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British Development

British Development

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A proposal to boost growth in the British economy.
A proposal to boost growth in the British economy.

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Published by: Christopher G D Tipper on Apr 30, 2010
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Viagra for the British economy?
Or maybe a dose of Chinese medicine
by Christopher G. D. Tipper <chris.tipper@live.co.uk >
$Date: Saturday, 9th July 2005$
HERE HAVE been several calls recently 
 for the focus of publicpolicy and private enterprise to be put on high-value manufactur-ing and knowledge-based services. With the collapse of Rover and therecent announcement of layoffs at Marconi, the theory goes thatBritain
s future economic success depends on retaining a key compet-itive advantage in high-technology and financial expertise.The closer one looks at recent developments, it is becoming apparentthat even our lead in knowledge intensive businesses is rapidly dimin-ishing. For example, Marconi
s recent failure to gain a tranche of business from BT
s £10bn next-generation infrastructure upgrade wassomewhat contrasted with the success of a Chinese conglomerate,Huawei, in gaining a slice of the same contract. When China is creating several tens of thousands of new science and engineering graduatesevery year it is an interesting point whether we have the resources tocompete. Even if the average quality of those graduates is markedly lower than our own, it is not unreasonable to expect a substantialminority to be as talented and creative as Britain
s indigenous talent.My point is that countries like China and India are entering the globalmarket for ideas and technology and are able to compete not just onprice, but due to their overwhelming populations increasingly onquality. We in Britain have a serious challenge to our economic pros-perity, and it will take a policy mix much more complex than just in-vesting in higher education, which I will return to later. We are likely to lose much of our intellectual advantage in the coming years, and we are already unable to compete on price due to our relatively highlabour costs and generous welfare systems.
 See for example James Dyson
2004 Richard Dimbleby Lecture 
The Economist 
 remarks (
, July 2
 2005)that when the European Commission presented the Lisbon Agenda2000, the accompanying research was littered with references to theUnited States but that the word China did not appear once. It seemsfair to say that after the lifting of tariffs on Chinese textiles at the startof 2005 the subsequent squealing of European clothing manufacturershas put Chinese trade firmly on the agenda. As
The Economist 
 pointsout the danger is that political populism will lead to a resurgence of protectionism on continental Europe, and this will have grave conse-quences. As Tony Blair put it in his speech to the European Parliament,on 23
 June 2005, Europe would risk
failure on a grand strategicscale.
It is worth quoting more of the Prime Minister
The purpose of our social model should be to enhance our ability to compete, to help our people cope with globalisation, to let them embrace its opportunities and avoid its dangers. Of course we need a social Europe. But it must be a social Europe that works.
”  “   
 And we 
ve been told how to do it. The Kok report in 2004 shows the way. Investment in knowledge, in skills, in active labour market policies,in science parks and innovation, in higher education, in urban regen-eration, in help for small businesses. This is modern social policy, not regulation and job protection that may save some jobs for a time at the expense of many jobs in the future.
Blair cites the Kok report in his speech. It is worth taking a small detourto see some of the points that were made in this document
 regarding the United Kingdom. Of particular concern is our level of spending on Research and Development (R&D).
Delivering Lisbon - Reforms for the enlarged Union
 (COM 2004/29); for the U.K.,under
, see  ANNEX 2.
Viagra for the British economy?
 Table 1
Business and government R&D expenditure as % of GDP
** 4.27* 3.62Sweden3.512.88Finland* 2.502.31Germany2.192.17France2.191.78Austria1.931.82EU1.871.81UK*** 1.16** 1.07Italy
* Estimate** 2001 figure*** 2002 figureSource: Eurostat 
Taking statistics from Eurostat we cansee that in 2002 Britain
s share of GDPspent on R&D lagged the average forthe EU-15 (1.99 percent) at 1.87 per-cent of GDP. By contrast the UnitedStates spent 2.64 percent of GDP andJapan spent an astonishing 3.12 per-cent. R&D spending in the UnitedKingdom has long been under-funded.Some have pinned blame on a short-termist business culture, but it seemsmore likely to this author to be thelearned response of the businesscommunity to a historically uncertainbusiness climate.
 Until relatively re-cently the British economy has beenprone to what Gordon Brown calls
, and it will take timefor British business to adjust to a longer-term viewpoint.One could question why, after over a decade of sustained economicexpansion, old-fashioned attitudes to R&D remain? If business aversionto R&D really is cultural, then more active solutions are required. Onesuch microeconomic measure is some form of research and develop-ment tax-credit, whereby a proportion of R&D expenditure can beoffset against profit, and thus taxed at a lower rate. It seems likely thatthis will mitigate the perceived risk to managers of investing in R&Dand over the long-term should raise the rate of R&D expenditure by British business.
 John Redwood MP (Cons) amplified my point about an uncertain business climatein his speech to Parliament on publication of the 2006 Budget, March 22
 2006. Hisremarks revolve around regulatory uncertainty centring on Gordon Brown
s arbitrary use of
 windfall taxes
 as a public policy tool. I have reproduced his remarks here.
Viagra for the British economy?

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