Is the UK Bound to follow Free Market Economic Policies?
Ken Coutts and Graham Gudgin.
Centre for Business Research, Judge Business School, University of Cambridge
kjc1@cam.ac.uk ggudgin@refor.com
The current economic crisis, involving the largest UK recession for over a century, is an appropriate
time to question whether the UK is following the most appropriate economic model. In the short
term it is clear to us, as Keynesian economists, that the policy of tax rises and public expenditure
cuts is self-defeating. It damages employment and incomes without realising its stated policy aim of
cutting the fiscal deficit. A better approach would be to increase public spending on infrastructure
projects while the costs of government borrowing remain low. The official Office of Budget
Responsibility (OBR) has modelled a similar policy and found that it would reduce both the deficit
and unemployment as long as there is sufficient spare capacity in the economy1.
Most of those who support a reflationary policy, however, advocate this as a short-term crisis
measure. There is much less questioning of the underlying liberal economic or free-market model. A
widespread view is that most aspects of the liberal economic regime introduced by Margaret
Thatcher, and continued up to the present by her successors, has benefitted the economy and must
be adhered to in its essential features even if some aspects need further reform. These generally
agreed positive features include:





Free markets including:
 Free trade
 Free movement of capital
 Free movement of labour (at least within the EU)
 Light regulation of business and labour markets
Private ownership of most production and services
Low income taxes
Weak trades unions
Strong competition law
1
OBR 2011 Economic and Fiscal Outlook Nov 2011 annex A. The central OBR assumption is that the UK
economy is close to full capacity operation despite the fact of unemployment at 2.6 million. With this
assumption the OBR predicts that a looser fiscal stance could not expand total GDP and hence the deficit
would rise. Relaxing the assumption, and assuming that capacity has continued to grow at its historic trend
value, generates a prediction that higher public spending is consistent with lower unemployment and reduced
government debt. The assumption that the UK economy is currently close to full capacity appears to come
from surveys like that of the CBI which ask firms if they are operating at close to full capacity. Most say that
they are at close to full capacity but , in our view, this is the wrong question. The correct question is ‘if demand
for your products were to expand by (say) 10% how quickly could you raise production’.
1
Many, including those in the current Coalition, would go further and argue for greater competition in
the remaining public services of health and education through private providers. They also believe in
low corporate taxes, with the UK corporation tax rate in process of being reduced from 30% in 2007
to a current of target of 20% despite their need for additional tax revenues to reduce the
government debt.
A wide range of mainstream economic commentators believes that the Thatcherite reforms ended a
long period of relative economic decline and introduced a sustained period of rapid and stable
growth. For instance Professor John Van Reenan, Director of the Centre for Economic Performance
at the LSE, wrote in April this year, ‘Mrs Thatcher’s reforms helped to end a century of relative UK
economic decline’2. The widely read economic historian Professor Nick Crafts takes a similar view3.
Andrew Sentance, Chief Economist at PwC and former Monetary Committee member, views the
quarter century from 1982 to 2007 as a ‘golden age’ 4.
These examples immediately reveal a contradiction at the heart of economic thinking about this
period. Everyone regards the post-war period up to the 1970s as one in which the UK economy grew
more slowly than its main competitors especially those in Western Europe. At the same time, the
same people frequently refer to the 1950s and 1960s as a ‘golden age’ of relatively rapid growth,
low unemployment and low inflation. By 1979 it was the relative decline which dominated
interpretations of the post-war period. At the same time, the stagflation and economic turbulence of
the 1970s led to a reaction to the ‘corporatist’ model which had prevailed under both Labour and
Conservative governments prior to1979. High inflation, frequent and damaging strikes, and
dissatisfaction with the performance of a range of nationalised industries all contributed to the
Thatcher victory in 1979 and the subsequent free-market revolution.
Most people, including most economists, view the period since 1979 as one of faster economic
growth and greater prosperity, as well as one of lower inflation, greater industrial peace and higher
efficiency in the privatised companies compared with their nationalised predecessors. It is the
growing inequality of incomes, and most recently the long recession since 2007, that have cast
doubt on the model, or at least on the financial deregulation aspects of the model. In this paper we
ask whether the benign view of the post 1979 is a true reflection of the economic facts. The aim is
not to conduct an exercise in economic history for its own sake, but to investigate the extent to
which a free-market model is an essential underpinning for our prosperity. If a free market economic
model has had limited or little success in improving economic performance, then the road lies open
to consider alternative ways of organising the economy.
2
The Times April 16 2012.
