BEING in favour of red tape is a bit like being in favour of rats or cockroaches. It would be correspondingly hard to oppose the Chancellor’s commitment to slashing the burden of regulation on companies, announced with much fanfare last week.

But a bit of perspective is in order. Anyone who thinks that UK company performance in world markets will be transformed by them filling in 25 per cent fewer forms and undergoing 30 per cent fewer inspections is as far from reality as Michael Jackson’s Neverland.

The graphics on the right show that in 1998 the UK had the least regulated product markets and the second most liberalised labour market in the world. The legislation passed since then, some of it European, may have changed the position a bit, but the fact is that the extent and speed of the deregulation of the UK private sector is unparalleled.

The real question around regulation is not ‘why are UK companies so tangled up in bureaucracy?’ but ‘why haven’t they made more of the economy’s almost unalloyed business-friendliness?’.

Compared with many other major economies, the UK is a manager’s paradise, with weak unions, no tripartite institutions, a stable, growing economy and governments of all colours determined to advance the private sector and to defend its ‘flexibilities’. Between 1979 and 1997, fully 10 percentage points of GDP migrated from the public to the private sector, leaving just 2 per cent of the economy in state hands.

Business textbooks prescribe exposure to the bracing winds of competition as a pick-me-up for entrepreneurial anaemia. But instead of being galvanised into new activity, a long list of sectors and companies have just quietly rolled over and died. The shrivelling of Rover is the latest example. Manufacturing has not ceased its headlong decline. Despite the favourable regulatory climate, UK productivity has made up no ground on that of apparently much less business-friendly economies, such as Germany and France.

Why have managers responded so limply to all the inducements they could have asked for? One answer is tantalisingly beginning to emerge from research at the Advanced Institute of Management Research. It suggests that ‘path dependence’ is partly to blame. By this it means that purely market-oriented reforms led companies down a cost-cutting path, concentrating on downsizing, delayering, outsourcing and making people work long hours.

But now that these one-time gains are running out, it is becoming clear that the one-trick pony has nothing left in its bag. UK managers have no track record in innovation. They are reactive, conservative and overconfident in their own abilities, with a knee-jerk tendency to default to cost-cutting mode when the pressure builds up – which is not surprising because that’s what the market-led reforms have taught them to be.

In this context, while the removal of a few forms and inspections is welcome, to imagine that competitiveness in world markets stands or falls by it is a travesty. A business-friendly environment is not at all the same thing as competitive companies. And ‘competition’, as we are beginning to see, is in any case a two-edged sword.

Today’s economic agenda emphasises co-operation as much as competition. ‘Working smarter’, whether in the shape of innovating, building better supply chains, or managing fluid networks, requires collaboration.

But the UK doesn’t do collaboration, either institutionally or within companies. The idea of social partners, as on the Continent, is scorned partnership with suppliers is honoured mostly in the breach research consortiums are a rarity and industry associations are weak and fragmented. The upshot is feeble exploitation of the country’s relatively vigorous science base and slow take-up of promising (collaborative) management practices. The systematic dismantling of counterweights to management and the market ironically leaves no lever to be pulled to switch the economy from the ‘low road’ of competing on low input costs, including labour, to the high road’ (competing on high value or better positioning in the supply chain).

Even within the company, competition and market-based approaches are the hallmark of conventional Anglo-Saxon management. Lip service to teamwork is undercut by performance-related pay, competitive rankings and The Apprentice -style rewards, all of which not only militate against co-operation but also result in a self-imposed bureaucracy which is much more of a drag on energy and initiative than any outside regulation. (This is the internal, private-sector equivalent of the specification and targets regime under which the public sector is buckling – but that is another story.)

At the heart of the enterprise, the doctrine of shareholder value institutionalises competition as the driving force, pitting shareholders against managers, employees, suppliers, customers and even society in rivalry for the returns that the business makes. One of the key demands of shareholder-value advocates, of course, is that regulation be kept to a minimum so that nothing gets in the way of the sacred duty of the company to make money for shareholders.

You can see the irony here. In the name of shareholder value, shareholders and managers colluded in the 1990s in devising monstrous incentives to align their interests at the expense of everyone else. The resulting excesses brought down a wave of regulation that makes anything around maternity leave or working hours look like footnotes.

Complying with America’s Sarbanes-Oxley corporate reporting legislation costs large companies millions similar legislation is on the way in France, Germany and Japan. This regulation really does threaten to dampen entrepreneurial spirits and tie managers up in red tape. But companies brought it on themselves – as they did, for example, with the equally debilitating rules governing the financial services industry.

What really holds UK companies back is not employment law or pernickety health and safety rules but the inefficiencies and regulation that they avoidably generate all on their own. The ball is in their court. The idea that for every new regulation an old one should be struck out is a great one. But thinking that it is a kind of Viagra for failing managerial drive is, alas, wishful thinking.

The Observer, 29 May 2005