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The case for (cautious) post-Brexit optimism

In the face of the UK’s decoupling from the European Union, you can become quite dizzy when you consider all the forces at play: potential new trade terms, immigration-law regulations and deregulation, to name a few.
The case for (cautious) post-Brexit optimism

– Yet, in the sea of analysis, one thing seems clear for the UK when it comes to boosting the economy. For a government, just as with a business, it all comes down to how much faster it can improve competitiveness relative to its peers.

Of course, it’s not enough to improve competitiveness if you are in an unattractive market; industry dynamics account for much of the value-creation potential. Thirty years of data show most growth potential comes from where-to-play choices.

When you look at the UK economy, the diversity of industries increases the influence of competitiveness. First, the UK’s efforts to make it easier for its businesses to improve competitiveness should apply to those playing in the best and worst of sectors. Secondly, if some companies can’t retain the benefit, it is likely because the market forces those benefits into the hands of consumers, who spend their money in other areas. Still, any effort by UK policy to identify attractive export sectors or domestic consumption stimulators will certainly only help further.

Harvard Business School professor Michael Porter, whose writing on competitiveness is among the most influential in business strategy history, and Jan Rivkin, one of the school’s most popular professors dedicated to strategy, have been studying US competitiveness for the past decade. In their 2012 article they define what they mean by competitiveness:

The United States is a competitive location to the extent that companies operating in the U.S. are able to compete successfully in the global economy while supporting high and rising living standards for the average American. A competitive location produces prosperity for both companies and citizens.

They emphasized quite presciently that lower currency doesn’t really improve competitiveness even if it helps exporters. This is because it amounts to a national price cut when you consider the rising cost of imports and how that affects citizens’ living standards.

Instead, what really drives competitiveness is the underlying productivity — the value added to the economy on a per-employee basis. If companies create more value while paying more for employees, they create a virtuous cycle of prosperity.

In the UK, we and others had been looking into improving the country’s competitiveness long before the Brexit vote. In this excellent discussion paper, my colleagues summarized the findings and implications of our research.

UK’s productivity is second-to-last among G-7 countries — one place better than 20 years ago, but its output per hour is 18% below the average of the rest of the G-7; that’s the biggest gap since comparable estimates began in 1991.

An optimist will look at UK data and see tremendous opportunity; a pessimist will worry that so little has improved after so long and that Brexit might hit the hardest on the most productive sectors, which are naturally more competitive and export more to the EU. I am leaning closer to the optimists, because I hope Brexit will create more urgency for decisive actions.

When considering what these actions should be, our report highlights six major priorities to improve productivity which I have summarized below. It’s fascinating but also intuitive to see how much is simply about talent (and the right talent).

6 ways to improve the UK's economic fundamentals
6 ways to improve the UK's economic fundamentals

In the longer term, it’s almost all about the talent. We need to: explore how to best educate our youth to be more creative and agile thinkers, help the long tail of lower performing students by helping them increase their skills in areas that matter the most, invest in those skills, and attract talent to locations where the skills will best help the economy (which in London will require curbing housing costs). In the short-term, making it easier for women to participate more and manage talent better can spur faster impact.

A big challenge will come when companies adopt technology designed to increase productivity while making some jobs redundant. In theory, if the boost to competitiveness is strong enough it should create new jobs. If talent re-skilling is fast enough everyone may win, but the transition is unlikely to be smooth. We all know how hard it is to manage this amid the rising global populism, but resisting artificial intelligence, automation and agile ways of working will not allow for the productivity improvement needed and leave the UK further behind.

Needless to say, the stakes are high. Future prosperity is looking harder than ever to secure and income equality is already hitting us in the present. But, hey, maybe I’m not enough of an optimist!

Yuval Atsmon is a senior partner in McKinsey’s London office.

Originally published on LinkedIn.