The changing balance of industrial economies

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The changing balance of industrial economies

• Vicky Pryce
• Chief Economic Adviser
• Director General, Economics

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Global Growth over past 30 years
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UK Growth Trends
change latest quarter on corresponding quarter
of previous year
Source ONS
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Global Growth Forecasts
Source National Authorities, IMF Consensus
Economics
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The knock-on effects of higher oil prices on
other energy prices can be significant

• Rough estimate of impact of 35/bbl oil on UK
  energy prices

• Wholesale elec.with carbon/MWh

• Wholesale elec.w/o carbon/MWh

• Oil (lagged)/bbl

• Wholesale gasp/therm

• CarbonE/tCO2

• Retail gasp/therm

• Retail elec.w/o carbon/MWh

• Retail elec.with carbon/MWh

Key assumptions / 1.7, 50/tonne coal,
electricity price set by CCGT cash cost, no
structural changes Indicative value (given
fuel price assumptions) if the carbon allowance
trading scheme was already in place
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Compositional trends globally
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Composition of UK Economy

• Change over time

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The Economic Environment Today

• A strong and flexible labour market

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Stable Macro-Economic Environment
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Strong growth in services and weaker growth in
manufacturing
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But manufacturing productivity growth is higher
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Steady growth in high tech sectors
Source ONS
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High tech services growth
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Drivers of Offshoring

• Technology and innovation
• Competition and falling ICT costs
• English language a key factor

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The Message

• To achieve higher prosperity, UK companies will
  need to upgrade
• their productivity by competing on more unique
  and more innovative
• products and services. Professor Michael E Porter

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DTI Strategy
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Manufacturing Strategy

• Seven Pillars
• Macroeconomic Stability
• Investment
• The Right Market Framework
• Science Innovation
• Best Practice
• Skills Education
• Modern Infrastructure

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The Bigger Picture key messages from the White
Paper

• Large potential gains from globalisation and
  liberalisation for all countries
• We reject mercantilism we benefit from imports
  as well as exports, outward as well as inward
  investment
• But there are adjustment costs and all countries
  need appropriate complementary policies

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Benefits of an Open Economy

• Good for business
• Competition provides incentive to improve
  efficiency
• Resources can be located where most efficient
• Inputs can be sourced more cheaply
• Good for consumers
• Lower prices from competitive markets
• Greater variety and choice (LOV)

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Adjustment and Transformation

• Liberalisation leads to changes in the pattern of
  production employment
• Transition can be difficult
• The overall effect on UK employment has been
  positive
• Labour market flexibility transferable skills
  help adjustment

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Knowledge Economy

• Skills and the Building of Human Capital
• Basic skills ? Skills for Life strategy
• Intermediate and higher level skills
• On the Job Lifelong Learning
• Management skills
• ICT skills

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Raising our game in the workplaceHigh
Performance workplaces
Knowledge Economy

• Leadership and management skills
• Employee involvement and partnership
• Flexibility, new ways of working, Work-life
  balance
• Skills development at all levels,
• Commitment to equality and diversity

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Value added by knowledge based services and
industries
SourceOECD
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And these form an increasing share of UK exports
Exports of Knowledge based services G7
Comparison, 1991 2001 Per cent of total
services exports
Source IMF
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Role of government in innovation policy

• Get the framework right
• Supply public goods and infrastructure
• Provide incentives for public bodies
• Support for businesses when market failures
  demand it and benefitsgtcosts
• Make other policies enablers not barriers to
  innovation

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Key reforms in recent years

• Increased investment in science and research base
• Incentives for universities to seek wider
  exploitation and commercialisation of science
• RD Tax Credit
• Rationalisation of DTI support for innovation

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The key message

• UK Businesses will only achieve long-term success
  in global markets by focusing on greater value
  added as their competitive edge.
• Comparative Advantage will be determined by the
  ability to exchange and apply knowledge
• This must be developed through investment in
  people (tacit knowledge) and in research
  (codified knowledge)

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The changing balance of industrial economies

• Vicky Pryce
• Chief Economic Adviser
• Director General, Economics