Bad managers to blame for UK’s productivity crisis, says Bank of England’s chief economist 

Bank of England
Bad managers do not realise they are holding their companies back, damaging UK productivity, economic growth and living standards, according to Andy Haldane at the Bank of England Credit: HANNAH MCKAY/Reuters

Bad managers stand accused of holding back economic growth in the UK by undermining productivity, preventing pay and living standards rising.

Most companies do not even realise they are performing poorly, however, Andy Haldane, the Bank of England’s chief economist, has claimed.

Just as most people believe they are better than average drivers, so most firms believe they are highly productive, he believes.

“A lack of management quality is a plausible candidate explanation for the UK’s long tail of [unproductive] companies,” Mr Haldane said.

“There is a statistically significant link between the quality of firms’ management processes and practices and their productivity. And the effect is large.”

“This suggests potentially high returns to policies which improve the quality of management within companies.”

Andy Haldane, centre, is gloomy on the prospects for productivity growth unless weak firms work hard to catch up with their most productive rivals Credit: Bank of England

Mr Haldane is no stranger to making controversial and potentially unpopular comments.

Last year he blasted the pensions industry, arguing that its impenetrable complexity made it impossible even for the financially trained to properly understand it, and said its jargon is undermining incentives to save.

In November he turned his guns on his own profession, urging economists to spend more time trying to understand normal people rather than writing papers “by the elite for the elite”.

And at the start of this year he said the financial crisis represented a “Michael Fish moment” for his own colleagues at the Bank of England as they failed to predict the crash.

This time he has accused the majority of poorly performing British firms of failing to understand their own predicament.

Citing Sir Charlie Mayfield’s Productivity Commission’s work, the chief economist said “not only is there a long tail of [unproductive] companies, but that many are unaware of that fact.”

“For the same reason most car-owners believe they are above-average drivers, most companies might well believe they have above-average levels of productivity,” he told an audience at the London School of Economics.

“In fact, we know most companies have below-average levels of productivity and a large fraction of them have seen no productivity improvement for several decades.”

One solution he backs, proposed by the Mayfield Commission, is to pair up productive companies with unproductive ones, so good managers can teach others how to boost their workers’ output.

This buddy system could enable firms at the cutting edge to teach their suppliers how to operate more efficiently, benefiting each company as well as the wider economy.

There are a range of other reasons for poor productivity growth, a blight which has affected the entire world in recent decades but appears to be hitting the UK particularly hard.

Charlie Mayfield, the boss of John Lewis, proposed that highly productive firms teach some of their methods to poorer performers Credit: Geoff Pugh

Firms which do not export are poor at raising productivity, which Mr Haldane believes may be because they are not as heavily exposed to foreign competition.

Similarly it can help if firms have foreign owners who are used to competing against the best the world has to offer.

Very high-tech innovations may be hard to copy because of patents and other intellectual property protections, Mr Haldane said.

The financial crisis may also have affected productivity, cutting off the supply of credit to innovative companies which need funds to invest in new technology and equipment.

The period of ultra-low interest rates may also have had some impact, Mr Haldane said, as unproductive firms have been kept on life support, meaning these “zombies” stay alive and continue to tie up resources, rather than dying and the capital behind them being used instead by newer, more innovative businesses.

Mr Haldane said higher interest rates could have forced those zombies to shut down, raising average productivity - but in the short run could have cost as many as 1.5m jobs

“Productivity is a gift for rising living standards, perhaps the greatest gift. It is not, however, one that always keeps on giving, as recent events attest,” Mr Haldane said.

“As Olympic athletes have shown, marginal improvements accumulated over time can deliver world-beating performance. Applying those marginal gains to the population of UK companies could significantly improve UK living standards, even if those are harder to measure than gold medals.”

 

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