N Crafts 2011. British Economic Decline Revisited. University of Warwick, May 2011. For instance p19,’when
competition was strengthened in later decades ( i.e. after the 1950s and 1960s) there was a strong
productivity response.’
4
The Times May 9 2012. Note that Sentance’s period handily omits the two deep recessions which
immediately preceded and immediately followed his 1982-2007 period. Sentance compares the 1982-2007
period to the ‘golden age’ in the 1950s and 1960s. Note that this ‘golden age coincides with part of Van
Reenan’s long period of relative economic decline.
3
2
Evaluating the Impact of Free Market Reforms since 1979.
The economic changes undertaken since the 1970s are so numerous and interwoven that an
evaluation is necessarily complex. In this paper we focus primarily on growth and productivity in the
macro-economy, although we plan later to have something to say about the impact of individual
changes such as the privatisation programme and deregulation. The most effective way to make a
judgement on the reforms is to conduct comparisons. Our main analysis compares UK economic
performance in the three decades since 1979 with the three preceding decades. In doing so, we also
compare UK performance with that of its main competitors to address the issue of relative growth
and decline. A number of studies have investigated the impact of deregulation and increased
competition by comparing individual sectors and firms5. These studies are valuable and informative,
but also partial. A necessary starting point in our view is to look at the performance of the UK
economy as a whole, and to use sectoral and other studies as an aid to interpretation.
The 30 years since the election victory that brought the Thatcher government to power is a long
enough period to attempt an assessment of the impact of this revolution on the UK economy6. The
last 30 years have been dominated by essentially liberal market or free market principles. The
previous decades are often described as ‘corporatist’7. During the 1950s, 1960s and 1970s the
economy was highly regulated with relatively high tariffs on trade8, controls on capital movements,
large-scale industrial subsidies and regional investment controls, cartels and weak competition rules,
public ownership of significant parts of production, and close involvement of trades unions in
determining economic policy9. Wage and price controls were also intermittently in force during
periods of high inflation, and average and marginal income tax rates were high by more recent
standards.
After 1979 all of this was to change. Fixed exchange rates had already been abandoned
internationally in 1971 and a start was made to UK financial deregulation in the same year. Capital
5
These studies are summarised in Crafts (2011) op cit.
It is also 40 years since the antecedents of the Thatcher revolution in the form of the liberalisation of banking
under the Competition and Credit Control reforms and the introduction of market determined exchange rates.
See Goodhart C A E (1984) The Theory and Practice of Monetary Policy: the Experience of the UK. Pitman
Press.
7
We recognise that the move towards free markets pre-dated Mrs Thatcher’s Government and included inter
alia the end of the Bretton Woods system of fixed exchange rates in 1971 and the end of direct restrictions on
bank lending under Competition and Credit Control, also in 1971.
8
The average effective rate of protection fell from 9.3% in 1968 to 4.7% in 1979, and 1.2% in 1986 Ennew C,
Greenaway, D., and Reed G (1990); Further Evidence on effective tariffs and effective protection in the UK.
Oxford Bulletin of Economics and Statistics, 52, 69-78). Membership of the EEC in 1973 and the European
Single market legislation contributed to the fall in protection but tariff rates were falling more widely under
the various GATT rounds.
9
Crafts (2011) op cit p11 describes UK industrial relations in the post-war decades as ‘idiosyncratic and
unreformed’ ‘characterised by craft control, multi-unionism, legal immunities for trades unions and strong but
decentralised collective bargaining’ with ‘increasing trades union density and the proliferation of shopstewards’.
6
3
controls were quickly removed in 1979 followed by wage, price and investment controls, and over
the 1980s a whole series of deregulatory measures were introduced in the financial and commercial
sectors10. Although the level of taxation was not permanently reduced there was a major switch
away from high marginal income taxes and towards indirect taxes. Competition law was
strengthened11 and trades union reforms introduced. Finally, a major programme of privatisation
transferred the ownership of public corporations to the private sector. In some cases this was a
reversal of earlier nationalisations but in the utilities this was a sell-off of organisations that were
originally developed by local or central government. The key question is whether these changes led
to faster economic growth and higher productivity across the UK economy as a whole.
