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

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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

  • Policy Implications


Real GDP/Person


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


Shares of World Manufacturing Production


Shares of World Manufactured Exports


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


Employment Shares (%)


Detailed Employment Shares (1) Percent


Detailed Employment Shares (2) Percent


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


The Beveridge Curve

Vacancy rate

UV2

UV1

Unemployment rate


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


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


The Payoff from Globalisation (% GDP)

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


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


Revealed Comparative Advantage in Manufacturing: Top 3 sectors


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%


Revealed Comparative Advantage, 2006: Top 6, All Sectors


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


Regional GDP/Person (% deviation from British average)

Source: Crafts (2005)


Regional GDP/Person(% deviation from British average)

Source: ONS


Correlations When One City has Higher Productivity

Source: Rice & Venables (2003)


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


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


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


Wage Levels, 2008(New York = 100)

Source: UBS (2008)


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)


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


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


UK Asset Management: Core BusinessOXERA (2005)


UK Asset Management: Back-OfficeOXERA (2005)


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


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)


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


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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