Britain falls behind

Last week, one of the world's leading business academics challenged Britain to "re-invent itself in the global economy". Michael Porter, professor at Harvard Business School, warned the Government that, despite New Labour rhetoric, it risks perpetuating a low-wage, low-cost economy.

Professor Porter's challenge comes on the heels of the annual Global Competitiveness Report commissioned by the World Economic Forum andwhich he co-authored. The World Economic Forum is best known for its winter gatherings at Davos, Switzerland, during which world political and business leaders exchange views.

The Global Competitiveness Report showed Britain slipping from fourth to eighth place in this year's ranking of the most competitive national economies - losing ground to Taiwan, Canada, Switzerland and Lux-embourg.

Professor Porter, who has spent much of the past decade scrutinising countries' competitiveness and was close to the Department of Trade and Industry when it was being run by Peter Mandelson, said: "The fall shows that there is a need for the UK to rebuild the momentum of previous years."

He said that the UK's image as a low-cost place to do business "has attracted investment, but in businesses that compete on costs rather than innovation". In terms of GDP per capita, the UK ranked 17, only just ahead of Ireland - and behind many other western European countries.

Professor Porter believes Britain must convert its high-volume, low- cost industries into high-value, hi-tech industries. He said: "It is not enough to be innovative in theory. A prosperous economy must turn good ideas into practice."

He called for Britain to start investing in innovative ideas rather than "bricks and mortar", saying: "The United Kingdom's undoubted innovative capacity is threatened by under-investment in human resources, and in research and development."

Despite repeated overtures to the private sector by the Prime Minister,Tony Blair, the results portray New Labour's Government as failing to support businesses in key areas, such as in education and in infrastructure.

The results - based on a poll of multinational businessmen as well as analysis of economic data - showed a backlash by UK respondents, while the macro-economic indicators remained more constant.

Other academic heavy-weights behind the report include Jeffrey Sachs, the outspoken director of Harvard University's Center for International Development, and its research fellow Andrew Warner.

The authors acknowledged that slowing economic growth in the United Kingdom may have contributed to the more pessimistic response, but the result remains a setback after the initial surge of pro-New Labour feeling in the business community.

This surge pushed the UK up the league table of competitive economies last year from seventh to fourth.

Commenting on the result, Professor Porter said: "There were substantial slips backwards, compared with only modest gains. For example, there is a perception in the UK of more government intrusion; that the general infrastructure is not getting better and may be worsening compared to other countries; and human resources are becoming a problem."

On the merits of New Labour's Third Way, he said: "Many of the ideas in the UK are impressive, but, at the same time, the policy blue-print has yet to be properly formed. Some of the consequences of this, like red tape and bureaucracy, are beginning to hinder business vitality and manifest themselves in the data."

The results pinpoint the UK's strengths as the sophistication of its financial markets, availability of venture capital and information, and quality of scientific and research institutions. Its chief weaknesses are the quality of its infrastructure, and the inadequacy of basic education in the workforce.

Other black spots include a perceived rise in burdensome administrative regulations. Respondents felt that government policies are increasingly influenced by special interest groups, and that senior management is having to spend more time dealing with government officials than before.

Modest gains in road and rail infrastructure, the vitality of local competition, and the use of computers by businesses were offset by significant falls in the areas of anti-trust policy; bureaucratic red tape; international communication costs; the quality of airports; openness of public sector contracts; the quality of domestic suppliers; adequate schooling of the labour force; and the rising power of collective bargaining in the workforce.

Particularly embarrassing for a government that has heavily promoted the use of technology, is the gap between UK companies and their overseas peers in the use of the internet. Less than 50 per cent of British businesses use the internet for e-commerce, compared with nearly 70 per cent in other countries. British companies ranked in the bottom eleven countries, just above Greece and Portugal, for their use of the internet to communicate with suppliers.

Elsewhere in the poll, British respondents told the World Economic Forum that diplomatic relations with neighbouring countries are hindering trade; that the pound is slightly overvalued; and that the Government's exchange rate policy was not favourable to exports.

Professor Porter believes that some of these conclusions should set alarm bells ringing in the UK. His recommendations to the British Government include reducing capital gains tax by half, and introducing an incremental tax credit for research and development.

Professor Porter describes the Thatcher years of government as "getting out of the things that government should not have been doing". He says that the challenge for the New Labour Government "is to figure out what it should be doing". He has already briefed the Government privately on the results.

UK RANKING

How Britain rates on its competitive abilities against 58 other countries

Openness 19

Government 16

Finance 1

Infrastructure 6

Technology 22

Management 19

Labour 12

Institutions 3

Overall ranking 8

Source: Global Competitiveness Report

UK: KEY FACTS

Economic indicators

GDP pounds 889bn

Population 58.1m

Per capita GDP pounds 15,303

Per capita GDP

growth 1.2%

Price inflation 3.4%

Unemployment 4.7%

Technology

R&D spending

(% of GDP) 1.9%

Internet hosts per

million people 16,734

PCs per 1,000

people 282