WEBVTT - BCG's Raoul Ruparel Talks UK Productivity

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news want to bring us

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<v Speaker 1>back to the UK now, of course, the trade news

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<v Speaker 1>on Friday adding a new layer of complications to the

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<v Speaker 1>challenges facing the UK economy, but one that's been much

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<v Speaker 1>more long running has been a lack of productivity growth.

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<v Speaker 1>Catherine Mann recently pointing it as to again one of

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<v Speaker 1>the key challenges facing the UK economy, and new report

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<v Speaker 1>by Boston Consulting Group is looking at this issue at

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<v Speaker 1>a sector by sector level, showing Britain's biggest industries have

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<v Speaker 1>been responsible for the decades long decline in productivity that's

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<v Speaker 1>roughly half the GDP growth rate since the end of

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<v Speaker 1>the nineteen nineties. Joining us now to discuss at role Ruperrell,

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<v Speaker 1>who was director of BCG's Center for Growth or All

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<v Speaker 1>good morning. I will get to your report in just

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<v Speaker 1>a moment, but as someone who's also a former advisor

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<v Speaker 1>to the Prime Minister Teresa Aow when she was in

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<v Speaker 1>that office, I'm just wondering what your perspective is on

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<v Speaker 1>the trade situation. This morning, Donald Trump talking about a

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<v Speaker 1>fifteen percent global TARFF. Now, of course it'd be an

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<v Speaker 1>increase for the UK as well. I mean, is this

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<v Speaker 1>particularly bad news for the government.

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<v Speaker 2>Yeah, well, good morning. It's obviously uncertain and adds another

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<v Speaker 2>layer of difficulty for something the government to navigate. But

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<v Speaker 2>I think it's still early days in terms of seeing

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<v Speaker 2>where this lands and whether it will be an increase

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<v Speaker 2>for the UK. It's not entirely clear what it means

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<v Speaker 2>for countries that have struck a deal with the US,

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<v Speaker 2>whether this would supersede that, whether there would be another

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<v Speaker 2>negotiation to try to bring down from it, and also

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<v Speaker 2>then where this lands in the medium and long term

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<v Speaker 2>when they revert beyond this short term measure. So I think, look,

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<v Speaker 2>it is another source of uncertainty, but the government and

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<v Speaker 2>most countries have had to navigate this for the past year,

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<v Speaker 2>and I think they will be taking it in their

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<v Speaker 2>stride and trying to work behind the scenes and again

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<v Speaker 2>re establish the deal that has been struck previously.

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<v Speaker 3>Okay, so that's interesting on trade, but as you say,

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<v Speaker 3>I mean the uncertainty is perhaps a concern for the

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<v Speaker 3>UK economy. And look, your research on productivity is very interesting.

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<v Speaker 3>We know that the UK's had a productivity issue for

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<v Speaker 3>for many years actually if you look at the data.

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<v Speaker 3>But do you think in the work that you've done

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<v Speaker 3>that the UK has a particular problem with productivity that

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<v Speaker 3>is worse than other countries or than peers globally.

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<v Speaker 2>Yes, well, I think one of the issues we tried

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<v Speaker 2>to unpack is doing a cross country comparison at the

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<v Speaker 2>sector level to see whether the UK is falling behind piers,

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<v Speaker 2>and I think what we see is that the UK

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<v Speaker 2>is doing worse see in some big sectors than a

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<v Speaker 2>number of peer countries and certainly then the global productivity frontiers.

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<v Speaker 2>So for example, in financial services we have fallen back

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<v Speaker 2>despite being quite close to the world leading into the

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<v Speaker 2>frontier in the nineties ninety two thousands. In manufacturing we've

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<v Speaker 2>stagnated for a long period and the front has pulled

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<v Speaker 2>away from US a bit, but that's true of most

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<v Speaker 2>of the G seven in other developed countries. And then

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<v Speaker 2>in information it comms the frontier is in the last

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<v Speaker 2>few years at least accelerating away from the UK, driven

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<v Speaker 2>particularly by the US. But the flip side of that

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<v Speaker 2>is that the UK is actually still growing faster than

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<v Speaker 2>the G seven in this sector. So there are different

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<v Speaker 2>things going on in different reasons. I would say info

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<v Speaker 2>and coms the UK is doing quite well, but not

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<v Speaker 2>quite as well as the best like the US, but

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<v Speaker 2>in financial services and manufacturing we are falling back, although

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<v Speaker 2>we are still better than peers in financial services in

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<v Speaker 2>many cases.

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<v Speaker 1>Yeah, the financial services figures I find of particular interest.

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<v Speaker 1>It seemed somewhat surprising that the UK would be, as

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<v Speaker 1>you say, falling behind on this despite the strength of

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<v Speaker 1>the sector overall. What's driving that, what's weighing on the sector?

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<v Speaker 2>Well, I think it's been a long term challenge post

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<v Speaker 2>of financial crisis which the UK and other countries have faced.

