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The Changing Place of Britain in the World Economy: a Long-Term Perspective

Explore the historical shifts in Britain's economy from industrialization to global trade, examining factors like de-industrialization, regional disparities, and adjusting to new comparative advantages. Understand policy implications and the impacts of globalization on British industries.

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The Changing Place of Britain in the World Economy: a Long-Term Perspective

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  1. The Changing Place of Britain in the World Economy: a Long-Term Perspective Nick Crafts Leverhulme Globalisation Lecture, University of Nottingham, November 19, 2008

  2. Themes • Relative Economic Decline • De-Industrialisation • Regional Disparities • Adjusting to Changing Comparative Advantage • Policy Implications

  3. Real GDP/Person

  4. 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

  5. Shares of World Manufacturing Production

  6. Shares of World Manufactured Exports

  7. 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

  8. Employment Shares (%)

  9. Detailed Employment Shares (1) Percent

  10. Detailed Employment Shares (2) Percent

  11. 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

  12. The Beveridge Curve Vacancy rate UV2 UV1 Unemployment rate

  13. 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

  14. Trade Exposure [(X+M)/GDP] (%)

  15. The Payoff from Globalisation (% GDP) Based on similar assumptions to HMT (2003) and Bradford et al. (2006)

  16. 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

  17. Revealed Comparative Advantage in Manufacturing: Top 3 sectors

  18. Lancashire Textiles and Globalization (Leunig, 2005) • Lancashire a highwage 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%

  19. Revealed Comparative Advantage, 2006: Top 6, All Sectors

  20. 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

  21. Regional GDP/Person (% deviation from British average) Source: Crafts (2005)

  22. Regional GDP/Person(% deviation from British average) Source: ONS

  23. Correlations When One City has Higher Productivity Source: Rice & Venables (2003)

  24. 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

  25. 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

  26. 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 • Offshoringoffers gains from trade in services not decimation of British economy

  27. Wage Levels, 2008(New York = 100) Source: UBS (2008)

  28. 1) India 2) China 3) Malaysia 4) Thailand 5) Brazil 6) Indonesia 7) Chile 8) Philippines 9) Bulgaria 10) Mexico Top 10 Offshoring Locations Note: based on financial attractiveness (40%), people and skills (30%), and business environment (30%) Source: A. T.Kearney (2007)

  29. Offshoring: Evidence • 14 million US service sector jobs ‘vulnerable’ (96 million not) • Offshoring of business servicesgrew 20-foldin 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-winwhen markets work well

  30. 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

  31. UK Asset Management: Core BusinessOXERA (2005)

  32. UK Asset Management: Back-OfficeOXERA (2005)

  33. 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

  34. Welfare Loss NW New Net Wage Curve NW3 B Welfare Loss NW2 A1 NW1 A Old Net Wage Curve NB NA N Source: Leunig & Overman (2008)

  35. 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 distortionsin 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

  36. 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

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