Download UK Growth Performance

UK Growth Performance
John Van Reenen: Centre for Economic Performance & LSE
BIS Evidence Based Policy Workshop on Growth
June 13th 2012
RECOVERY FROM THIS RECESSION IS VERY SLOW – UK
GDP STILL OVER 4% BELOW 2008 LEVELS IN 2012
1980s
1930s
Current
Source: NIESR
2
Summary
• Given current gloom, UK did surprisingly well post 1997 even
after including current recession
– Fast GDP per adult growth in G6
– Not “bubble” in finance (or public sector, property or oil)
• More than continuation of improvement after Mrs. Thatcher Policies likely played a part
• “Output gap” may be larger than supply side pessimists think
– Implies room for Plan B, slowing fiscal consolidation
• Long-run growth strategy (LSE Growth Commission)
– Get economic environment right
– Relentless focus on removing barriers in sectors with strong
global growth where UK has comparative advantage
3
1 UK Relative Economic Performance since 1997: Growth,
productivity and jobs
2 Role of Policy?
3 The Great Recession and Beyond
4 Policies for Growth
4
UK growth in GDP per capita faster than every other
G6 country
Annual average growth GDP per capita & GDP per adult, 1997-2011
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
UK
Germany
US
GDP per capita (person)
France
Japan
GDP per capita (adult)
Italy
Focus for next
few slides
Notes: OECD data GDP is US$, constant prices, constant PPPs, (OECD based year: 2005). Adults are civilian population
over 16. US Bureau of Labour Force Statistics.
5
Growth in GDP per capita since 1997 in G6: UK pretty
good
Annual average growth GDP per capita & GDP per adult, 1997-2011
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
UK
Germany
US
GDP per capita (person)
France
Japan
GDP per capita (adult)
Italy
Focus for next
few slides
Notes: OECD data GDP is US$, constant prices, constant PPPs, (OECD based year: 2005). Adults are civilian population
over 16. US Bureau of Labour Force Statistics.
6
GDP per adult growth (1997=100) in UK
130
110
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
100
1979
Real GDP per w.a.a. relative to 1997
120
90
80
70
60
UK
US
Germany
France
Notes: CB data GDP is US$, constant prices, constant PPPs, (CB based year: 2011). Adults are civilian population over 16.
US Bureau of Labour Force Statistics. Data for Unified Germany from 1991.
7
GDP per adult growth (1997=100) in UK and US
130
110
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
100
1979
Real GDP per w.a.a. relative to 1997
120
90
80
70
60
UK
US
Germany
France
Notes: CB data GDP is US$, constant prices, constant PPPs, (CB based year: 2011). Adults are civilian population over 16.
US Bureau of Labour Force Statistics. Data for Unified Germany from 1991.
8
GDP per adult growth (1997=100) in UK, US, FRA
130
110
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
100
1979
Real GDP per w.a.a. relative to 1997
120
90
80
70
60
UK
US
France
Notes: CB data GDP is US$, constant prices, constant PPPs, (CB based year: 2011). Adults are civilian population over 16.
US Bureau of Labour Force Statistics. Data for Unified Germany from 1991.
9
GDP per adult growth (1997=100) UK,US,FR, GER
130
110
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
100
1979
Real GDP per w.a.a. relative to 1997
120
90
80
70
60
UK
US
Germany
France
Notes: CB data GDP is US$, constant prices, constant PPPs, (CB based year: 2011). Adults are civilian population over 16.
US Bureau of Labour Force Statistics. Data for Unified Germany from 1991.
10
GDP per adult (absolute levels)
GDP per working age adult (2011 $ , PPP)
70,000
65,000
60,000
55,000
UK
50,000
US
45,000
Germany
40,000
France
35,000
30,000
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
25,000
Notes: CB data GDP is US$, constant prices, constant PPPs, (CB based year: 2011).
