Transcript The Changing Place of Britain in the World Economy

The Changing Place of Britain
in the World Economy: a
Long-Term Perspective
Nick Crafts
Leverhulme Globalisation Lecture,
University of Nottingham, November 19, 2008
Themes
• Relative Economic Decline
• De-Industrialisation
• Regional Disparities
• Adjusting to Changing Comparative
Advantage
• Policy Implications
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
• Britain’s time as the ‘workshop of the world’
has gone; de-industrialisation is a fact of life
and there is a new international division of
labour
Shares of World Manufacturing
Production
1880
1913
1955
1973
2007
UK
23
14
8
5
3
China
12
4
2
4
11
Shares of World Manufactured
Exports
1880
UK
China
38
1913
27
1953
1973
2007
18
7
4
0.6
0.7
11
De-Industrialisation
• Common experience of advanced economies
and has been continuous in Britain since the late
1960s
• Reflects income elasticities of demand,
productivity growth, comparative advantage and
trade policy
• Accelerated with move away from high tariffs
and then Thatcherism
• Structure of employment has changed greatly
over the long run
Employment Shares (%)
1911
1951
1979
2008
Agriculture
11.8
6.4
2.8
0.9
Industry
44.1
44.5
37.0
15.9
Services
44.1
49.1
60.2
83.2
Detailed Employment Shares (1)
Percent
1911
Textiles &
Clothing
1951
1979
2008
12.4
7.1
2.9
0.4
Engineering
6.7
11.2
8.6
2.8
Metal
Manufactures
4.1
4.6
4.9
1.4
Detailed Employment Shares (2)
Percent
1911
1951
1979
2008
Financial &
Business
Services
1.1
3.5
9.2
21.2
Education
1.5
1.5
5.8
8.9
Health
0.7
1.7
5.6
12.7
Reversing Relative Economic Decline
• Required improved incentive structures to
improve TFP and reduce NAIRU
• TFP gaps have been much reduced and
Beveridge Curve shifts in
Vacancy rate
The Beveridge Curve
UV2
UV1
Unemployment rate
Reversing Relative Economic Decline
• Required improved incentive structures to
improve TFP and reduce NAIRU
• TFP gaps have been much reduced and
Beveridge Curve shifts in
• Key ingredient was increasing competition in
product markets
• Openness in both capital and trade flows
matters
• Realising gains from trade is important
Trade Exposure [(X+M)/GDP] (%)
1830
17.6
1870
40.3
1910
44.0
1960
40.0
2000
56.8
The Payoff from Globalisation (% GDP)
1830-70
38.7
1870-1910
2.7
1910-1960
-2.7
1960-2000
12.5
Based on similar assumptions to HMT (2003) and Bradford et al. (2006)
UK Comparative Advantage
• Has changed markedly over time
• Victorian staples were neither high-tech nor
human-capital intensive but today’s
manufactured exports are often both
• World market share in services in now twice that
in manufactures
• Responding to these changes requires both
sectoral and spatial adjustment
• Agglomeration plays a key role
Revealed Comparative Advantage
in Manufacturing: Top 3 sectors
1913
1937
1979
2006
Rail & Ship
Alcohol &
Tobacco
Aerospace
Pharmaceuticals
Textiles
Textiles
Pharmaceuticals
Aerospace
Office Machinery
Electrical &
Electronic
Equipment
Iron & Steel
Rail & Ship
Lancashire Textiles and Globalization
(Leunig, 2005)
• Lancashire a high wage industry: 6 x India and Japan
in 1910
• But continued to dominate world trade (60% world
market share in cottons in 1910)
• Unit costs lower than India or Japan even before
adjusting for output quality
• Lancashire flourished because of agglomeration
benefits ..... its productivity exceeded other British
locations by 33%
Revealed Comparative Advantage,
2006: Top 6, All Sectors
Financial Services
4.68
IT Services
2.37
Communication Services
2.26
Personal, Cultural & Recreational Services
2.09
Other Business Services
2.07
Pharmaceuticals
1.84
Regional Implications of Globalization
• Contraction of tradables that lose
comparative advantage hurts East Anglia
(then), West Midlands (now)
• Growth of invisibles boosts London (then
and now) and South East and East Anglia
(now)
• Globalization undermines North West
which has been in long term relative
economic decline since mid-19th century
Regional GDP/Person (% deviation from British average)
80
60
40
20
0
-20
1871
1911
-40
London
Rest SE
Source: Crafts (2005)
East Anglia
West Midlands
North West
Regional GDP/Person (% deviation from British average)
60
50
40
30
20
10
0
-10
-20
London
Source: ONS
1971
Rest SE
2006
East Anglia
West Midlands
North West
Correlations When One City has Higher
Productivity
Y/L
Y/L
Skills
W
Density
HP
1
+
+
+
+
1
+
+
+
1
+
+
1
+
Skills
W
Density
HP
Source: Rice & Venables (2003)
1
Equilibrium Regional Disparities
• These regional differences are consistent with
an equilibrium …. no market failure
• Real earnings for each skill level converge
quickly across regions (Duranton & Monastiriotis, 2002)
• Can only be eliminated if productivity gap is
closed
• If that is impossible, best to let favoured city get
bigger
Sub-Optimal Size of British Cities
• Optimal locations for big cities today different
from mid-19th century
• Successful 19th century cities expanded
dramatically but not allowed today; (Blackburn
and Preston vs. Oxford and Cambridge)
• Both expansion and contraction distorted by
policy interventions
• Key symptom of city that is too small; high urban
land values
Death of Distance?
