are also policy objectives in their own right.



4

Role of government – key principles• Government role limited but crucial

• Set the framework: – Stable macroeconomic environment

– Establish and enforce property rights and contract

– Company, consumer and employment law

• Invest in assets where the market under-

provides: – Public goods – basic science

– Transport and other network infrastructure

• Correct market failures



5

Classes of market failure

• Externalities

• Barriers to entry• Imperfect information and uncertainty

• Public goods



6

Framework for Intervention

• Work with the grain of the market

• Market failure rationale necessary though not

sufficient… • Allocate resources where most effective

– Where there are the biggest opportunities

– Where Government has effective levers

• Research and evaluation needs to be usedmore systematically so limited resources

used where impact is greatest



7

• Strength of scheme rationale is key

• Promotion of collaboration brings benefits

• Additionality greater for SMEs

• Support most effective for long-term,innovative schemes, with strategiccommitment

• Well specified schemes with clear objectives score best



8

• Business support system should: – Have clear market failure rationale

– Be more focused on investments to drive up productivity

– Focus on improved delivery & customer relationships

• Smaller range of products

• Customer access through Business Links, DTIrelationship managers or delivery partners such asbanks

• Improved monitoring and evaluation to ensureongoing improvement in impact



9

The UK experience

• Porter identified two periods of UK

economic reform

– 1980s framework improvement

– 1990s/2000s – rebuilding the asset base



10

1980/90s – framework reform

• 1980s - Injection of market mechanisms

– De-regulation, privatisation, labour market reform

• 1990s reform of macro environment

– Inflation targeting post ERM, independent central

bank/fiscal rules post 1997

• Late 90s – Reform of competition policy,company law, corporate governance



11

1990s/2000 Asset building

• Major investments in UK national assets

– Science base – £180bn transport programme

– Education (significant improvements in

literacy and numeracy)

– Institutional reform



12

How successful has it been?

• UK now has GDP per head similar toGermany, France, and above EU

average

• Recent performance largely driven bylabour market – highest employment in

G7• Productivity performance in 1990s still

lags US and EU



13

Breakdown of UK Growth

-4%

-2%

0%

2%

4%

6%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

GVA Grow th due to Productivity (per w orker)

GVA Grow th due to Jobs

Source: ONS



14

UK Productivity gap is

longstanding

0

20

40

60

80

100

120

140

160

180

200

1870 1913 1950 1973 1979 1989 2000

US

France

Germany

Note: 1870 - 1973, Maddison (1991). 1979-1999, DTI calculations using OECD data



15

What Drives Productivity? – Innovation

– Enterprise

– Skills

– Investment

– Competition



16

Michael Porter on the UK

Source: Porter and Ketels (2003)



17

Innovation - weak R&DBusiness R&D per worker

0

200

400

600

800

1,000

1,200

US Germany France UK

1995 US Dollars

(PPP)

1990 1995 2000

Source: OECD



18

Enterprise – numbers involvedPercentage of Workforce engaged in Enterprise

0%

2%

4%

6%

8%

10%

12%

US Canada Italy UK France Germany Japan

Source: Global Entrepreneurship Monitor 2001



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Assessment• UK framework conditions are supportive

• But more needs to be done to buildassets

– Increase factor accumulation

• And combine assets together better

– TFP and innovation

• This is common across the EU



20

Role of government – recap

• Indicators provide a useful way of benchmarking UKperformance on the ‘drivers’ against other countries.

• But they do not necessarily indicate where policy

interventions will be most effective.• Preference for market-based solutions:

– Identify market or institutional failures

– Ensure that interventions help to correct for that failure

• Government has a key role in setting the macroeconomic,institutional and regulatory framework in which businessoperates. – And improving public sector productivity.

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