How Labour steered an economy going global

Today's Financial Times has the first of a five-part series grandly called New Britain: The State of the Nation, covering "the Britain Blair will leave". Martin Wolf writes about This stable isle: how Labour has steered an economy going global (subscribers only). He notes a solid growth record since 1997:

Since Labour won power, the economy has expanded by 28 per cent, a compound rate of 2.8 per cent. Slowly but surely, the British economic tortoise has caught up with the European hares that had surpassed it in the 1950s, 1960s and 1970s. As Mr Brown enjoyed pointing out in his latest Budget speech, “before we came to office, Britain was seventh of seven in the G7 [leading high-income countries] for national income per head”. “Figures published today show that since 1997, as a result of stability and sustained growth, Britain has risen from seventh out of seven to sixth, then fifth, then fourth, then third, now second in the G7 – second only to America in national income per head.”

Consistent growth in the economy has come largely because inflation has been stable: the annual rise in the retail price index, excluding mortgage interest, has averaged 2.4 per cent since the beginning of 1997. It has not gone above 3.2 per cent or below 1.5 per cent.

Wolf gives Brown more credit than Blair for this result:

After more than nine years in power, the meaning of New Labour is to be found not just in what its leaders have said but in what they have done. What they have produced is indeed something new, at least for the UK.

This is the combination of internationally open markets with an active state; of private enterprise with an enabling state; and of rewards for success with a redistributive state. Under New Labour the UK no longer has the “owning state”. Instead it has the “prudent state”, the “interventionist state”, the “caring state” and the “redistributionist state”.

By virtue of his domination of the Treasury, his control over Whitehall, his strategic thinking and his determination, the chancellor of the exchequer has had a bigger impact on the condition of Britain than the prime minister. New Britain is more Gordon Brown’s than Tony Blair’s.

Through Britain's productivity performance is less impressive:

If stability is the first striking feature, a tolerable, but less than stellar, productivity performance is the second. Output per hour remains well behind the US, France and Germany. On average, says a recent report from the Department of Trade and Industry, “workers in the UK have to work nine hours to produce the same output that workers in Germany achieve in eight and workers in France in seven”.*

The rate of growth of output per worker has fallen in recent years: in the five years to the second quarter of 2001, it rose at 2 per cent a year against only 1.4 per cent in the five years to the second quarter of 2006. Moreover, the UK has failed to match the upsurge in productivity growth seen in the US in recent years. According to the Conference Board, a US business group, between 2000 and 2005 output per hour rose at 2.6 per cent a year in the US, against just 1.8 per cent in the UK. Much Treasury effort has gone into raising productivity. The verdict on its efficacy thus far is the Scottish one of “not proven”.

On the jobs record, and income distribution:

The unemployment rate fell from 7.2 per cent when Labour achieved power (itself a 3.5 percentage point decline from the peak in early 1993) to below 5 per cent before its recent rise to 5.5 per cent.  ...Between 2000 and 2005 the number in employment rose by 1.2m. No less than 47 per cent of this additional employment was in the public sector. While the government’s increased regulation of the labour market – via the minimum wage and a host of other interventions – has not halted the growth of private-sector jobs, overall performance would have been appreciably worse without the 562,000 jump in public-sector employment.

...On personal income distribution the story is complex. According to the Institute for Fiscal Studies, a think tank, “income inequality rose throughout the later 1990s ...However, [it has] since fallen back to levels just above that seen in 1996-97”. But, surprisingly, the government’s efforts at redistribution seem to have made little difference. “One possible explanation,” suggests the IFS, “is that, had the 1996-97 tax and benefit system been left un­reformed, it would have achieved less and less income redistribution as the population, economy and individual incomes have evolved over time. The reforms have therefore been required to keep the level of redistribution constant.”**

Wolf argues that Britain's specialisation in financial services has helped it prosper in the face of globalisation:

The sixth feature is globalisation. In current prices, the ratio of trade (exports plus imports) to GDP has oscillated, rather than risen, largely because the relative prices of tradeable goods have been falling. In constant prices, however, the ratio jumped from 48 per cent in the second quarter of 1997 to 64 per cent in the second quarter of this year.

The UK has also enjoyed a favourable specialisation in trade, with the prices of its exports rising strongly relative to those of its imports: since March 2001, the terms of trade (the relative prices of exports to imports) have improved by 7 per cent (largely explained by gains in services). According to the 2005 economic survey from the Organisation for Economic Co-operation and Development, “command GDP”, which allows for the additional real income generated by improving terms of trade, grew about 0.3 points a year faster than actual GDP between 1995 and 2004.

Openness to capital flows and the role of London as a world financial centre is a signal feature of the country’s globalised economy. UK external assets and liabilities were a respective £4,837bn ($9,086bn, €7,181bn) and £5,006bn at the end of 2005, or around four times GDP. Yet, despite its small net liability position, the UK apparently ran a surplus on investment income of £30bn (2.5 per cent of GDP). This offset two-thirds of the deficit on trade in goods and services. The country runs a persistent current account deficit, though one far smaller than that of the US in relation to GDP. In 2005, the deficit was 2.6 per cent of GDP.

