Transcript What Were the Real Penalties of the Early Start?

What Were the Real Growth
Penalties of Britain’s
Early Start?
Nicholas Crafts
Keynote Lecture, Maddison Memorial
Conference, Amsterdam, November 6, 2010
Long-Run British Economic
Growth
• Aim is to understand the relative economic
decline of the first industrial nation
• Basic proposition: history matters for
growth performance
• Policies and institutions matter greatly but
are not always easy to reform; yesterday’s
solutions may be tomorrow’s problems
Angus Maddison’s Legacy
• Evaluating British economic performance requires longrun international and inter-temporal comparisons of
productivity
• Growth accounting is a key ingredient; but we have to
consider both the proximate and the ultimate sources of
growth
• Angus’s work facilitated a transformation in the terms
of this discourse enabling the notions of catching-up,
falling behind, and forging ahead to be quantified
• The huge debt that we owe him will be obvious as this
lecture proceeds
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
Source: Crafts and Toniolo (2008)
Penalties of the Early Start
• Is sometimes argued that being the pioneer impaired
later growth performance; if so, how and when?
• ‘Path dependence’ is the obvious way to make this
claim; going beyond QWERTY!
• Possibilities include
• Dutch disease (over-commitment)
• Institutional legacy
• Constraints on policy
• Is it pre WWI or post WWII?
Relative Economic Decline (1)
• Quite apparent from the 1870s through the
1930s; catch-up by Europe, catch-up and then
overtaking by USA
• Acceleration in US TFP growth after 1890 not
matched by UK
• Idiosyncratic technological progress, intangiblecapital-based endogenous innovation central to
US productivity growth
• Unique American advantages or British failure?
Growth of Real GDP/Hour Worked
(% per year) (Huberman & Minns, 2007; Maddison, 2003)
UK
USA
1870-1890
1.28
1.45
1890-1913
0.79
2.06
1913-1929
1.88
3.19
1929-1938
1.21
3.00
Crude TFP Growth (% per year)
Abramovitz & David (2000); Crafts (2004)
UK
USA
1856-1889
0.6
1855-1890
0.4
1889-1913
0.4
1890-1905
1.3
1924-1937
0.8
1905-1927
1.3
1929-1948
1.5
Late-Victorian Britain
• Choices of technique basically correct
• Foreign investment profitable, portfolio
diversification valuable, banking not so bad after
all
• Emulation of USA not feasible in nonneoclassical world (non-universal technology,
different geography) but this is not really a
problem of the early start
• BUT could better economic policy have made a
difference?
Did Late-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
Productivity in Services
Broadberry (2006)
• Growth of productivity in services more
important than in manufacturing for American
overtaking
• ‘Industrialization’ of services, where highvolume, low-margin business based on
hierarchical management realized economies of
scale based on new technology, lagged in UK
• Demand, education, competition all played a
part
Labour Productivity Growth,
1870-1910 (% per year) (Broadberry, 2006)
UK
USA
Manufacturing
1.1
1.3
Services
0.4
1.1
Transport &
Communication
0.7
2.5
Distribution
-0.3
1.3
Finance & Other
0.9
1.4
The Over-Commitment Hypothesis
• Richardson (1965): pre-WWI UK skewed to low
productivity-growth sectors (old industries); a
‘lock-in’ based on comparative advantage in a
free-trade economy
• Protectionist policies needed to counter the
hangover of the early start; problem solved in
interwar period when new industries deliver
economic revival
• Economic structure is the problem;
government intervention is the solution
Structure of UK Trade
• Revealed Comparative Advantage looks
very different from USA, is persistent and
unlike 20th century leader
• UK RCA strong in old industries, weak in
R & D-intensive sectors
• Agglomeration benefits explain some of
this
Revealed Comparative Advantage Rankings
UK 1913
UK 1937
US 1913
(Crafts, 1989)
US 1937
Agricultural Equipment
10
16
2
1
Cars and Aircraft
12
11
4
2
Industrial Equipment
5
7
3
3
Electricals
8
5
5
4
Iron and Steel
3
9
9
5
Non-Ferrous Metals
16
15
1
6
Book and Film
13
8
10
7
Chemicals
11
12
12
8
7
13
6
9
Brick and Glass
14
10
11
10
Wood and Leather
15
14
7
11
Rail and Ship
1
3
8
12
Fancy Goods
9
4
13
13
Apparel
6
6
14
14
Alcohol and Tobacco
4
1
15
15
Textiles
2
2
16
16
Metal Manufactures
Would It Have Been Better to
Abandon Free Trade?
• Free trade unusual and a legacy of the early
start
• Shift-share analysis says difference between UK
and US is overwhelmingly is intra-sectoral
productivity growth not structure
• Does not address slow productivity growth in
services or incentives to innovative effort
• Chamberlain tariff would have shifted
employment further away from structure that
Kennedy and Richardson want (Thomas, 1984)
Interwar Tariffs
• Richardson thought that WWI and 1920s tariffs
were a good infant-industry policy
• Kitson & Solomou (1990) found that productivity
growth accelerated in newly- protected but not in
non-newly protected industries in the early
1930s
• Doubtful that protection improved productivity
performance either in the short or the long run
(Broadberry & Crafts, 2011)
Difference-In-Differences Analysis of
Productivity Growth Revisited
1930/5 – 1924/30 =
0.733 + 1.321 Additional - 0.974 Early
(1.026) (1.384)
(-0.762)
1935/48 – 1924/35 =
-1.228 + 0.109 Additional - 1.843 Early
(-2.993) (0.200)
(-2.584)
The 1930s: Onward and Upward?
