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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

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The changing place of britain in the world economy a long term perspective

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
Themes Long-Term Perspective

  • Relative Economic Decline

  • De-Industrialisation

  • Regional Disparities

  • Adjusting to Changing Comparative Advantage

  • Policy Implications


Real gdp person
Real GDP/Person Long-Term Perspective


Relative economic decline
Relative Economic Decline Long-Term Perspective

  • 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




De industrialisation
De-Industrialisation Long-Term Perspective

  • 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
Employment Shares (%) Long-Term Perspective


Detailed employment shares 1 percent
Detailed Employment Shares (1) Long-Term PerspectivePercent


Detailed employment shares 2 percent
Detailed Employment Shares (2) Long-Term PerspectivePercent


Reversing relative economic decline
Reversing Relative Economic Decline Long-Term Perspective

  • Required improved incentive structures to improve TFP and reduce NAIRU

  • TFP gaps have been much reduced and Beveridge Curve shifts in


The beveridge curve
The Beveridge Curve Long-Term Perspective

Vacancy rate

UV2

UV1

Unemployment rate


Reversing relative economic decline1
Reversing Relative Economic Decline Long-Term Perspective

  • 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
Trade Exposure [(X+M)/GDP] (%) Long-Term Perspective


The payoff from globalisation gdp
The Payoff from Globalisation (% GDP) Long-Term Perspective

Based on similar assumptions to HMT (2003) and Bradford et al. (2006)


Uk comparative advantage
UK Comparative Advantage Long-Term Perspective

  • 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



Lancashire textiles and globalization leunig 2005
Lancashire Textiles and Globalization sectors(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%



Regional implications of globalization
Regional Implications of Globalization sectors

  • 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
Regional GDP/Person sectors(% deviation from British average)

Source: Crafts (2005)


Regional gdp person deviation from british average1
Regional GDP/Person sectors(% deviation from British average)

Source: ONS


Correlations when one city has higher productivity
Correlations When One City has Higher Productivity sectors

Source: Rice & Venables (2003)


Equilibrium regional disparities
Equilibrium Regional Disparities sectors

  • 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
Sub-Optimal Size of British Cities sectors

  • 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
Death of Distance? sectors

  • 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


Wage levels 2008 new york 100
Wage Levels, 2008 sectors(New York = 100)

Source: UBS (2008)


Top 10 offshoring locations

1) India sectors

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)


Offshoring evidence
Offshoring: Evidence sectors

  • 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


London as a financial centre
London as a Financial Centre sectors

  • 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




Agglomeration economies
Agglomeration Economies sectors

  • 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
Welfare Loss sectors

NW

New Net Wage

Curve

NW3

B

Welfare Loss

NW2

A1

NW1

A

Old Net Wage

Curve

NB

NA

N

Source: Leunig & Overman (2008)


Planning laws need a major re think
Planning Laws Need a Major Re-Think sectors

  • 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


Conclusions
Conclusions sectors

  • 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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