Economic Growth in the Long 20th Century

Nicholas Crafts

Table 1. Real GDP/Head (UK = 100 in each year)

USA West Germany

France

1870 76.6 58.81913 107.8 70.81950 137.7 61.7 74.71964 133.5 101.3 92.21979 142.7 115.9 111.1

1997 133.7 100.9 95.4

2007 124.9 88.9 86.8

Sources: The Conference Board (2014) and West Germany in 2007 calculated from Statistiches Bundesamt Deutschland.

Table 5. Contributions to Growth in Market Sector, 1873-2007 (% per year).

Education K/HW TFP Y/HW

UK1873-1913 0.3 0.4 0.2 0.9

1924-1937 0.3 0.1 0.3 0.7

1950-1973 0.5 1.5 1.4 3.4

1973-1995 0.4 1.2 1.3 2.6

1995-2007 0.4 1.0 1.0 2.6

Germany1950-1973 0.4 2.3 2.5 5.2

1973-1995 0.3 1.1 1.3 2.7

1995-2007 0.0 1.0 0.7 1.7

United States1871-1890 0.0 0.8 1.0 1.8

1890-1905 0.1 0.5 1.3 1.9

1905-1927 0.2 0.5 1.4 2.1

1929-1948 0.4 0.1 1.5 2.0

1950-1973 0.3 0.9 1.5 2.7

1973-1995 0.3 0.5 0.4 1.2

1995-2007 0.3 1.2 1.1 2.6

Did Victorian Britain Fail?

• New Economic History said NO!; subsequent research says this is a bit too strong

• Competition in a very open economy was central to the NEH argument (McCloskey & Sandberg,

1971); if correct, implies Golden-Age UK much more susceptible to failure

• But examples skewed to tradeables; look at a sector (railways) where competition and shareholders are both weak and productivity performance is much more questionable

The ‘Managed Economy’ Strategy of the 1930s

• Post-1932 dirty floating, cartels, tariffs understandably seen as damage limitation and a way to restore profitability

• This implied a major reduction in competition which lasted well into the post-war period

• The reduction in competition reduced productivity growth both before and after WWII (Broadberry & Crafts, 1992, 1996)

• No evidence that imposing tariffs was good for productivity growth (Broadberry & Crafts, 2011)

• The claim that the 1930s represents an antidote to Victorian failure is seriously misleading

Relative Economic Decline in the Golden Age

• The UK growth failure in 1950-73 was about 0.75 pp per year

• Supply-side policy was badly designed and undermined incentives to invest and to innovate

• Policy was seriously constrained by accepting the ‘trade union veto’ in seeking to maintain full employment

• Competition was much weaker than pre-WWI

Traditional Criticisms of Post-WWII British Industry

• Weak and incompetent management

• Difficult industrial relations

• Seriously inefficient use of inputs

• NB: these were all nurtured by inadequate competition in product markets interacting with the historical legacy

Institutional Legacies (1)

• By the later 20th century, the UK was characterized by an unusual degree of separation of ownership and control (Cheffins, 2008)

• Relatively few large firms had a dominant external shareholder; principal-agent problems a big concern, especially when competition was weak

• UK followed a path from 19th-century origins to ‘Anglo-American’ (rather than German) capitalism promoted by revisions to company law, taxation, transition from personal to institutional investors

Institutional Legacies (2)

• The early start produced a distinctive and persistent ‘British system of industrial relations’

• Characteristics include craft control, legal immunities, multi-unionism, TUC rather than LO, effort bargains that influenced technical choice

• E.g., the ‘British system of mass production’ (Lewchuk, 1987)

• 19th-century organizational structures became dysfunctional but employers did not find it worthwhile to pay the price/take the risk to abolish them

Competition and Productivity Growth

• Competition is strongly positive for productivity outcomes in UK firms without dominant shareholder (Nickell et al., 1997)

• Competition promotes better management practices (Bloom & van Reenen, 2007)

• 1956 Act led to significant improvement in productivity performance in formerly-cartelized sectors (Symeonidis, 2008)

Impact of Increased Competition (1)

• Increases in competition correlated with 1980s productivity growth at sectoral level (Haskel, 1991)

• Openness promoted TFP growth in catch-up model for manufacturing sectors post-1970 (Proudman & Redding, 1998)

• Single Market shock improved TFP performance in plants exposed to agency problems (Griffith, 2001), raised patenting in close-to-frontier industries (Aghion et al., 2009)

• Post-1980, competition for corporate control meant restructuring and divestment in large firms (Toms & Wright,

2002); management buyouts raised TFP (Harris et al., 2005)

Impact of Increased Competition (2)

• During the 1980s and 1990s, increased competition reduced union membership, union wage mark-ups and union effects on productivity (Brown et al., 2008; Metcalf, 2002)

• Surge of productivity growth in unionized firms in 1980s as organizational change took place under pressure of competition (Machin & Wadhwani, 1989)

• De-recognition of unions in face of increased foreign competition had strong effect on productivity growth in late 1980s (Gregg et al., 1993)

UK in the ICT Age

• Invests relatively large amount in ICT capital with positive productivity effects

• This requires reorganization and is supported by light regulation

• This would not have happened with 1970s-style industrial relations and weak competition

Table 11. Sources of labour productivity growth in the market sector, 1995-2007 (% per year)

Labour Quality

ICTK/HW

Non-ICT K/HW

TFP Growth

Y/LGrowth

France 0.3 0.3 0.4 0.9 1.9

Germany 0.0 0.5 0.5 0.7 1.7

UK 0.4 0.8 0.4 1.0 2.6

USA 0.3 0.9 0.3 1.2 2.6

Source: van Ark (2011)