The salient facts
Looking back over the past sixty years, the evidence is now clear that there was no sustained
improvement in the trend growth of per capita GDP in the UK after 1979. Indeed, per capita GDP has
only briefly returned to the pre-1979 trend, at the pinnacles of the 1980s and 1990s booms in 1989
(chart 1). The current level of per capita GDP is 14% below what it would have been if the 1950-79
trend had continued. This suggests two things. Firstly, any claim that market liberalisation in the UK
has raised the growth rate of UK per capita GDP depends entirely on the view that in the absence of
the liberal reforms the trend would have deteriorated. Any assessment of the impact of market
liberalisation in the UK thus needs to examine the plausibility of the proposition that, in the absence
of the liberal reforms, deterioration in the growth trend would have set in after 1979.
Second, the superior trend over the three decades before 1979 was achieved despite the presence
of all of the corporatist apparatus listed above which is now generally regarded as damaging to
economic growth and productivity. As well as high marginal income tax rates and higher inflation
(the latter being mainly confined to the period from the late sixties to the early eighties), much of
the period was also characterised by wage, price and investment controls12, fixed exchange rates,
greater public ownership, subsidisation and regulation of industry, alleged poor management and
restrictive labour practices13, together with a less favourable record of strikes and industrial
relations. Any claim that the economic record has been better under a more liberal economic regime
must explain why faster growth was possible under the more corporatist and interventionist regime
that characterised the period up to 1979. Such a claim also needs to establish why a continuation of
the corporatist regime after 1979 would have led to a poorer economic record than it did prior to
10
The main measures of financial deregulation are listed in Nigel Lawson’s 1992 autobiography ’The View
From No.11’. (Bantam Press). Lawson lists the ten most important measures on page 626. These include the
abolition of restrictions on lending and hire purchase agreements by banks and building societies, the abolition
of exchange controls and bank reserve asset ratios, the removal of restrictions on the stock exchange in the
1986 ‘Big Bang’ and the collapse of the building societies cartel. One might also add the Big Bang’s opening of
London banking to foreign banks, and particularly, large US investment banks.
11
Anti-trust law was strengthened by the Competition act of 1998 and the Enterprise Act of 2003. Crafts states
that these Acts increased the independence of the competition authorities, removed the old ‘public interest’
defence and introduced criminal penalties for running cartels. (Crafts op cit p13.) By international standards
UK competition rules were still weak in 1995 but were much stronger by 2005.
12
Through much of the 1950s consumer rationing and significant tariffs were also in force
13
See N Craft British Relative Economic Decline Revisited CEPR Discussion Paper DP8384 May 2011
4
1979. Two possible reasons for a worsening economic growth performance in the UK are firstly
slower growth in world trade and secondly the international spread of free trade under GATT rules.
Chart 1: Real GDP per capita in the UK (2003 price reference year)
25
23
21
£
0
0
0
s
19
17
15
per capita GDP
13
2.25% pa trend
11
9
7
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
5
Sources of data: GDP in constant prices (chain-linked 2003 reference year) from ONS UK National Accounts. Population from
Conference Board Total Economy database. The trend is adjusted to begin 1% below the actual level in 1950 reflecting
Dow’s estimate of the position of the economic cycle in that year (J.C.R Dow The Management of the British Economy 194560 NIESR CUP 1965). The vertical line is at 1979 and marks the boundary between the pre- and post-Thatcher period.
What is also obvious is that economic growth has become more volatile in the sense that departures
from the long-term trend have been deeper and more prolonged, even if they are less frequent.
Between 1950 and 1979 in what were then called ‘stop-go cycles’, the ‘stop’ years were slow-downs
in the rate of growth rather than recessions with actual declines in GDP. The only years in which real
GDP was lower than the previous year were 1974 and 1975, following the first oil price hike14. Since
1979, there have been three major recessions, with the latest one being the deepest and most
prolonged in the entire post-war period. Departures from the 2.25% pa growth trend have been
much more serious and prolonged in the post-1979 period (Chart 2). It seems that after 1979 it was
difficult to achieve growth rates that would fully restore the loss of GDP incurred during the
recessions15. While the earlier trend in productivity (GDP per hour) was maintained after 197916, the
employment rate (i.e. the ratio of employed persons to population of working age) was generally
14
The quadrupling of OPEC oil prices in 1973 was itself due to the depreciation of the real value of oil revenues
as inflation accelerated in the late 1960s and early 1970s following US government decisions to expand
defence spending and social benefits without concomitant increases in tax. The most plausible explanation for
the subsequent recession (which was quite mild by post-1979 standards) was the difficulty of recycling the
huge increase in OPEC revenues through a relatively under-developed international financial system. These
were eventually recycled to less developed countries at the cost of a round of sovereign defaults in the early
1980s.