11
Growth decomposition
Basic “welfare” measure
GDP
GDP
Employees

x
Capita employee population
Labour productivity
Employment Rate
12
Productivity: GDP per worker growth (1997=100)
130
110
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
100
1979
Real GDP per worker relative to 1997
120
90
80
70
60
UK
US
Germany
France
Notes: CB data GDP is US$, constant prices, constant PPPs, (CB based year: 2011).
13
Productivity: GDP per hour growth (1997=100)
130
120
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
100
1979
Real GDP per hour relative to 1997
110
90
80
70
60
50
UK
US
Germany
France
Notes: CB data GDP is US$, constant prices, constant PPPs, (CB based year: 2011).
14
Employment Rate (Workers per adult) growth
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
100.00
1979
Employment per w.a.a. relative to 1997
110.00
90.00
80.00
UK
US
Germany
France
Notes: CB data GDP is US$, constant prices, constant PPPs, (CB based year: 2011).
15
Employment per adult
0.70
0.65
UK
0.60
US
Germany
France
0.55
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0.50
Notes: CB data GDP is US$, constant prices, constant PPPs, (CB based year: 2011).
16
UK still lags behind in total economy productivity levels
GDP per hour levels (UK=100)
160%
140%
125%
112%
120%
120%
UK=100 in
each year
100%
80%
1979
60%
1997
40%
2007
20%
2011
0%
US
Germany
France
Notes: Analysis based on CB data GDP is US$, constant prices, constant PPPs.
17
The sources of productivity growth by sector : It wasn’t
all finance in the 1997-2007 boom
Sector contributions to market economy labour productivity growth (1979-2007)
Annual average growth rates in percentage points
3.5
3.0
2.5
2.0
2.8 % p.a.
2.7 % p.a.
0.4
0.2
0.3
0.8
0.5
0.1
Financial intermediation
Business services and
renting of m&eq
Distribution services
Personal and social services
1.5
0.7
0.6
0.0
0.1
1.0
0.6
0.5
Manufacturing excluding
electrical
0.4
0.5
-0.03
-0.05
Electrical machinery, post
and communication
1979-1997
1997-2007
0.5
0.0
-0.5
Other goods producing
industries
Reallocation
UK
Notes: Analysis based on EU KLEMS data. Average sectoral growth rates for the periods 1979-1997 and 1997-2007 are
weighted by each sector’s average share in market economy nominal GVA (GDP less taxes, plus subsidies) over the
relevant period. Reallocation effect refers to the labour productivity effects of reallocations of labour between sectors
that have different productivity.
18
The sources of productivity growth by sector : It wasn’t
all finance in the 1997-2007 boom!
Sector contributions to market economy productivity growth (1979-2007)
Annual average growth rates in percentage points
3.5
3.0
2.5
2.0
Finance chopped off
Business services and
renting of m&eq
Distribution services
0.3
0.8
0.5
Personal and social services
0.1
1.5
0.7
0.6
0.0
0.1
1.0
0.6
0.5
Manufacturing excluding
electrical
0.4
0.5
Electrical machinery, post
and communication
-0.03
-0.05
1979-1997
1997-2007
0.5
0.0
-0.5
Other goods producing
industries
Reallocation
UK
Notes: Analysis based on EU KLEMS data. Average sectoral growth rates for the periods 1979-1997 and 1997-2007 are
weighted by each sector’s average share in market economy nominal GVA (GDP less taxes, plus subsidies) over the
relevant period. Reallocation effect refers to the labour productivity effects of reallocations of labour between sectors
that have different productivity.
19
The sources of productivity growth by sector : It wasn’t
all finance in the 1997-2007 boom!