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<v Speaker 2>But I think there's probably a combination of obviously regulatory

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<v Speaker 2>choices that the UK has made and maybe not quite

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<v Speaker 2>getting the right balance in the medium and long term

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<v Speaker 2>between risk and regulation. In terms of the financial services,

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<v Speaker 2>we've also seen a shift in the nature of our

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<v Speaker 2>financial services sector in the UK. You know, we are

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<v Speaker 2>less banking and investment banking dominated than we were back

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<v Speaker 2>then before the financial crisis, and we've moved more to

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<v Speaker 2>sort of xiliary services asset management, payments, etc. And these

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<v Speaker 2>services are at least in the stats, inherently a bit

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<v Speaker 2>less productive, but obviously they may present growth opportunities going

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<v Speaker 2>forward in the future as other countries develop and maybe

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<v Speaker 2>demand more of these services. So it's a nuanced picture,

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<v Speaker 2>but it does say that other countries have done a

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<v Speaker 2>slightly better job in the post crisis period, even those

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<v Speaker 2>that were hit quite hard by the crisis, such as

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<v Speaker 2>the US, to diversify and continue to grow their financial

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<v Speaker 2>services productivity, whereas the UK has been stagnating in this

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<v Speaker 2>sector for essentially fifteen years.

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<v Speaker 3>Yeah, I mean the findings of the report are really

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<v Speaker 3>pretty stark. You talk about the few sectors which were

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<v Speaker 3>able to prop up the rest of the economy are

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<v Speaker 3>no longer doing so. I suppose the big question from

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<v Speaker 3>all of this research is what is the government doing

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<v Speaker 3>about it? Now? What can it do to try to

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<v Speaker 3>re energize an economy that on so many fronts is

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<v Speaker 3>not performing as well as it should be well.

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<v Speaker 2>I think the point of our report was hopefully to

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<v Speaker 2>highlight that, you know, you can take a nuanced and

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<v Speaker 2>approach to this, and that there are certain sexual strength

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<v Speaker 2>I mentioned info and comms where we are doing well

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<v Speaker 2>and we are performing better than our G seven peers,

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<v Speaker 2>for example. But I think it speaks to needing different

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<v Speaker 2>interventions for different problems rather than just doing a one

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<v Speaker 2>size fits all approach, and I think there are sectors

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<v Speaker 2>like manufacturing where the government is pushing on some of

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<v Speaker 2>the structural problems we see that have held the sector

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<v Speaker 2>back as a whole. We know they're working on planning,

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<v Speaker 2>we know they're working on looking at energy prices to

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<v Speaker 2>an extent, but more needs to be done there. And

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<v Speaker 2>then I think we also know there are some things

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<v Speaker 2>going on in the financial services sector on the regulatory

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<v Speaker 2>approach to try and find a better balance here. But yeah,

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<v Speaker 2>it speaks to the need to continue to push and

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<v Speaker 2>really focus in on these sectors that can drive growth.

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<v Speaker 2>And I think when it comes to the industrial strategy

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<v Speaker 2>that seems to have fallen by the wayside a little bit,

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<v Speaker 2>so making sure that as a focus in getting back

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<v Speaker 2>to that core mission of driving growth will be really important.

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<v Speaker 1>What about the question of artificial intelligence In this we're

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<v Speaker 1>constantly tell that there are huge productivity gains to be

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<v Speaker 1>had from it. Does the UK look set up to

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<v Speaker 1>be able to take advantage of those gains?

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<v Speaker 3>Well?

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<v Speaker 2>I think one thing that comes through from this report

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<v Speaker 2>is that we do have a very long tail of

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<v Speaker 2>low productivity firms. The number of low productivity firms has

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<v Speaker 2>increased in real terms since nineteen ninety seven, for example,

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<v Speaker 2>and so and the lowest five percent are actually less

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<v Speaker 2>productive in real terms than they were in ninety seven.

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<v Speaker 2>And I think what that tells us when it comes

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<v Speaker 2>to AI is that if you believe the productivity benefits

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<v Speaker 2>from ar AI partly come through adoption, so this being

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<v Speaker 2>spread across the economy and adopted by as many businesses

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<v Speaker 2>as possible, that is something that the UK has traditionally

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<v Speaker 2>not been great at. You know, that's why we have

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<v Speaker 2>this long tail of low productivity firms despite the fact

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<v Speaker 2>that some firms at the top of the productivity spectrum

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<v Speaker 2>are growing quite strongly. You know, we're not spreading that innovation,

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<v Speaker 2>spreading new technology, spreading best practice. And so I think

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<v Speaker 2>from an AI perspective, what the UK has to avoid

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<v Speaker 2>is getting back into the same problem where we see

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<v Speaker 2>a few firms at the top adopting it and getting

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<v Speaker 2>productivity gains, and then a big gap between those in

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<v Speaker 2>the middle and the bottom of the spectrum where it

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<v Speaker 2>takes a lot longer for that to pass through. And

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<v Speaker 2>if that happens again, I think we will miss out

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<v Speaker 2>on some of the potential productivity gains from AI. So

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<v Speaker 2>there are definitely some learnings for how we should approach

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<v Speaker 2>rolling out AI and maybe how the government can support

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<v Speaker 2>the spread of best practiced the spread of innovation and

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<v Speaker 2>helping businesses understand use cases and how they can start

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<v Speaker 2>practically using AI and allowing the lowest productivity firms to

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<v Speaker 2>catch up rather than just letting the most productive pull ahead.