15
In the 1980s the pre-1979 trend was only regained towards the end of the decade. This contrasts with the
USA where a much larger fiscal deficit (occasioned by combining high defence spending with tax cuts) kept the
economy close to the pre-1979 trend through much of the 1980s.
16
There is evidence of slow productivity growth during the 1950s when price-fixing and cartels dominated
(Broadberry S N and Crafts N R (2001) Competition and Innovation in 1950s Britain, Business History 43; and
Crafts N (2011) op cit p11. However productivity accelerated over the 1960s to regain the long-term trend in
GDP per hour of 2.68%pa.
5
lower after 1979 despite the expansion of the female workforce and the growth of part-time
employment.
Multi-factor productivity
Another common measure of productivity is calculated by adjusting the growth of labour
productivity for increases in capital per worker. To estimate multi-factor, or total factor productivity
we first calculate the growth of output implied by the growth of labour and capital inputs. Multifactor productivity is the residual between the growth of output calculated from factor inputs and
the growth of actual output and is often attributed to general features of improvements in technical
knowledge and organisation.
As a measure of capital input, we have used a series produced by ONS for the volume of capital
services, which goes back to 195017. To obtain a comparably long series for labour input, we have
used a consistent series for employment from the OECD and a series of hours per person from
Conference Board data. Table 1 shows the resulting estimate of multi-factor productivity.
Table 1
Multi-factor productivity - historical growth rates
Percent change per annum
1950-1979
1980-2007
Output per head
2.25
2.17
Multi-factor productivity (MFO)
1.78
1.44
Over the first three decades the growth rate of MFP averaged a little less than 1.8% per annum, but
fell slightly in the second period to about 1.4% per annum18. Once again, the evidence is that
productivity performance deteriorated after 1979.
17
See Appleton J and Wallis G (2011) the Volume of capital services. New Annual and Quarterly estimates for
1950-2007 in ONS Economic & Labour Market Review, May 2011. The series is based on the perpetual
inventory method and combines capital stocks according to estimates of rental price, rather than purchase
price of capital assets. Our method uses coefficients of 0.3 on the capital term and 0.7 on the labour term.
18
The estimated growth rate from 1970-2007 of 0.8% per annum agrees closely with the figure given in the
ONS Economic & Labour Market Review, May 2011. Acheson J ‘Multi-factor productivity: estimates for 19702009.
6
Chart 2: Per capita GDP. Deviations from a 2.25%pa Trend
10
5
o
f
0
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
%
-5
t
r
e -10
n
d -15
-20
Sources of data: As for chart 1
Other changes in the post-1979 period compared with earlier decades include:




Increased inequalities in income especially during the Tory period 1979-97 (IFS 2011 p30)
and largely continued under Labour.
Faster decline in manufacturing output as a share of GDP. The UK now has proportionately
the smallest manufacturing sector of any OECD country.
Reduced rates of income tax with higher indirect taxes and reduced public sector
investment, combined with a higher share in GDP of private consumption and household
investment.
Greater regional inequalities in per capita GDP and large tax revenue flows out of the
Greater South East to support public expenditure in other regions (the current outflow of
revenues is estimated to be 7% of GDP of the Greater SE19).
There is a widespread consensus that the market liberalisation reforms since the 1970s have
strengthened the competitiveness of the UK economy. Crafts (2011) concludes that “applied
economists in the UK are now generally agreed that strengthening competition in product markets is
good for productivity performance”. Crafts reviews a range of studies which shows that price-fixing
and cartels, market concentration, separation of ownership and control, and strong trades unions all
tend to reduce growth in productivity, as do barriers to trade and to new entrants in a sector.
However, Crafts fails to explain why reforms from the 1970s, which abolished or weakened all of
these constraints to competitiveness, failed to raise the trend growth rate for UK productivity (GDP
per hour) or for per capita GDP. Moreover there is no real explanation for the marked slowdown in
EU productivity growth from the 1970s despite the growing international movement towards
liberalisation in the form of reduced tariffs and freer capital flows.
19
Oxford Economics (2010) Regional Winners and Losers in UK public Finances. Oxford Economics Ltd,
Economic Outlook.
7
The UK’s Relative Performance.
One set of facts that has underpinned the consensus around the economic benefits of market
liberalisation has been the UK’s improved performance relative to major competitors. In the
immediate post-war years, levels of productivity and per capita GDP in the UK were well above those
of most of Western Europe. The advantage had disappeared by 1979 as productivity in other EU
countries improved faster than in the UK, but after 1979 the UK matched or bettered productivity
growth in the EU15 (chart 3). There is however little evidence, as we have seen, that this
improvement in relativities was caused by any improvement in the actual growth of GDP in the UK.
