Download British Relative Economic Decline Revisited

British Relative
Economic Decline
Re-visited
Nick Crafts
Relative Economic Decline
• Does deserve to be analyzed; it can be seen in
the data even if it is also a notion constructed for
political purposes
• Not a full and balanced account but a narrative
focused on one key aspect, competition
• Will put Golden-Age failure in long-run
perspective
• NB: the UK was overtaken in the Golden Age
Real GDP/Person
UK/USA
UK/West
Germany
UK/France
1870
130
173
170
1913
93
135
141
1950
73
162
132
1979
70
86
88
2007
75
109
104
Relative Economic Decline
• Was most apparent from the 1950s
through the 1970s
• Was associated with a period of
protectionism and weak competition
• Has possibly been reversed in the recent
past
Growth of Real GDP/Hour Worked
1950-73
1973-95
1995-2007
France
5.1
2.7
1.7
Germany
5.9
2.7
1.7
UK
2.9
2.4
2.2
USA
3.0
1.1
2.1
Source: The Conference Board (2008)
Reversing Relative Economic
Decline
• Required improved incentive structures to
improve TFP and reduce NAIRU
• A key ingredient was increasing
competition in product markets
• Regulatory and technological environment
favoured UK versus the large continentalEuropean economies
Golden-Age Britain Did Fail
• Slower growth not fully explained by less
scope for catch-up
• Lots of evidence of poor productivity
performance reflected in weak TFP growth
• Not just catch-up but overtaking by
European peer group including both
France and West Germany
Levels and Rates of Growth of Real
GDP/Person 1950-1973
($1990GK and % per year)
7
6
5
4
3
2
1
0
Greece
Portugal
Spain
Ireland
Italy
Austria
Finland
W. Germany
France
Norway
Belgium
Nethrlands
Sweden
UK
Denmark
Switzerland
In the Golden Age
• UK competition and (broadly-defined)
competition policy were very weak while the
separation of ownership and control became
more pronounced
• In all these respects comparisons with Germany
unfavourable (Baldwin, 2006;Cheffins, 2008, Crafts & Mills, 2005)
• Comparisons with early and late 20th century
also adverse; competition was undermined in
the 1930s and strengthened from the 1970s
Competition
• Depends on entry threats as well as market structure so
is influenced by trade policy and regulation
• Matters much more when shareholders are weak
because it is an antidote to agency problems within the
firm
• Absence generates rents from market power that can be
dissipated through effort bargains that undermine
productivity
• Is a key reason why gains from greater openness are
much bigger than traditional welfare triangles (cf. Frankel &
Romer, 1999)
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 where competition and shareholders are
both weak and productivity performance is much
more questionable
Late-Victorian Railways
(Crafts et al., 2008)
• Cost inefficiency in late 1890s
substantial; 10% for median company ,
cost 1% GDP
• Subsequent elimination of much of this
inefficiency as profits fell to unacceptable
levels suggests managerial satisficing;
action taken when fall out of comfort zone
• Foreshadows much more general
problem that surfaced in Golden-Age UK
Appropriate Growth Policy
Aghion & Howitt (2006)
• Should base policy insights on Schumpeterian
(quality-improving innovations) growth model
• As catch-up becomes advanced, need to shift
from facilitating diffusion to promoting innovation
• Implies close-to-frontier countries should
encourage competition/entry and expand higher
education
Schumpeterian Growth Model
Y = A 1-α kα
∆A/A = μN + μO
Far-from-frontier countries need institutions
and policies that raise μO but close-tofrontier countries need (different?)
institutions and policies that raise μN
NB: change in technology that provides μO
may also imply need for reform
Policy experiments and endogenous growth: rise
in savings; rise in R & D effort
Schumpeter relationship (high μ)
x
Schumpeter (low μ)
Solow (high s)
Solow steady-state relationship (low s)
^
k
Competition and Productivity Growth
• Absence of competition allows managers to be sleepy if
ineffective control/monitoring by shareholders
• Competition is strongly positive for productivity outcomes in
UK firms without dominant shareholder (Nickell et al., 1997)
• Competition promotes better management practices (Bloom
and van Reenen, 2007)
• Patenting performance of UK firms suggests inverted Ushaped relationship with price-cost margin which peaks at
about 20% (Aghion et al., 2005)
Policy Impact on Rate of Technology
Adoption
Firm Type
Maximizing
Agency Problems
Competition Policy
Negative
Positive
Industrial Policy
Positive
Negative
Maximizing Firms
Competition Policy lowers expected profit from innovation
Industrial Policy raises expected profit from innovation
Agency Problem Firms
Competition Policy cuts rents and raises cost-reducing effort
Industrial Policy pays subsidies and lowers cost-reducing effort
Traditional Criticisms of Postwar
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
Competition in Golden-Age UK
• Undermined by nationalization, protectionism
and largely ineffective competition policy
• Weak compared with West Germany: PCM 1.8
vs 1.1; median tariff 20% vs. 8%
• Given that UK was strongly exposed to agencyproblem firms, emphasis on industrial rather
than competition policy was a serious error (cf.
