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 Sir Howard Davies, Director of the LSE, former Director of the Confederation of British Industry (CBI) and former Chairman of the UK Financial Services Authority, gave a speech to a group of 50 senior bankers, industrialists, politicians, Microsoft directors and diplomats, including over 20 LSE alumni, at the British Ambassador’s Residence in Lisbon on the 30th January 2006. The event was organised jointly by the BPCC and Enterprise LSE Ltd, and generously sponsored by Ernst & Young.
Sir Howard Davies & HM Ambassador John Buck | Sir Howard, speaking on a theme of ‘Competitiveness, Innovation and Higher Education’ made several clear points. Firstly, that Europe’s central economic and social problem remains unemployment. He said most economists would argue that, in the long run, the most decisive influence on growth and wealth comes from productivity. How effective are a country’s producers at combining factor inputs – labour and capital – to produce output. Here again, a comparison between Europe and the US is unfavourable. In both manufacturing, and the market economy more broadly, US productivity is well above that in Germany, France and the UK. A team of researchers from the LSE, working with McKinsey, have been trying to understand these differences and looked in depth at some of the key drivers of the productivity conundrum.
Some of the obvious possible answers do not seem fully to explain the problem. Relative investment rates only explain part. Differences in skill levels in the labour force are relevant, and also account for part of the differential, but by no means all. One interesting point was that US–owned firms operating in the UK, with British workers, manage to achieve productivity levels comparable with those they get at home.
It seems therefore that one of the most important answers lies in the quality of management, and the LSE/McKins
Teresa Cochito - Ernst & Young | ey study offers solid proof of that. It showed significant variation within countries but that the UK and France, in particular, have a tail of poor performers which brings the overall management performance down. The UK is at the bottom of that particular league table.
Why is management less efficient in Europe? A number of factors contribute. Some may be cultural, and hard to correct. Others can perhaps be addressed. Two things which seem to make a difference are competition, and the age of firms. If competition is strong, firms with poorer management tend to be eliminated, bringing the average up. It also appears that younger firms are on average better managed, so if we can make business creation and market entry easier we can make a difference.
Labour market regulation also matters, and contributions to poor management. On a measure of firing and dismissal costs, the UK is half way between the US and continental Europe – not for the first time. This right should give the UK an advantage, but not enough to offset the negative effects of the country’s poor managers.
Secondly, where does higher education fit into this question?
Prof. Armando Marques Guedes & Dr. Basilio Horta - API | Sir Howard, as Director of one of the world’s best social science universities, noted that in the United Kingdom there was a major debate on the appropriateness of fee charging in British universities in 2003-2004. Eventually, Parliament reached the view that universities should be allowed to charge up to £3,000 a year, as long as the money available for scholarship support for students from poorer families was significantly increased. In the case of the LSE, that still left domestic students paying only around two thirds of the cost of their undergraduate education, but was a step in the right direction. In the United States the top private universities charge fees very significantly above those which obtain in the UK or elsewhere in Europe. And yet the best of them are able to offer “needs blind” admission, since they cross subsidise among the student body. They are able to do this in part because of the fee levels, but also because of the huge scale of private sector support for American universities, something which is very much lacking in Europe. There has been no tradition of private support for most British universities – with the exception of Oxford and Cambridge.
If Europe’s universities are to compete at that level, Sir Howard argued that the answer did not entirely lay in increased public
Dr. Jose Araújo - Millennium BCP, Chris Barton -BPCC & Engº Guiherme Moraes Saramento - BES | expenditure. He stressed institutions should be looking to persuade corporations and foundations to invest more in higher education, and seeking to convince alumni that they should be prepared to reinvest some of their higher life time earnings from the qualifications they received, so that successor generations can enjoy the benefits they received, irrespective of their personal means.
In conclusion, Sir Howard highlighted that there was a crisis and an opportunity. Many of Europe’s universities are not globally competitive, and that more investment is needed. That was likely to come – if it comes – from diverse sources, not just the public sector, though governments will have to play their part. As a route towards financial diversification universities should be given more freedom to raise fees so they can play the role they should play in enhancing European competitiveness.
Text: Adam Austerfield (Enterprise LSE) & Chris Barton (BPCC)
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