Rather, it was caused by a dramatic slowing in the growth of continental EU economies from the
early 1970s onwards (chart 4).
The war-affected economies of Western Europe experienced rapid post-war recoveries plus rapid
catch-up to the technology frontier aided by political stability and expanding free-trade within the
EU and under GATT trade rules20. Madison’s historical data on economic productivity levels (GDP per
head) suggests that the recovery of France and Germany from the low war-ravished levels of 1945
continued until around 1970 when they regained the levels relative to the USA previously
experienced in the interwar and pre-WW1 periods. The UK gained less from post-war reconstruction
and was initially much less far behind the technology frontier. Its growth both before and after the
1970s was more typical of an economy closer to the technology frontier, even though the UK has
never managed to close the whole of the wide productivity gap with the US that opened up during
and after WW2. After 1970 there was little further European convergence towards US levels of per
capita GDP21. This interpretation suggests that the panic around economic decline that swept 1970s
Britain was unwarranted and that already by the late 1970s the UK was matching productivity
growth in the EEC. It also suggests that in as far as the decision to join the EEC in 1973 was taken to
gain access to fast-growing markets, this decision was based on a false premise.
20
Abramovitz M and David P A (1996) Convergence and delayed catch-up: productivity leadership and the
waning of American exceptionalism. In Landau R, Taylor T and Wright G (eds) the Mosaic of Economic Growth.
Stanford UP. The authors suggested that the post-war catch up proceeded better than in the inter-war period
because incentive structures were better and because US technology became more cost effective in European
circumstances.
21
In his Milliman lecture (May 19 2011, ‘The US Recession of 2007-201?’) R E Lucas argued that the failure of
EU economies to fully converge on US levels of GDP per head depends on the greater regulation of markets in
the EU. This appears to confuse productivity (GDP per hour worked) with per capita GDP. The main reason for
higher US levels of per capita GDP lies in the longer hours worked in the US. The USA is unusual among
advanced economies in not reducing its working time as it has become richer. This may be due to an overly
competitive economy and labour market.
8
Chart 3 Productivity EU14 as a percent of the UK
130
120
110
100
90
GDP per Head
80
GDP per Hour
70
60
2010
2006
2002
1998
1994
1990
1986
1982
1978
1974
1970
1966
1962
1958
1954
1950
50
Sources of data: Conference Board Total economy database Data in US$ at 1990ppp
Chart 4: GDP per Capita in US$ ppp (logged)
10.5
10.0
9.5
9.0
UK
EU14
2.25% pa trend
8.5
8.0
Sources of data: Conference Board Total Economy Database. Note: (W Germany’s GDP per head is estimated after 1989 by
assuming the same growth rate as for Germany as a whole. Crafts (2011) gives a figure for 2007 based on German national
sources which is close to the one estimated here.
9
Chart 5 GDP per head (% of USA)
120.0
100.0
80.0
UK
France
Germany
60.0
40.0
20.0
Source of data: Madison. Historical Statistics of the World Economy
Per capita GDP is not a direct measure of productivity. It is influenced by labour productivity
(GDP per hour worked) but also determined by the employment rate (proportion of the
working-age population in employment), the hours worked per employee and by the
dependency rate (children and retired people as a proportion of the population).
Differences in the rates of European convergence to the technology frontier as represented by
the USA are shown in chart 6. In France and Germany labour productivity (GDP per hour
worked) converged much faster towards the US level in the post-war decades than was the case
in the UK. There was clearly something deficient in the UK performance. The UK convergence
trend of close to 1%p.a. was under half the rates achieved by France or Germany. The
important point in relation to economic liberalisation is that the UK convergence trend did not
accelerate after 1979. Indeed it remained on much the same slow convergence trend until the
mid-1990s when it stalled at 80% of the US level. French and German productivity converged
fully on the US level by around 1990. From this date French and German productivity slowed
down to the long-term US rate of just under 2% pa. Because the slower UK convergence
continued for a few further years the gap between the UK and France/German narrowed a little
after 1990. UK productivity levels remain well below those of France and the US (and West
Germany). They were also below the level that would have prevailed if the pre-1979
convergence trend had continued right up to the present. There is thus little in this record to
suggest that free market reforms improved UK performance. Productivity in the UK remains
below that of major competitors.
