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

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

  • Relative Economic Decline

  • De-Industrialisation

  • Regional Disparities

  • Adjusting to Changing Comparative Advantage

  • Policy Implications


Real gdp person

Real GDP/Person


Relative economic decline

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 Manufacturing Production


Shares of world manufactured exports

Shares of World Manufactured Exports


De industrialisation

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

Employment Shares (%)


Detailed employment shares 1 percent

Detailed Employment Shares (1) Percent


Detailed employment shares 2 percent

Detailed Employment Shares (2) Percent


Reversing relative economic decline

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

The Beveridge Curve

Vacancy rate

UV2

UV1

Unemployment rate


Reversing relative economic decline1

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

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


The payoff from globalisation gdp

The Payoff from Globalisation (% GDP)

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


Uk comparative advantage

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

Revealed Comparative Advantage in Manufacturing: Top 3 sectors


Lancashire textiles and globalization leunig 2005

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

Revealed Comparative Advantage, 2006: Top 6, All Sectors


Regional implications of globalization

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

Regional GDP/Person (% deviation from British average)

Source: Crafts (2005)


Regional gdp person deviation from british average1

Regional GDP/Person(% deviation from British average)

Source: ONS


Correlations when one city has higher productivity

Correlations When One City has Higher Productivity

Source: Rice & Venables (2003)


Equilibrium regional disparities

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

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

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

Wage Levels, 2008(New York = 100)

Source: UBS (2008)


Top 10 offshoring locations

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

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

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 business oxera 2005

UK Asset Management: Core BusinessOXERA (2005)


Uk asset management back office oxera 2005

UK Asset Management: Back-OfficeOXERA (2005)


Agglomeration economies

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

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

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

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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