Competitive advantage is under threat

The British economy increasingly depends on the ability of its workforce to develop and utilise new

Lord Leitch's interim report on skills, released last December, made depressing reading. One in six adults lacks the literacy skills expected of an 11-year-old, and almost half lack numeracy skills to the same level. Over one-third does not have a basic school-leaving qualification. The author commented, in something of an understatement, that "our nation's skills are not world class".

Yet the sectors on which the British economy depends are increasingly those that require high levels of knowledge and skill. Unskilled labour has largely become a commodity; what matters is not where work is done but how much it costs. One result is that traditional industries, such as mining, textiles and shipbuilding, have declined in Britain. We have lost a million manufacturing jobs since 1997 and the sector accounts for less than 16 per cent of the gross domestic product, according to the Economist Intelligence Unit.

However, while these industries are in decline, others have expanded. Peter Linthwaite, the chief executive of the British Venture Capital Association (BVCA), identifies two areas of growth. "Britain has an affluent population that is a big consumer of service industries. We've also seen growth in manufacturing industries where the competitive edge comes from technological innovation rather than price," he says.

Britain thus retains a competitive advantage in a number of industries where what counts is education and skills in the workforce: the knowledge economy. London is one of the world's leading centres of business and financial services. According to UK Trade and Investment, the government body that handles international trade, the UK accounts for 75 per cent of quoted European biotechnology companies, and 13 per cent of the global aerospace industry. Other major export sectors include chemicals, mechanical equipment and the creative industries.

A strong educational system is key to remaining competitive in such industries. Universities provide skilled workers and also conduct original research, some of which will have commercial potential. The 2004 Library House Spin-out Monitor found that Britain's 36 leading research universities have produced 435 new technology companies. The strength of Britain's workforce is also a source of foreign investment. UK Trade and Investment says that what attracts investment to Britain is the perceived quality of its education and training.

If Britain's competitive advantage lies in the skills of its workers, low skill levels could soon cause the economy to falter, and there are reasons to think that Britain is facing greater competition in this area. Anthony Thompson, head of employment at the Confederation of British Industry (CBI), notes that emerging markets, such as China and India, are investing massively in workforce skills. "Competition from cheap labour is moving very quickly into the high end of the workforce," he says.

Employers have expressed three main concerns about Britain's skills. First, that too many British workers lack basic literacy and numeracy skills. A report from accountants Ernst & Young found that, in the late 1990s, low basic skills cost the UK economy £10bn a year.

"The majority of new jobs in the future will be at higher skill levels," says Jaine Clarke, director of skills planning at the Learning and Skills Council, "but unless we tackle these basic skills we won't have a platform to progress." The government launched the Skills for Life campaign in 2001 to tackle this problem, but there have been questions about its effectiveness.

A second concern relates to less tangible skills, such as the ability to think creatively, manage projects and work in a team. A recent CBI survey of employers found more than 40 per cent of employers were dissatisfied with school leavers' attitude to work. Last year's 14-19 education white paper went some way to addressing these concerns through proposals to improve vocational education.

But perhaps the greatest worry for British industry is the shortage of graduate-level technical skills. A recent study from the Institution of Engineering and Technology found that, thanks to a fall in the number of students taking subjects such as engineering, 40 per cent of businesses in the sector did not expect to be able to meet their recruitment needs. In the long term, this could pose a huge threat to Britain's hi-tech industries. John Cridland, deputy director general of the CBI, has described it as "a car crash in slow motion". Industry bodies are offering bursaries and summer work in an effort to attract more school leavers to technical courses.

Employers claim to be worried as much about the quality as the quantity of graduates. The CBI's response to Leitch cites a multinational pharmaceutical company that says graduates often lack practical science training and require retraining. It adds, "Without these skills, companies will relocate to areas of the world where they are available."

Skills in workforces in Asia and beyond will continue to grow. If the British economy is to remain competitive, government and business need to work together to improve skills at all levels. If they don't, that pharmaceutical company won't be the last to consider emigrating.