Sector contributions to market economy productivity growth (1979-2007)
Financial intermediation
3.0
0.5
0.4
0.2
0.5
0.1
1.5
0.7
0.6
0.2
0.0
0.4
0.4
1.0
0.6
0.5
0.8
0.0
0.1
0.7
0.5
0.4
0.4
0.5
0.00
-0.02
0.2
0.0
-0.03
-0.05
0.3
0.00
-0.5
1997-2007
1979-1997
UK
EU
0.5
0.4
0.7
-0.01
-0.1
US
Distribution services
Personal and social
services
0.1
0.2
Other goods producing
industries
0.5
Manufacturing excluding
electrical
0.6
1997-2007
0.5
0.2
0.2
0.5
0.5
0.4
0.7
0.7
0.1
0.2
0.0
0.1
0.1
0.1
0.2
0.2
0.4
0.3
-0.01
0.0
0.03
1997-2007
0.1
0.2
1979-1997
0.8
0.5
1979-1997
2.0
0.3
1997-2007
2.5
Business services and
renting of m&eq
0.4
0.2
1979-1997
Annual average growth rates in percentage points
3.5
Electrical machinery, post
and communication
Reallocation
France
Notes: Analysis based on EU KLEMS data. Average sectoral growth rates for the periods 1979-1997 and 1997-2007 are
weighted by each sector’s average share in market economy nominal GVA (GDP less taxes, plus subsidies) over the relevant
period. Reallocation effect refers to the labour productivity effects of reallocations of labour between sectors that have
different productivity. EU represents all EU-15 countries for which growth accounting could be performed, i.e. AUT, BEL, DNK,
ESP, FIN, FRA, GER, ITA, NLD & UK. Data for France and EU are available from 1981 onwards.
20
Sources of productivity growth: Skills and ICT became
more important post 1997
Sources of market economy productivity growth (1979-2007)
3.5
3.0
2.8 %
2.7 %
2.5
1.2
1.0
2.0
1.1
0.4
Efficiency (TFP)
0.9
1.5
1.0
1.1
0.7
0.5
0.5
0.7
ICT capital per hour
0.7
Labour composition
0.6
0.7
1.0
0.5
Non ICT capital per hour
0.9
0.8
0.6
0.5
0.3
1979-1997
1997-2007
UK
0.3
0.4
0.5
0.3
0.2
0.2
0.3
1979-1997
1997-2007
1979-1997
1997-2007
EU
0.5
0.4
0.8
US
0.4
0.4
0.3
1979-1997
1997-2007
France
Notes: Analysis based on EU KLEMS data. EU represents all EU-15 countries for which growth accounting could be performed, i.e. AUT, BEL,
DNK, ESP, FIN, FRA, GER, ITA, NLD & UK. Data for France and EU are available from 1981 onwards.
21
Other measures of business performance
• Focus on productivity because it’s key measure of long-run
performance for economists
• But also look at
– Investment (overall and FDI)
– Innovation
– Education and skills
– Management
– Entrepreneurship
– Profits
– Trade
– Regional Inequality
• Overall, more of a mixed bag. Positive trends but still
problems in levels
22
The UK has been successful at attracting FDI, with
inward FDI higher than comparators
Inward Foreign Direct Investment Flows (% GDP)
12%
10%
8%
6%
4%
2%
0%
Germany
France
UK
US
Notes: Analysis based on OECD data
23
R&D has increased slightly as a proportion of GDP
between 1997 and 2007 after falling since late 1970s
Gross Domestic Expenditure on R&D (GERD), as a % of GDP
4%
3%
2%
1%
0%
Finland
Japan
US
1981
Germany France
1987
1997
UK
Canada
Italy
2007
Notes: OECD MSTI June 2010 (data not available on a consistent basic prior to 1981)
24
Proportion of workers with a college degree has risen
faster in UK than other countries
Percentage of 25-64 year old population by educational level
100
90
3.2 % p.a.
1.7 % p.a.
23
33
80
34
1.0 % p.a.
2.9 % p.a.
