Summary:
The pandemic has burdened many businesses with large debts. By offering to write off government-backed loans, the government has a rare opportunity to ask for something in return from companies across the economy and country. That opportunity should be used to tackle the UK’s poor productivity head on. Our proposed exchange programme for company directors and managers offers a solution: the mechanism is proven to increase productivity; and our implementation is fair, open to all companies and administratively straightforward.
Detail:
As Andy Haldane, the Bank of England’s Chief Economist, has put it: “The UK faces perhaps no greater challenge, economically and socially, than its productivity challenge.” And as he and others have pointed out, one of the key causes of the UK’s relatively weak productivity performance is its “long tail” of low-productivity firms. Bringing the performance of “the rest” into line with “the best” would not only propel the economic recovery, boost wages and raise living standards: it would also help to level up parts of the economy that have been left behind.
Technological progress – which includes not just product innovation, but also the ability to combine existing tools, assets and human resources better – is what makes higher productivity possible. But on its own, it is not enough to raise productivity across the economy. For that to happen, technology needs to be diffused. And one of the most important mechanisms through which technology is diffused is through people. In particular, Bank of England research has found that companies whose directors are poorly connected tend to have lower productivity, and that this may help explain the UK’s long tail of low-productivity firms. The Bank concluded that, for two otherwise-identical companies, annual productivity growth for the well-connected company is around one percentage point higher than for the poorly-connected one. To put this in context, increasing UK productivity growth by one percentage point would mean the average worker producing around £10,000 more goods and services over five years.
In the UK, we do badly at diffusing technology. In short, ideas travel fast between a small group of well-connected companies; but they fail to reach the large group of disconnected ones. Making matters worse, economists have also found that company executives in the UK have, on average, substantially poorer management skills than competitor countries. We set out below a conditional write-off scheme for coronavirus loans that could improve technology diffusion by connecting low-productivity firms with high performers, and thereby developing the skills of their managers and directors.
Stage 1: scoring. A central authority compiles a list of participating firms and calculates their productivity. Productivity can be calculated directly from accounts filed with Companies House; alternatively, firms can be asked to submit data.
Stage 2: matching. Firms with lower productivity are able to choose a higher-productivity firm, based on the sort of help and expertise that they are seeking. Higher-productivity firms can also take the initiative and pitch themselves to a low-productivity firm. To ensure that all pairings involve a substantial productivity gap, firms could be divided into productivity deciles, with low-productivity firms only allowed to pair up with firms five deciles higher, and vice versa. This means for example that companies at the bottom match with companies in 6th decile; and companies in the 5th decile match with the top decile. It is however important to avoid matching companies that are direct competitors, since this would harm competition. This could be achieved by disallowing matches within the same industry, and/or via attestations from directors that they are not in competition with the company they are pairing up with.
Stage 3: agreement. Company A would enter into an agreement requiring a director of their board to sit on the board of Company B for a fixed period (probably at least a year). And vice versa. Alternatively or in conjunction, companies may also choose to share senior managers.
Stage 4: evaluation and loan write-off. A portion of the loan is written off once the director and/or senior management “exchange programme” is completed. Both companies are awarded further write-offs upon the lower-productivity firm achieving certain targets: for example, growing its productivity by x% compared to pre-pandemic levels. This would provide strong incentives for the high-productivity firm to support and develop the low-productivity one both during the exchange programme and after.
Why might this increase productivity? In short, because technology is diffused through people, as set out above. The exchange programme would expose lower-productivity firms to the practices, products and processes of higher-productivity ones. For example, the new director might motivate the low-productivity firm to invest in ICT and help with the implementation; or they might use their connections to help the company attract fresh outside talent, or introduce them to new investors. Equally, a senior manager from the low-productivity firm might gain new skills and insights in their time away and bring back these practices to their firm.
One key advantage of this idea is that all companies can participate: low- and high-productivity alike. By being open to all interested firms, the conditionality is fair. This is not the case for other conditions that might target productivity or other outcomes more directly. For example, an alternative scheme might offer write-offs in exchange for firms adopting a certain technology. Such a scheme would only be open to firms that haven’t already adopted the technology in question. And it’s also more open to waste, through firms adopting a technology they don’t in fact need.
And that is the second key advantage of this idea: the actions that would result from the exchange programme would reflect the particular circumstances, challenges and needs of the companies in question. It is tailored in a way that no centrally mandated programme to improve business productivity could ever be.
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