• Trend growth did not increase (Greasley & Oxley, 1996;
Mills, 1991)
• Correctly measured, the labour productivity gap
with the US widened further
• TFP growth remained modest and investment
stayed low
• This is not the optimistic picture that the overcommitment school painted
US Real GDP per hour worked in manufacturing
(UK = 100) (De Jong & Woltjer, 2009)
37
19 5
3
19 3
3
19 1
3
19 9
2
19 7
2
19 5
2
19 3
2
19 1
2
19
12
19 0
1
19 8
0
19 6
0
19 4
0
19 2
0
19 0
0
19 8
9
18 6
9
18 4
9
18 2
9
18 0
9
18
150 160 170 180 190 200 210 220 230 240 250 260 270 280 290
Longer-Term Implications of the
19th Century Development Path
• UK exceptionally vulnerable to interwar
‘globalization backlash’
• World-market share of export staples
unsustainable
• ‘Outer Britain’ depended on exports of staples
• Labour market adjustments required by
changes in world economy extremely difficult
Insured Unemployment in Interwar Britain
(%) (Beck, 1951)
June 1929 June 1932 June 1937
South East
4.4
12.3
4.9
East Anglia
5.8
15.4
6.9
South West
7.7
16.1
6.5
West Midlands
9.0
22.0
6.2
North
15.2
36.4
16.8
North West
12.7
25.3
12.7
Scotland
11.0
26.8
14.0
Wales
18.2
37.4
20.7
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)
• The claim that the 1930s represents an antidote
to Victorian failure is seriously misleading
Malign Implications of the
Interwar Period
• Loss of faith in the market economy to deliver
full employment
• Future competition for votes would have to
address this issue
• Shocks had adverse long-term effects both
direct and indirect
• The episode was especially unfortunate for UK
because future policy was constrained and the
new policy framework interacted badly with the
institutional legacies of the early start
Hypothesis
• The problems of the early start were not Dutch Disease
and an inability to protect new industries before World
War I
• The key transmission mechanism was the persistence
of institutions together with the policy framework
resulting from the severe interwar problems to which the
early start exposed us
• The real penalties of the early start were felt after World
War II
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 ‘AngloAmerican’ (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
Institutions Differ
• West Germany vs. UK: industrial
relations and capital markets
• UK firms more exposed to hold-up
problems given multiple unions (Bean &
Crafts, 1996)
• UK firms more exposed to agency
problems especially given weaker
competition (Crafts & Mills, 2005)
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)
Relative Economic Decline (2):
UK in the Golden Age
• Does deserve to be analyzed; it can be seen in
the data even if it is also a notion constructed
for political purposes
• UK was overtaken; growth appreciably lower
than it could have been
• Reflects adverse incentive structures
• Happened in a period of protectionism and
weak competition
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
Source: Crafts and Toniolo (2008)
Levels of GDP/Person and GDP/Hour
Worked ($1990GK) (The Conference Board,2008)
1950
1973 Y/P
Y/P
1950
Y/HW
1973
Y/HW
France
5271
13114
5.00
15.72
West
Germany
4281
13153
4.36
16.05
UK
6939
12025
7.35
14.05
Competition in Golden-Age UK
• Undermined by nationalization, protectionism and
largely ineffective competition policy
• Price-Cost Margins much higher than in West Germany
or post-1970 UK (Crafts & Mills, 2005, 2011)
• Tariffs remained at 1930s levels through the mid
1960s; when trade costs fell, mark-ups collapsed;
median tariff twice West German level in late 1950s
(PEP, 1962)
• UK strongly exposed to agency-problem firms:
emphasis on industrial rather than competition policy a
serious error (cf. Aghion et al., 1997)
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)
Trade Costs Index (Jacks et al., 2009)
UKFrance
UKGermany
1929
100
99
1938
121
122
1950
122
142
1960
122
115
1970
110
105
1980
74
66
Trade Costs and the Mark-Up
(Crafts & Mills, 2011)
1.4
1.2
1.0
0.8
0.6
Manufacturing markup
Trade costs: UK-France
Trade costs: UK-Germany
0.4
0.2
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
After the Golden Age: Competition and
Productivity Performance
• Increases in competition correlated with 1980s
productivity growth at sectoral level (Haskel, 1991)
• Openness and TFP growth strongly correlated
across manufacturing sectors post-1970 (Proudman
& Redding, 1998)
• Post-1980, restructuring and divestment
replaced diversification and conglomeration that
had prevailed under inadequate corporate
governance (Toms & Wright, 2002)
Industrial Relations
• The legacy has big costs in this period
including not achieving the Eichengreen cooperative equilibrium
• Craft control was increasingly costly as
American mass-production methods improved
further
• Multi- (relative to single-) unionism implied a
reduction of 0.75 percentage points per year in
TFP growth for affected sectors (Bean & Crafts, 1996)
• Effort bargaining was bad for TFP:
“underemployment of labour is one of the major
scandals of the British economy” (Clegg, 1964)
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)
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
Conclusions
• The problems of the early start were not Dutch Disease
and an inability to protect new industries before World
War I
• The key transmission mechanism was the persistence
of institutions together with the policy framework
resulting from the severe interwar problems to which the
early start exposed the UK
• The real penalties of the early start were felt after World
War II