23
20
25
27
41
70
60
39
37
50
37
40
61
52
Tertiary education
43
Upper secondary and postsecondary non-tertiary
60
48
Below upper secondary
30
20
41
41
30
10
30
14
11
1997
2008
17
15
1997
2008
-
1997
2008
UK
US
Germany
1997
2008
France
Notes: Data from OECD Education at a Glance (2010)
25
Summary of UK performance 1997-2011
• Pretty good performance even if we include post 2008
• Continues 1979-1997 trend: UK GDP/cap grew faster than both
the US and France
• Productivity growth was broad based – finance only a small
contribution (business services and distribution matter more)
• Growth of efficiency (TFP) similar in both Lab and Con periods, but
bigger contribution from skills and new technology post 1997
• Other indicators also show signs of improvement but level of
productivity and other business indicators remains a problem
26
1 UK Relative Economic Performance since 1997: Growth,
productivity and jobs
2 Was the UK’s strong post 1997 Performance anything to
do with Policy?
3 The Great Recession and Beyond
4 Policies for Growth
27
UK performance 1997-2010 looks good.....
• But was any of this was due to policy?
– Government reaped dividends of Conservative reforms:
privatisation, anti-union laws, “lame duck” subsidies
• Conservatives reforms were unlikely to cause permanent increase
in the rate of productivity growth (e.g. unions).
• Likely that some policies contributed:
– Competition, Education, Innovation & (maybe) immigration
– Welfare to work reforms
• Caveat: Lack of proper evaluation of most UK policies means
much guesswork
28
Competition Policy
• Strong evidence that increases in product market competition
boost productivity
– Empirical findings in Nickell (1996), Blundell et al (1999),
Symeonidis (2000), Bloom & Van Reenen (2007, 2010), Holmes
and Schmitz, (2010); MGI survey
• 1998 Competition Act & 2002 Enterprise Act. Competition
authorities (Competition Commission & OFT):
– Stronger (e.g. Cartel punishments & whistle blowers)
– Less politicised (e.g. Merger policy)
– More autonomous & better resourced
• Utility Regulation (2003 Communication Act & Ofcom Strategic
Review)
29
Innovation Policy
• Growth theory puts innovation at centre of productivity
growth
– “Spillovers” imply that too little R&D performed
• Empirical evidence shows that:
– R&D boosts productivity growth
– Tax incentives increase R&D (Van Reenen et al, 2002, 2012)
• UK R&D tax credit for small firms introduced in 2001 &
extended to large firms in 2003
• Increases to the science budget (Haskel et al, 2010)
• R&D/GDP falling since ‘70s, but stabilised from mid- 2000s
30
Education Policy
• Increases in human capital increase productivity via higher
average labour quality but also through “spillovers” (e.g.
Innovations).
• Quantity of education increased through
– Expansion of Higher Education
– Higher staying on rates (e.g. EMA, see Dearden et al. 2009)
• Quality of Education?
– City Academies (Machin and Venoit, 2011)
– Teaching interventions like Literacy & Numeracy Hours
(McNally, 2010)
– More qualifications, but concern over grade inflation
31
1 UK Relative Economic Performance since 1997: Growth,
productivity and jobs
2 Was the UK’s strong post 1997 Performance anything to
do with Policy?
3 The Great Recession and Beyond
4 Policies for Growth
32
Did the Great Recession change everything?
33
Did the Great Recession change everything?
34
The Output Gap Debate
GDP at market prices (2008 £ million)
450,000
400,000
16%
350,000
300,000
250,000
GDP
Pre crisis trend
2012 Q1
2011 Q1
2010 Q1
2009 Q1
2008 Q1
2007 Q1
2006 Q1
2005 Q1
2004 Q1
2003 Q1
2002 Q1
2001 Q1
2000 Q1
1999 Q1
1998 Q1
1997 Q1
200,000
2005 -2006 Trend
Notes: ONS Q1 2012 Quarterly National Accounts, GDP in £ million, in real terms at market prices (seasonally adjusted)
35
Did the Great Recession change everything?
• What are the effects of Great Recession on potential output
– How much output permanently lost?