10
Chart 6. GDP per hour Worked USA=100
110
100
90
UK
80
France
70
W Germany
60
Germany
50
1.1%pa Trend
40
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
30
Source of data; Conference Board 2010
Productivity has grown a little more slowly in all of the major European economies since the
mid-1990s. The US productivity spurt of the late 1990s, largely due to Walmart and other large
US retailers (and in financial dealers), was not reflected in Europe where higher population
densities mean that planning regulations constrain the development of large-scale retail
operations. In the current recession US productivity growth has again outpaced that in Europe,
as US employment has fallen more rapidly than in Europe.
Chart 7 GDP per hour in the USA (logged)
3.90
3.70
2.5%pa trend
3.50
3.30
3.10
1.9%pa Trend
2.90
2.70
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2.50
.
Source of Data: Conference Board 2010.
11
In the USA itself there has also been little evidence that deregulation and other liberal market
policies have boosted the growth of productivity. In the period up to 1970, with fixed exchange
rates, US productivity grew at 2.5% pa, Since the Reagan era the trend rate has dropped below 2%,
with only minor and temporary changes including the productivity spurt of the late 1990s (chart 7)
While productivity (GDP per hour worked) remains below US, French and West German levels, other
components of per capita GDP bring the UK closer to France and Germany but not the USA. The UK
employment rate (the proportion of the working-age population in employment) has always been
relatively high, while that in France and Germany has always been lower (chart 8). There is evidence
that low productivity workers are disproportionately excluded from employment by institutional
arrangements in countries with low employment rates22.
The number of hours worked by employees tends to fall as countries become richer23. This has
happened in all western economies, but occurred much more slowly in the USA than in Western
Europe (chart 9). The slow decline in the number of hours worked in the USA became even slower
after 1980, and the USA labour force now works longer hours than in any other western economy.
Since US employees used to have shorter hours than Europeans until the 1980s, the current long
hours are unlikely to represent a cultural preference for income over leisure. An important reason is
the low number of days of annual holiday in the US, and one reason for this is likely to be job
insecurity. Whatever the reason, the longer hours worked in the USA and the UK serve to raise the
level of per capita GDP relative to those in the rest of the EU. In the UK this goes some way to
compensate for low levels of labour productivity.
Chart 8 Employment Rates. Persons Employed as % of Population Aged 15-64
76.0
74.0
72.0
70.0
UK
68.0
USA
66.0
FR
64.0
Ger
62.0
60.0
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
58.0
22
Crafts op cit p12. W Lewis (2006) makes the same point for France.in The Power of Productivity : wealth and
Poverty and the Threat to Global stability.
23
In the UK an important influence on falling average hours worked per employee has been the decline of
manufacturing and the growth of services. Manufacturing has always been more heavily based than services
on full-time employment. Although there has been some decline in hours worked within manufacturing and
within services these declines have been relatively small.
12
Source of data: OECD dataset ALFS Summary tables. Germany is West Germany up to 1990.
Chart 9 Annual hours Worked per Employee
2400
2300
2200
2100
France
2000
Germany
1900
W Germany
1800
UK
1700
USA
1600
1500
2010
2006
2002
1998
1994
1990
1986
1982
1978
1974
1970
1966
1962
1958
1954
1950
1400
Source of data: Conference Board
The UK Share of World Trade.
Another set of facts used to suggest an economic revival from the 1970s onwards concerns the UK’s
share of world trade. At the end of WW2 the UK share of world goods exports was almost 14%, or six
times its share of world population. This share fell rapidly over the 1950s and 1960s, but stabilised at
around 5% from 1973 until the mid-1990s, after which it declined once more, reaching 3% by
13
Chart 10 UK Exports of Non-Oil Goods as a % of World Exports (and -2.7%pa trend)
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Source of data: IMF Direction of Trade Statistics2010 (chart 10). The improvement in the falling trend of the
UK share of world trade lasted only from the mid-1980s to the mid-1990s. . The UK share of world
trade had fallen by close to 2.7% pa up to 1979 (chart 11). Over the 15 years from 1984-1999 the UK
share of world trade improved relative to the previously falling trend, indicating an improvement in
competitiveness (chart 11). From the late 1990s this improvement went sharply into reverse and by
2010 the share was close to what it would have been had the pre-1979 trend continued.
The accelerated downturn from 1999 suggests a reaction to the 25% increase in UK relative unit
labour costs between 1996 and 1998 (chart 12). Similarly, the improved performance from 19841999 reflected low unit labour costs over this period. This in turn may reflect some weakness in the
wage bargaining strength of trades unions after 1979, but cost competitiveness relative to other
Chart 11 Ratio of UK Share of World Goods Exports to -2.7% pa Trend
150
140
130
120
110
100
90
80
70
Source of data: IMF Direction of Trade Statistics.Uk exports exclude oil and gas.