• Transport and communications costs melt
away: all locations equally good, so go
where labour is cheap
• Greatly exaggerated; ICT is rearranging
geography not abolishing it
• Agglomeration benefits still matter a lot
• Offshoring offers gains from trade in
services not decimation of British economy
Wage Levels, 2008 (New York = 100)
110
100
90
80
70
60
50
40
30
20
10
0
Frankfurt
Source: UBS (2008)
London
Barcelona
Prague
Shanghai
Mumbai
Top 10 Offshoring Locations
1)
India
6) Indonesia
2)
China
7) Chile
3)
Malaysia
8) Philippines
4)
Thailand
9) Bulgaria
5)
Brazil
10) Mexico
Note: based on financial attractiveness (40%), people and skills (30%), and
business environment (30%)
Source: A. T.Kearney (2007)
Offshoring: Evidence
• 14 million US service sector jobs ‘vulnerable’
(96 million not)
• Offshoring of business services grew 20-fold
in 5 years to 2007; typical cost saving 20%40%
• Offshoring works for routine activities where
performance is easy to verify and face to face
interaction is not needed
• Payroll services, IT services, transaction
processing, telemarketing etc
• It is win-win when markets work well
London as a Financial Centre
• Agglomeration where size matters
• Benefits from thick labour markets and
importance of proximity for deal-making
• Clerical jobs will increasingly be
offshored
• This will strengthen the core business
UK Asset Management: Core Business
OXERA (2005)
Importance
Score
Financial
Infrastructure
4.00
3.96
Size of Labour Pool
3.96
4.24
Quality of Life
3.77
3.36
Market Liquidity
3.69
4.29
Regulatory Regime
3.69
3.40
UK Asset Management: Back-Office
OXERA (2005)
Importance
Score
Total Labour Cost
4.00
2.74
Size of Labour Pool
3.92
4.08
Flexibility of Labour
Market
3.89
3.22
Property Rentals
3.59
2.11
Financial
Infrastructure
3.42
3.85
Agglomeration Economies
• External economies of scale from localisation
and urbanisation economies
• Increase with city size (though not without
limit)
• Much bigger in services: financial services =
0.25, manufacturing = 0.04 (Graham, 2007)
• Central to British competitive advantage
under globalisation
• Are foregone if transport inadequate or city size
restricted
Welfare Loss
NW
New Net Wage
Curve
NW3
B
Welfare Loss
NW2
NW1
A1
A
Old Net Wage
Curve
NA
Source: Leunig & Overman (2008)
NB
N
Planning Laws Need a Major Re-Think
• UK is failing to take full advantage of the opportunities
presented by globalisation
• Spatial adjustment is severely constrained
• Planning restrictions imply massive distortions in land
use: housing/agricultural land values 400/1 (Cheshire &
Sheppard, 2005); office space more expensive in
Manchester than in New York (Cheshire & Hilber, 2008)
• Local Communities, especially in the South East, can
and should be incentivised to want development
Conclusions
• Positive response to globalisation has been
important in reversing relative economic decline
• Regional disparities are an inherent part of
this and per se do not signal need for policy
intervention
• Flexible adjustment to globalisation was the
hallmark of 19th-century Britain and needs to be
facilitated in 21st-century Britain