– Lower productivity growth? Very unlikely (1930s policies)
• Low Demand (recession, Eurozone, austerity)
– Model of partial Labour hoarding (especially in high
productivity sectors) can match trends
– Labour market performing relatively well in this recession:
Wages and matching
• Supply Side Pessimists
‒ Compositional shift out of high value added sectors like
finance not large enough to account for productivity falls
‒ Capital-Labour ratio rises
‒ Skills & Innovation
36
The Great Recession and beyond
• What are the effects of Great Recession on potential output
– How much output permanently lost?
– Is economy on a lower productivity growth trend?
• “Output Gap” is difference between potential & current output
– If economy near full capacity output gap is close to zero, so if
demand increases (e.g. Expansionary monetary and fiscal
policies translate into higher inflation)
– Supply side pessimists view that output gap is small/zero
– OBR 2.5% vs. 14% (or 9.5% in Martin & Rowthorn, 2012)
37
Estimating the Output Gap (“educated guesses”)
1. Statistical Filters
– Transparent, but depends on period over which one
“smooths”
2. Production functions (OECD, EC, NIESR)
– Based on economic model, but sensitive to judgements,
measurement and data revisions
3. Business surveys (Office Budget Responsibility)
– Uses wider range of timely information, but survey
measurement issues & needs scaling to another method
4. Semi-structural approaches (IMF- Global Projection Model)
– More rigorous but very sensitive to econometric specification
38
Pessimists: banking crisis reason for permanent damage
• Direct effect : banking a high productivity sector & shift of workers
into other industries dampens aggregate productivity
– But in long-term better allocation of UK talent to sectors creating
positive spillovers (e.g. High tech manufacturing & ICT)
– Evidence on direct effect suggests only small (e.g. Martin, 2011;
BoE, 2011). Productivity fell a lot in in finance, but large falls were
witnessed in others sectors too.
• Indirect effects of banking crisis
– Less efficient allocation of capital
– Fewer new company formations, capital scrapping or liquidations
– Evidence is unclear (Oulton, 2012). Although crises followed by
slow growth (i) depends on policy response, (ii) lots of
heterogeneity
39
Indirect Evidence for Pessimists
• Recent poor growth performance
– Global demand low. Real improvements pre-2007
• Oil Producing Sector in decline
– Long trend, oil not big contribution to productivity 1997-2007
• High inflation shows we have little spare capacity
– Mainly “imported” inflation – domestic wages inflation very low
• Hiring in 2010-11 evidence for little spare capacity?
– Real wage cuts keep jobs up
– Partial labour hoarding with expansion of low productivity sector
based on over-optimistic growth of sales (Martin & Rowthorn,
2012) . Second half of 2011 job growth stalls
• Business Surveys – But answers adjust to the cycle
40
1 UK Relative Economic Performance since 1997: Growth,
productivity and jobs
2 Was the UK’s strong post 1997 Performance anything to
do with Policy?
3 The Great Recession and Beyond
4 Policies for Growth
41
Policies
• To promote long term growth we need to:
– Expand the potential of the economy via supply side
policies (LSE Growth Commission)
– Run the right macro policies: helping recovery from
recession by running at current potential
• Many important factors are outside direct influence of UK
economic policy (e.g. Eurozone, US debt ceiling, China, ….)
• Nevertheless, UK domestic policy does matter.
42
In designing long term supply side policies, key
points are:
• Listen to what Growth theory tells us: Importance of
innovation, human capital, competition & creative
destruction, good governance
• Admit our “collective ignorance”: There is no single
“magic bullet” to growth – need to experiment, evaluate
and learn.
• Prioritise & think of overall strategy
• Appreciate the complementarities or trade-offs between
policies: “laundry lists” are not enough (though we will
give one in a minute!)
43
“Plan V” strategies involve the right environment
for growth, and some targeted enabling policy
• Economists rightly wary of too interventionist a stance
• Despite this most governments do have a de facto industrial
policies (e.g. towards exports and FDI).
• Policies should be focused on the intersection between the
areas of global growth and local comparative advantage.
