LSE Growth Commission

What drives long-run economic growth? How can the UK devise a strategy conducive to long-term prosperity? What are the implications of such a strategy for the way Government is structured?

These are the questions that the London School of Economics aims to address in partnership with the Institute for Government. The vehicle of this inquiry - the LSE Growth Commission  - was launched on Monday January 23 with an agenda setting session where Larry Summers and Stephen Nickell reflected on some of key challenges the commission may need to explore.

The sheer size of the task did not go unnoticed. Larry Summers started by stating the importance of being humble in approaching the task. He argued that the correlation of (country-specific) economic growth one decade to the next is close to zero, suggesting “there is no formula for growth” - if there was one, he said, countries that had components of the formula would always grow. Prof. Nickell, in turn, emphasised the obstacles to implementation, alluding to substantial preceding work with very sensible recommendations which have never seen the light of day.

Many of the orthodox views about the obstacles to the performance of the British economy featured in the session. The list is long and relatively well known: regulatory barriers to competition  such as planning and immigration controls; mid-level skill shortages; weak numeracy and literacy in the bottom and middle range of the skills spectrum; management capability deficits; weaknesses in getting the output of R&D to the market; problems in access to credit; regulation of banks, etc.

Some of the conventional wisdom was challenged however.

Larry Summers suggested that the commission consider the effects of ongoing fundamental changes in the world. First, the combination of inelastic demand and rapid productivity growth is leading to increased output but fewer employment opportunities in many areas. Second, the world is becoming much smaller and more integrated through the increases in reciprocal investment, trade in tasks rather than in goods, and international integration of production.

Mr. Summers suggested that the UK economy should focus more on building on its strengths rather than compensating for its weaknesses. This implies worrying less about diversifying the economy and more about focusing on comparative advantage, he said,  as well as considering carefully the attitude towards the UK leadership in financial services.

Mr. Summers also warned the commission against a separation of macro demand management and long-term growth - if the UK remains depressed relative to its potential for 5 to 10 years, the implications for the capital stock, career path and management practices of future generations are likely to be greater than any improvements achieved through supply side initiatives.

Finally, Prof. Nickell called into question the foundations of a popular argument in some corners of the growth debate - the increasing weight of services and the alleged need to rebalance the economy towards manufacturing. He noted that the size of the UK manufacturing sector is similar to that of the US and France, while Germany is an outlier. Moreover, the UK manufacturing sector has made greater use of outsourcing than other countries, so the data on the value added by UK manufacturing is underestimated compared to other countries, while business services are artificially inflated.

The commissioners will reconvene Friday January 27 to set the detail of the agenda of the commission for the next 11 months. To learn more about the LSE Growth Commission and/or submit your views go to LSEGrowthCommission