14
countries depends on the exchange rate as well as on local wages and productivity and thus has
complex causes.
One further point to note is that the UK balance of trade was closer to balance prior to 1979 than it
has been subsequently (as it had to be, in an era of fixed exchange-rates and restricted capital
movements (chart 13). The 2.25%pa trend in per capita GDP was thus maintained with a more
favourable trade balance before the 1970s than subsequently. The deteriorating trade balance after
1979 was largely due to a strongly worsening balance of goods trade, despite the build-up of North
Sea oil production. The services balance was little changed through most of the period since 1979.
Chart 12 UK Relative Unit Labour Costs 2005=100
IMF relative unit labour cost, actual and normalised
120
100
index 2005=100
80
Actual RULC
60
Normalised RULC
40
20
0
1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
..RELZF REER BASED ON ULC (Units: Index Number)
..REUZF REER BASED ON RNULC (Units: Index Number)
United Kingdom OECD relative unit labout costs
Source: IMF
15
Chart 13 UK Trade Balance (% of GDP)
6.0
4.0
2.0
Goods
-2.0
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
0.0
Services
Total
-4.0
-6.0
-8.0
Source of Data: ONS
The unfavourable goods and services balance over recent decades is the counterpart of an excess of
domestic expenditure over domestic income. In part this excess has occurred because of rising
household debt which has allowed spending to grow faster than income. The level of household
debt has risen from around 60% of household disposable income to over 160% in the most recent
years (chart 14). Our econometric estimates suggest that around 15% of increases in household debt
contribute to private sector spending (through new house-building, spending associated with
moving home, and other spending financed through equity release). If so, then the rise in household
debt since the early 1980s, equivalent to 100% of private sector disposable income, may have raised
private expenditure by around 15% over the 30 years from 1980 to 2010.
Chart 14 Financial Liabilities of the Household sector (% of Household Disposable Income/GDP)
% of HDI
% OF gdp
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
H
D
%
I
/
o
G
f
D
P
200
180
160
140
120
100
80
60
40
20
0
Source of data: W Martin Slim database 2009 based on ONS national Accounts
16
Discussion.
To recap, it seems clear that the growth of the UK economy in the three decades since 1979 during
which market liberalisation occurred has not been demonstrably superior to the previous three
decades. The trend rate of growth in per capita GDP has not risen, and the growth on productivity
(GDP per hour worked) has been worse. Volatility has been greater, and inequalities of income and
regional prosperity have increased. The argument that UK prosperity over recent decades has
depended on the liberal market reforms introduced in the 1970s and 1980s thus depends wholly on
an assumption that, without the reforms, the trend in economic growth would have deteriorated
after the 1970s.
It is not clear what factors would have caused such a deterioration in UK trend growth. The main
contenders are the slowing in growth of world trade after 197924, and the intensification of
international competition as a result of lower tariff barriers around the world. Through joining the
EEC in 1973 in the expectation of tying the UK economy to fast growing markets, the UK also became
part of one of the world’s slower growing trade blocs as growth slowed in France, West Germany
and other EEC nations. Membership did not, however, necessarily constrain exports to fastergrowing markets, and all other EU economies have maintained proportionately larger manufacturing
sectors than the UK. It is clear that other EU nations have also outshone the UK in rising to the
challenge of more intensive international competition for manufactures.
While some aspects of economic liberalisation may have helped to raise competitiveness in the UK
others have not. Crafts (2011) argues that the intensification of competition contributed to higher
productivity and this is no doubt true. However, the benefits of higher productivity within individual
firms and sectors are only realised at the level of the economy as a whole if the displaced labour is
re-engaged. Since employment rates languished at below the pre-1979 levels for much of the period
since 1979, these productivity gains often contributed more to income inequality than to raising
aggregate GDP.
Poor industrial relations were improved under the liberal market regime, and the reduction in the
annual number of days lost in strikes has been dramatic (chart 15). Both high unemployment and the
reform of trade union legislation and practice played a role. The reduction in strikes and related
disruption have been generally welcomed and must have helped management to raise productivity.
The impact on GDP growth is not however clearly a large one. The growth in productivity in the UK
has not risen as the days lost in strikes have fallen. Although other factors are clearly involved it
seems that strikes have not been a large enough influence to overcome other influences.
