Saturday 3 December 2011

Not fit for the future

In 2008, Mervyn King, the governor of the Bank of England, warned that the UK is about to enter a ‘time of decreasing living standards’. The last figures from the Office for Budget Responsibility seem to reveal the staggering extent of the disaster that is unfolding in front of our eyes: stagnating wages, missed inflation targets and high youth unemployment. Given that there are few signals in the UK and Eurozone economies indicating imminent growth, this is as close to a perfect storm as it can get. 
There are however economies in Europe that still enjoy healthy growth rates. The German economy is one of them. Having reformed the employment regulations under the Social Democrat Gerhard Schroeder, and retaining a functioning apprenticeship system which brings companies and educational institutions together, Germany has been well placed to weather the storm. In fact, it did even better than that. It enjoyed unprecedented growth rates and its unemployment figures are down again this month. So what’s wrong with the UK? 
The public debate focusses much on pay differentials between CEOs and employees in the FTSE 500 companies, a dysfunctional banking sector failing to lend to businesses and whether or not the deficit should be reduced in four or eight years. These may all be important topics for politicians slugging it out in the ring of public opinion. However, the underlying factors for growth in the long term may be found elsewhere. The deficit will come down sooner or later, regardless of whether Labour or the Conservatives’s plan will prevail. 
What is less clear is whether Britain will be ready for business once growth returns. To be ready it must tackle the deep inefficiencies that obstruct this economy from being competitive. What are those inefficiencies? There have been two large trends in the last two decades which allowed Britain to enjoy boom years but may now come haunt her. First, manufacturing has relocated to China and other developing countries ensuring that British people could consume goods at record low prices. 
This came at a price for domestic manufacturing though and it will be difficult to reverse the trend. Looking at China and labour wages there, things are moving fast: Chinese labour is becoming more expensive yet this may not mean that British labour is becoming more competitive. British wages are still much higher than Chinese wages. So, in the long run, what would get Britain back into the picture is not cheap labour but skilled labour. This leads to the second large trend in modern economies, the disappearance of low skilled jobs.
On the face of it, German manufacturing cannot compete with Chinese production facilities either. Yet, they have managed to retain their manufacturing capacity by fostering highly skilled labour forces through workplace apprenticeships paid for by companies and colleges. German educators call it the dual system of education: two weeks in a company, two weeks in college. At the end of the training, most apprentices are integrated into the workplace and familiar with work routines in a given company, a critical advantage for gaining a job. 
In Britain nothing of this sort has happened. The Blair government pushed hard to increase university attendance to 50%. Although it failed to achieve this number, the consequence was a highly educated student body with low levels of practical skills. Thanks to the expansion of university education under Blair, colleges and university put on thousands of nonsense degrees which failed to provide practical training, and led nowhere near a job. British students, with the exception of some professions, are overeducated if judged by their degrees, but have little work experience or employable skills. 
Britain may enter very choppy waters over the next years, but if it wants to re-emerge as a competitive manufacturing centre at the other end, it needs to radically reform its educational sector and the way in which companies train young people. The chasm between the educational system and companies must be bridged. Otherwise the government’s aspirations to be open for business will not ring true for thousands of young people for decades to come. 

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