Wolf concludes:

The government’s job – any government’s job – is to provide a stable base for engagement with the world economy. That, without doubt, New Labour has achieved. Yet questions lie ahead. One is whether it will be possible to sustain economic growth at recent rates with a national savings rate that is so remarkably low. Another is whether the current account deficit will need to shrink and, if so, what changes in exchange rate might result. A further question is what would happen to consumption and economic growth if house prices and the ratio of household debt to GDP started to fall. Equally important, perhaps, is how far the re-regulation of the economy is eroding flexibility.

In all, Labour was lucky with what it inherited and with what the world economy has offered. This does not mean the world economy has offered only smooth sailing. Nor does it mean that Labour has made mistakes in economic management. On the contrary, the world economy it has offered plenty of turbulence and Labour has made many good decisions. But it is also true that the economy has not been severely tested.

Even so, Labour has done well enough to shift the political argument in its direction. The discussion is no longer about tax cuts alone. It is now, as Mr Brown long wanted, about the cost of those cuts in terms of foregone public spending. The debate has shifted because Labour has indeed met the challenge of running an open economy while raising public spending sharply. What it has not yet proved is that it can raise taxes efficiently, spend wisely and run the economy successfully over the long term. The debate over Britain’s economic future is not over. It has hardly even begun.

*UK Productivity and Competitiveness Indicators 2006, March 2006, www.dti.gov.uk;
**Poverty and Inequality in Britain: 2006, www.ifs.org.uk

Comments

[jon livesey]

Although this sounds like good news, the last paragraph is worrying. Just how do you measure services GDP output when 47% of new employment is in the public service? Do the statistics agencies attribute an amount of output to a civil servant, and if so, how do they do that? What output does one attribute to a nurse in a hospital - a lot, I hope - and what output does one attribute to a five-a-day fruit and vegetable officer, or to a local government official installing weight measuring devices in wheely bins and prosecuting people afterwards for over-loading them? Come to think of it, what's the contribution to the GNP of the press officers whose job consists of announcing the same "initiative" multiple times?

[A. PERLA]

"The debate over Britain’s economic future is not over. It has hardly even begun."

Oooppps, bad news, that. Makes one think that there's time for an amicable academic debate of the question. This is not the case.

When the Chinese start opening engineering offices in Germany to understand/assimilate the engineering prowess of Germany's mainstay exporter (engineered machine tools), this means what?

This means that the Chinese will begin to compete in the higher-tech sectors. It remains to be seen how effective they can be. But, neither is there time to discuss it.

It's time to be proactive. With policies that introduce higher level of productivity in the services sector across the board. (A sector that demonstrates already high technology content.) More so, Europe needs to start creating original technological advances (and keeping it) - not implementing technology that comes from elsewhere. In this manner, others will play "catch-up" whilst Europe milks the cash-cow.

[jon livesey]

A. Perla makes a good point. If the chinese break out of the low-cost manufacturing niche, they can become the next Japan, only larger. In the fifties, Japan was seen as low-cost and imitative, but today they can be very innovative. In a services and design driven world, which is the only one in which Western Europe can hope to prosper, the key factor is going to be education. For a party that ran on the slogan "education, education,..." New Labour hasn't done so well. They seem to have raised a generation of students with mediocre skills in very soft subjects whose career ambition is limited to a nice soft government job.

[A. PERLA]

I will add to the argument that "jawboning" China about its flagrantly low exchange rate is no longer working.

Let's look at exchange rates from the Chinese point of view. Anecdote: When a French minister was visiting China officially, he approached the matter of exchange rates with his Chinese counterpart - who (supposedly) responded with a smile and this remark, "Do you know how many millions of shirts China must produce to earn the money to purchase one Airbus A-380?".

Point well taken, even if a bit exaggerated. But, this sort of attitude in classical economics is called "beggar thy neighbor", and if it was acceptable for a period of time during which China was evolving from the Communist darkness, that time is now coming to a close. Unemployment has become an acute problem in Europe and the US is getting more concerned about it by day.

We all know that China appreciating the yuan will not very much change its competitiveness, given the drastically lower labor costs. But let's remember also, it would make imports less dear and that could help its global "neighbors" to better support the unbalanced trade accounts.

Then again, we know also that China MUST create hundreds of thousands of jobs a year in order to absorb the rush of the young into city centers (where production is located) from the provinces. This is an internal problem for China. But the disarray in provincial services (particularly health care) is no reason for the rest of the world to accept blithely Chinese inadequacy to address it.

The solution, as always, is not a simple remedy.

[Lisa P]

After the long day months of the campaign about the presidential election of the long run candidacy of the Obama Presidential election let see and watch what will happened next.
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