Economic Growth in the Long 20th Century

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Economic Growth in the Long 20th Century

• Nicholas Crafts

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Table 1. Real GDP/Head (UK 100 in each year)
USA West Germany France
1870 76.6 58.8
1913 107.8 70.8
1950 137.7 61.7 74.7
1964 133.5 101.3 92.2
1979 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.
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Table 5. Contributions to Growth in Market
Sector, 1873-2007 ( per year).
Education K/HW TFP Y/HW
UK
1873-1913 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
Germany
1950-1973 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 States
1871-1890 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
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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

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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

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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

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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

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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

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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

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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)

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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)

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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)

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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

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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)