Aghion et al., 1997)
• Implication: weak shareholders, weak
competition and unreformed industrial relations
undermined productivity performance
Market Power and UK Productivity
Performance (Broadberry & Crafts, 1992, 1996)
• In 1930s increased market power
substantially reduced productivity growth
• In early postwar years, collusion
undermined productivity performance
• Both pre- and post-WWII, high CR3
associated with low levels of UK labour
productivity relative to US
Restrictive Practices Act (1956)
• The one competition-policy reform during
the Golden Age with teeth
• Had significant impact on productivity
• 1954-63 compared with 1964-73:
productivity increase in non-colluding
sectors unchanged but in formerlycolluding sectors rose by 1.8% per year
(Symeonidis, 2008)
From Industrial to Competition
Policy in the 1970s and 1980s
• Not through strengthening ‘competition
policy’ per se
• Trade policy liberalized through EU
membership and GATT rounds
• Subsidies largely withdrawn
• De-regulation
UK Industrial Subsidies, 1946-90
Source: Wren, 1996
Increased Competition and Productivity
Performance
• Increases in competition correlated with 1980s
productivity growth at sectoral level (Haskel, 1991)
• Compared with France and Germany, greater
deregulation of product markets implied a TFP
growth advantage of 0.5pp per year in the 1990s
(Nicoletti and Scarpetta, 2003)
• Post-1980, restructuring and divestment
replaced diversification and conglomeration that
had prevailed under inadequate corporate
governance (Toms & Wright, 2002)
Increased Competition:
Effects via Industrial Relations
• Weak competition in product markets generates rents
that can be partly appropriated by unions with bargaining
power into higher wages and lower effort
• 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)
• Multiple unionism in an industry reduced TFP growth
by 0.75pp from the 1950s through the 1970s but had no
effect in the 1980s (Bean and Crafts, 1996)
Mark-ups in Non-Manufacturing
Mark-ups are calculated for individual 2-digit ISIC sectors and aggregated over
all sectors using country-specific final sales as weights
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
Italy
Korea
Austria
Finland
Japan
Norway
France
Denmark
Germany
Netherlands
Luxembuorg
Belgium
Canada
USA
Sweden
UK
Source: OECD STAN database and Secretariat calculation
Product Market Regulation,
1978-1998 (0-10) (Conway & Nicoletti, 2006)
1978
1988
1998
10.00
9.67
7.17
Germany
8.67
8.50
4.67
UK
8.00
6.33
2.33
USA
6.17
4.00
2.67
France
Regulation and the contribution of ICT-using services to
aggregate productivity growth
ICT using services, 1996-2001
Correlation coefficient: -0.62
t-statistic: -3.35
MEX
USA
1.3
AUS
GBR
0.8
IRL
SWE
CAN
0.3
NLD
JPN
AUT
NOR
DNK
FIN
CHE
KOR
BEL
DEU
ESP
ITA
FRA
-0.2
0
0.5
1
1.5
2
Product market regulation (inward-oriented), 1998
2.5
3
3.5
Source: Nicoletti & Scarpetta (2005)
Traditional UK Competition Policy
• Case-by-case cost-benefit approach allows
efficiency defence
• Competition authorities investigate; ministers
decide
• Relatively few investigations, no penalties, no
redress
• Typical remedy is ‘stop it’
• 1998 and 2002 Acts are a big reform after
which UK looks respectable by OECD standards
Antitrust Framework
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Greece
Portugal
Austria
Belgium
Norway
Spain
Luxembou
Mexico
France
Ireland
Switzerlan
NLD
Poland
Italy
Sweden
Turkey
Japan
Denmark
Germany
UK
Finland
Iceland
Hungary
Canada
Slovak
Czech Rep
Australia
NZ
USA
Korea
Source: Hoj (2007)
Lessons for Today from the 1930s
• The ‘managed economy’ strategy made sense
as damage limitation but had a significant longterm productivity cost
• Supposing that the present crisis indicates a
return to state ownership and industrial policy
would be a triumph for hope over experience
• There is a strong case for much stricter financial
regulation but this needs to be distinguished
from a claim that a return to interventionism is
generally desirable