UK: SMITH ON ECONOMICS - HOW DOES BRITAIN MEASURE UP? - Britain has slipped into the world economic league's relegation zone, according to Labour. The figures, based on per capita GDP, can be questioned, says David Smith, as can the Government's rosy vie

Last Updated: 31 Aug 2010

Britain has slipped into the world economic league's relegation zone, according to Labour. The figures, based on per capita GDP, can be questioned, says David Smith, as can the Government's rosy view.

Everyone likes to know where they stand in relation to the competition. However well United Widgets plc is doing, its management will lose sleep at night if its arch rival, Widgets International plc, is doing better. Even worse, perhaps, is if its big French competitor, Lyonnaise des Widgets SA, or the German giant Widgetten Gmbh, are cleaning up in its main export markets.

On a national scale, such worries are multiplied. From the time of the Great Exhibition in 1851, when German manufacturing was first sighted as a distant threat to Britain's dominance, we have either been looking over our shoulders, or getting out the binoculars to see how far the competition had raced ahead. Did we enjoy what now seems to have been a golden age of solid, non-inflationary growth in the 1950s and 1960s? We did not. Any feeling of satisfaction was marred by the fact that others were doing a lot better, not least the defeated second world war powers. This, after all, was when Germany had its Wirtschaftswunder, and when Japan began to emerge as the industrial giant we know today.

Exchange rate discrepancies

But how has Britain been doing of late? Recently, the Labour Party offered a disturbing picture of relative British economic decline. Using OECD figures, it claimed that since 1979 Britain has slumped from 13th to 18th place in the world economic league, a far cry from the picture of regeneration and renewal that the Government likes to paint.

Labour's figures, derived from data for per capita GDP, can be questioned in several respects. For a start, GDP comparisons are highly sensitive to the exchange rate chosen and to the accuracy of each country's national accounts. In the late 1980s, when Britain was overtaken by Italy as the fifth largest economy in the world (measured by total rather than per capita GDP), an episode known as Il Sorpasso, it was because the Italians decided to incorporate estimates for its famous black economy into the official statistics. Overnight, the Italian economy got bigger by a sixth. There can also be huge differences depending on whether the comparison is made using actual market exchange rates or, as the OECD does, so-called purchasing power parity exchange rates - which measure notional exchange rates on the assumption that currencies have moved in such a way as to perfectly reflect different countries' inflation performances.

Even without getting hung up on the technicalities, there is another problem with such comparisons. Because countries follow different economic cycles, the choice of date is all important. In 1979 Britain was at the top of an economic cycle. In 1993, the basis for the 18th place comparison, the economy was near to a trough. Thus, 13th place probably flattered Britain in 1979 and 18th did us an injustice in 1993.

The best way of measuring relative performance is over a prolonged period of time. And here, there are some grounds for pride. To take the best first, British manufacturers have been among the best in the world in recent years at extracting higher productivity from their workers. Of 12 industrial countries, the UK was second only to Japan in the growth of output per hour in manufacturing over the period 1979-94, with growth of nearly 4% a year. There is an argument, of course, that Britain's performance was good because there was so much catching-up to do. Even so, a strong productivity performance has been sustained beyond this initial catch-up period.

Placed eighth for productivity

The idea of an improved recent productivity performance is supported by economist Nicholas Oulton in a National Institute paper, Supply Side Reform and UK Economic Growth: What Happened to the Miracle? Comparing two periods, 1960-73 and 1973-89, he found that in the former period Britain ranked only 22nd out of 25 countries in the growth rate of output per worker. In the latter period, in contrast, Britain had climbed to a creditable eighth place.

But Oulton's article also contained less favourable comparisons. Productivity growth is important, but so too is the overall growth in output. And during the 1979-94 period, Britain's growth rate (of GDP) averaged a meagre 1.85%. This was better, incidentally than the 1973-9 performance, when growth was just 1.4% a year, but considerably worse than the 3.2% of the 1960-73 period and, significantly, also worse than most other countries. For manufacturing, where the most impressive productivity performance was recorded, the annual average growth rate of output over the 1979-94 period was a feeble 0.67%. The lesson of these figures is that Britain needed to combine a good productivity performance with a strong output record, but failed to do so. Yet another of Oulton's comparisons shows that, out of 11 industrial countries, Britain's growth performance between 1970-94, with GDP rising by an average of 2.1% a year, was a poor tenth.

A curate's egg

We therefore have something of a curate's egg of a performance, with the bad parts significantly outnumbering the good. It seems that in Britain the progress which has been made on the microeconomic front - better management and techniques producing good productivity performance - has too often been outweighed by errors in macroeconomic management, or, in other words, government policy.

But there is hope. The productivity figures tell us something important about the flexibility of the economy, in contrast to the rigidities elsewhere in Europe. So too did the fact that unemployment started to fall relatively early in the recovery. After falling over a prolonged period, Britain's share of world trade stabilised in the mid-'80s. We should not then get too depressed when the Labour Party tells us that we have slipped into the world economic league's relegation zone. But we should treat ministerial bombast about the economy's performance with a large dose of salt. It is not all disaster, but the report card should say, in very large letters: Could do much better.

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