Better management at helm is key to growth

Arguments over the size of next week’s budget cuts are, for the most part, trivial

Fri, Oct 11, 2013, 01:41

Chris Johns

The arguments over the size of next week’s budget cuts are, for the most part, trivial. More so than ever, economic and political fortunes are dependent on growth. The real question should be ‘what are we doing to boost growth?’ But in these austerity-conditioned times we conclude that all of our hopes for growth are vested in what happens overseas. There is spurious talk of using budget ‘flexibility’ to try to give the economy a kick-start, but the harsh reality is that there is nothing that conventional policies can do: the budget is all about subtracting from GDP growth. This may or may not be the last time that happens - the last austerity budget - but we are still a very long way from imagining a time when fiscal policy can actually turn expansionary.

Is there anything else we can do? Are there any policy levers to be pulled that can help growth? One problem is that economists struggle to explain, in a fundamental way, where growth actually comes from. At the end of the day it all boils down to productivity growth. And we have only the vaguest ideas about what determines productivity. We have plenty of theories and some evidence but nothing conclusive. We often mutter about technology, the strength (or otherwise) of a country’s institutions and legal framework, the quality of education and a host of other familiar suspects. But we don’t really have much of a clue why one country can do so much better than another - or even why companies in the same business can have strikingly differing levels of productivity (and profitability).

Latest thinking - and an impressive body of research - points the finger at management: just how well our companies are managed seems to have a surprisingly high correlation with national productivity performance. This is not to say that productivity has just one driver, it clearly doesn’t. But only a few economists (as opposed to management consultants) have paid much attention to how we measure management performance and how that might feed into the behaviour of the wider economy.

Those that have looked at this have come up with some fascinating conclusions. There is a growing body of evidence, built up by economists on both sides of the Atlantic, that suggests management quality varies wildly between countries, within countries and within similar industries. And that all of this matter hugely for the economy as a whole. In particular, John van Reenen of the LSE and Nicholas Bloom of Stanford, with others, have been working for the last decade on studying 10,000 organisations across 20 countries. They have identified factors common to well-managed firms - and those that are common to weakly managed enterprises. Countries that score highly on measures of management quality typically have high productivity growth - and high economic growth. The researchers have several interesting ideas about what can be done to boost management quality.

US manufacturing firms are the best managed in the world. Firms in Canada, Germany, Japan and Sweden score highly. Companies in developing countries, particularly Brazil, China and India are typically poorly managed. Manufacturing and non-manufacturing businesses have a wide spread of management quality within all countries. Hospitals and the retail sectors are well managed in the US but their schools are definitely not. In all sectors, in all countries, government owned enterprises have the lowest management quality. In the private sector, businesses run by the son of the founder are typically poorly managed. Multinational firms, in all countries, are the best managed. The level of educational attainment of managers is a great indicator of how good they are.

In a good result for Ireland, the researchers found that at least part of our multinational sector is as well managed, if not more so, than in most other countries. But, in a very disturbing result, some of our domestic firms are last but one in the league table of management quality. Only Greek firms are worse and we stand below India, Chile, Brazil and Argentina.

All of this no doubt comes with the caveats associated with economic research. It says nothing about Irish managers per se: it could well be that some of the best are working in Ireland in the multinational sector. But it is an impressive and compelling series of studies with some very clear messages. At a time when budgetary or monetary stimulus is off the table, if we want to get domestic growth up in a sustainable way, we need to figure out how to improve the management quality of at least some of our domestic businesses. And the government is the last place we should look to for inspiration.