– Areas like: bio-pharmaceuticals, financial and business
services, creative industries and some areas of ICT
– Look at barriers and useful pro-active policies
44
Some specific “Plan V” policies which we will
briefly run through…
• Competition
• Education and skills
• Infrastructure
• Financial markets
• Higher education
• Immigration
• Public sector productivity
• Regulation and planning
• Taxation
45
Long-run growth policies: some thoughts
• Competition
• Education and skills
• Infrastructure
• Merger of OFT and CC could
be a distraction
• Higher education
• Stalling of greater
international market
integration
• Immigration
• Dangers of trade protection
• Financial markets
• Public sector productivity
• Regulation and planning
• Taxation
46
Long-run growth policies: some thoughts
• Competition
• Education and skills
• Literacy and numeracy rates
• Infrastructure
• Education leaving age
• Financial markets
• Higher education
• Apprenticeships for under
19 year olds
• Immigration
• Public sector productivity
• Regulation and planning
• Taxation
47
Long-run growth policies: some thoughts
• Competition
• Education and skills
• Infrastructure
• Financial markets
• Higher education
• Immigration
• Public sector productivity
• Regulation and planning
• Taxation
• Public investment (at a time
of low interest rates) will not
“spook” markets
• Many smaller projects –
larger and less risky returns
than “grand projet”
• Expand remit of GIB
• Transport (re-read
Eddington!)
48
Long-run growth policies: some thoughts
• Competition
• Education and skills
• Infrastructure
• Financial markets
• Higher education
• Immigration
• Higher capital
requirements, living wills
• Vickers agenda – plus?
• SME access to finance (KfW
style bank?)
• Public sector productivity
• Regulation and planning
• Taxation
49
Long-run growth policies: some thoughts
• Competition
• Education and skills
• Infrastructure
• Financial markets
• Higher education
• Immigration
• Public sector productivity
• Regulation and planning
• Human capital, scientific
innovation and an export
industry
• Risks of tougher immigration
policy for highly skilled
• Taxation
50
Long-run growth policies: some thoughts
• Competition
• Education and skills
• Infrastructure
• Financial markets
• Higher education
• Immigration
• Public sector productivity
• Regulation and planning
• Direct role on GDP
• Productivity effects of
immigration in general
unclear
• Free movement of highly
skilled workers, including
scientists a “no brainer”
• Taxation
51
Long-run growth policies: some thoughts
• Competition
• Education and skills
• Infrastructure
• Financial markets
• Higher education
• Immigration
• Public sector productivity
• Regulation and planning
• Taxation
• Competition,
information & choice
• Design implementation
needs care (e.g. NHS
price competition)
• Need more
geographical (&
individual) variation in
public sector pay
52
Long-run growth policies: some thoughts
• Competition
• Education and skills
• Infrastructure
• Financial markets
• Higher education
• Immigration
• Public sector productivity
• Regulation and planning
• High tech clusters held
back by planning system
• Planning and retail
productivity
• Labour market regulation &
Beecroft. Not UK’s major
problem
• Taxation
53
Long-run growth policies: some thoughts
• Competition
• Education and skills
• Infrastructure
• Financial markets
• Higher education
• Immigration
• Public sector productivity
• Regulation and planning
• Taxation
• Agree with thrust of Mirrlees
• Real issues with complexity
and instability rather than
marginal rates
• Removal of special deductions
(e.g. IHT and family firms),
removing corporate tax bias
towards debt
54
Conclusions and discussion
• UK growth record since 1997 pretty good
& broadly continued trend from 1979
• Not solely “unbalanced” bubble from
finance, property & government
• Some benefit from policies over
competition, education & innovation
• In presence of significant output gap room
for slowing fiscal consolidation
• Long term policies need coordinated
strategy drawing on lessons from past
55
References
• LSE Growth Commission
http://cep.lse.ac.uk/LSEGrowthCommission/
• Full version of the Report
• http://cep.lse.ac.uk/conference_papers/15b_
11_2011/CEP_Report_UK_Business_15112011
.pdf
56