24
Using WTO data for the volumes of world trade, the growth rate for 1950-79 was 7.3% pa for total trade
(8.9% pa for manufactures). For 1979-2010 the growth rate was 4.8% pa (5.8% pa for manufactures).
17
Chart 15 Annual Days Lost in Strikes
5000000
4500000
4000000
3500000
3000000
2500000
uk
2000000
Germany
1500000
1000000
500000
0
Source of data: UN laborsta
Other factors may have had little influence. There is only a loose connection between inflation and
economic growth under a flexible exchange rate regime. It is not clear in any case that falling
inflation after 1980 was due to liberal policies. A deficiency of demand and high unemployment
were more important at the beginning of the Thatcher period. Despite a number of energy price
hikes, the trend in world inflation has been downwards as emerging economies in Asia and Latin
America have entered the production of goods for world markets at low labour cost.
High personal taxation, high public spending and high rates of unionisation might have persisted
beyond 1979 in the absence of the Thatcher revolution, but the continued existence of these
features in Scandinavian and other economies has not damaged economic competitiveness, nor has
GDP growth slowed in these countries. The onus would appear to be on those who argue for liberal
economic policies as requirements for high per capita GDP to make their case.
One consequence of a liberal economic policy regime has been an over-reliance on low taxation and
low levels of business regulation to stimulate investment, and a reduced use of more direct
industrial policy measures. This may partly explain why the UK has experienced the largest
contraction of the share of manufacturing in total GDP of any OECD country and why, almost
uniquely, the ratio to GDP of business spending on research and development (BERD) has been
falling for many years. Nordic and other countries have used high BERD ratios and excellent
education systems (including good vocational education systems) to underpin manufacturing
success and economic competitiveness. There is a need for effective policies to improve academic
and vocational education, investment in R&D and revitalised regional policies (since the weakness of
many local economies beyond the Greater South East creates a need for huge fiscal transfers
between regions).
18
Annex A Measurement problems in estimating productivity growth
rates since 1950
The Blue Book which was published in September 2011 introduced major changes to the method of
deflating the money GDP to obtain chain linked volume measures of output. The principal change to
the price deflators was to replace indices based on the Retail Price Index with the Harmonised
Consumer Price Index. Since the latter tends to grow more slowly over time, the effect of this
introduction has been to raise the volume of output compared with previous official estimates. The
printed version of the Blue Book (BB11) revises these changes to historical data back to 1997.
However, the electronic version, published at the same time on the ONS website, makes available
volume data before 1997 which is based on the earlier methodology, only revaluing the reference
year from 2006 to 2008. The historical series therefore has a discontinuity resulting from the change
of methodology and the decision of the ONS not to reconcile pre-1997 data with the new
methodology. In comparing historical growth rates of GDP, productivity etc., there is a bias imparted
in using official data as published.
Our measure of output per head is the chain-linked volume of gross value added (GVA) at basic
prices, divided by resident population, mid-year estimates25. For years between 1997 and 2009, we
use the implied price deflators obtained by dividing the money GVA by the volume GVA, using BB10,
i.e. the Blue book published in 2010 under the earlier methodology. Using these deflators, rescaled
for the reference year of 2008, we use the latest available data on money GVA and divide by the
adjusted deflators to obtain a revised series for the volume GVA.
Table A1
Average Output per Head - historical growth rates
Percent change per annum
1950-979
1980-2007
Official data (BB11)
2.25
2.41
Adjusted data
2.25
2.17
Difference
0.24
Table A.1 shows that the official data, using an inconsistent methodology, produces a bias to the
average growth rate of about ¼% per annum. Over the two periods, 1950-1979 and 1980-2007, the
growth rate of output per head using the adjusted data, is very similar, with the second period being
on average a little lower.
25
The series have ONS codes ABMM and DYAY. Their ratio is published in Table 1.5 of BB11 as code YBGT. It
should be noted that prior to 1997, the online ONS database for YBGT is at 2006 reference year, whereas for
1997 onwards, it is at 2008 reference year. Users may download this series from 1950 with no warning about
this massive discontinuity.
19
Reference
Broadberry S N and Crafts N R (2001). Competition and Innovation in 1950s Britain. Business History
43
N Crafts (2011) British Relative Economic Decline Revisited. University of Warwick May 2011
J.C.R Dow (1965) The Management of the British Economy 1945-60 NIESR CUP 1965
IFS (2011) Jin W; Joyce R; Phillips D; Sobieta L; Poverty and Inequality in the UK 2011. IFS
20