Glimmer of economic hope

This week’s appalling GDP figures are far from the worst statistics that have come out on the British economy recently.

One quarter of bad data can always be dismissed as a blip but there are reasons to believe Britain’s economic problems are deep-rooted. It takes hard work to divine any potential for improvement although it is there for those who look carefully enough.

Earlier this month a sobering report was published by the National Endowment for Science, Technology and the Arts (Nesta), an independent charity, which showed that the economy has suffered a “lost decade” of innovation*. The report, using a methodology developed by Imperial College, London, and the Office for National Statistics, showed that innovation by British business has fallen by £24 billion since the recession began in 2008.

Nesta defined innovation broadly so that only 13% of it was accounted for by research and development. The rest included design, innovative training, organisational development and software development.

This record of slow innovation, broadly defined, runs directly counter to the common perception that we live in an era of rapid technological change. People commonly point to the likes of the internet, smartphones and social media to argue that the world is changing faster than ever before.

Such technology is indeed exciting but its broader economic impact is often exaggerated. It is generally used as a consumer tool, helping individuals to communicate better, rather than to raise economic productivity.

In contrast, in areas where better technology, design and software could make a big difference it is being introduced slowly. That helps explain why Britain has not just had one bad quarter of GDP performance but five years of economic downturn. Until the challenge is faced it also means that it will be hard to escape the economic doldrums.

Indeed the bloated growth of the City in the run-up to 2008 can partly be seen as a by-product of the failure to innovate. Investors would often prefer to play the market rather than invest in real productive activity. Short-termism triumphed over a more prosperous future.

There is substantial recognition of this problem of low innovation among both scientists and policymakers. But whether they can devise and implement policies that will work is another matter. Too often such initiatives are stymied by an excessively cautious approach and business culture.

Of course it is possible to quibble with the exact composition of Nesta’s innovation index. Perhaps it is moves too far away from focusing on technology itself. But the broader point still stands. Without an innovative core of the economy it is hard to see where durable growth will be generated.

So where is the hope? Although the economic climate looks bleak at present the good news is that, with the right initiatives, it would be possible to change it. The challenge is not just to invest in innovation but also to promote a cultural shift in which change and risk-taking are welcomed.

* Nesta Working Paper 12/09, UK Innovation Index: Productivity and Growth in UK Industries, by Peter Goodridge, Jonathan Haskel and Gavin Wallis, available at Nesta’s website

This blog post was first published on Fundweb today.