Sunday, July 13, 2003
Spinning back to the golden years
Posted by David Smith at 06:41 AM
Category: David Smith's other articles

What's in store for the economy over the next 50 years? A tough question, given that most of us struggle to get a handle on what's going to happen over the next 50 weeks.

But last week the new, Mervyn King-led monetary policy committee (MPC) sensibly reduced the base rate to 3.5%, a level last seen in the 1950s, the economy's "golden age", and that sets one thinking about these longer-term possibilities.

Past performance is not necessarily a guide to the future, as unit-trust advertisements remind us, although by the same token those who ignore the mistakes of history are condemned to repeat them.

So any look back over the past 50 years reveals plenty of mistakes. British economic policy has often provided other countries with lessons in how not to do things. But not now. Whether by luck or good judgment - and I would say mostly the latter - the current policy framework has given us a new golden age of economic performance. And this one, in many respects, is better than its predecessor in the 1950s.

The Society of Business Economists has put together a collection of essays (The Challenge of Change, edited by Jim Hirst, Profile Books, 12.99) to mark its 50th anniversary. Most of the authors, many of them the wrong side of 50, have taken the opportunity to look back as well as peer forward.

What we have seen, of course, is enormous economic progress. Gross domestic product per head has risen by nearly 300% in real terms in the past 50 years, meaning that we are now almost four times better off, after allowing for inflation.

What we have also seen, particularly in the last decade or so, is that Britain has started to do better than competitor countries. The days when this country was the sick man of Europe and the most inflation-prone of the big economies seem to be over.

Neil Blake of Experian Business Strategies, one of the authors, points out that in the first golden age Britain's growth rate was strong in absolute terms but weak in comparision with everybody else. Between 1953 and 1967 Britain had a 2.9% average growth rate, but America managed 3.8%, France 5.2%, Germany 5.5%, Italy 5.7% and Japan 9%. Britain's economy slowed over the following 10 years, as did everybody else's. But our 2.4% average growth rate was at the bottom of the international pile, as was the 1.7% annual rate of growth over the 1977-85 period. Only since the mid-1980s has the economy had a record of which it could be proud.

Overall economic growth since then, 2.6%, has exceeded Japan (2.4%), France (2.3%), Italy (2%) and Germany (1.7%). Only America's 3% rate has been higher. On a per capita basis - the best measure of economic success - the story is even better.

Measured like this, Britain's 2.2% growth rate since the mid-1980s has exceeded all the other countries, including America. The run that has now seen 44 consecutive quarters of economic growth means that recession is a distant memory. This is a longer continuous period of growth, incidentally, than during the golden age.

What's gone right? How has a volatile, underperforming economy been transformed? The answer is that the "supply-side" reforms of the Thatcher years - deregulation, reducing union power and income-tax cuts to restore incentives - have combined for the past decade with a much-improved macro-economic policy framework.

An inflation target has proved an effective basis for monetary policy, notably in the past six years of Bank independence. Combined with fiscal rules to limit government borrowing, the wild policy swings of the past have been avoided.

Blake is confident that the backtracking by Labour on the Tory supply-side reforms - the re-regulation of the economy - has not gone far enough to do serious damage to growth prospects. His tentative view for the next 50 years is that Britain's outperformance will continue.

Based on demographic projections and trend growth rates, he suggests that per capita GDP will continue to rise by 2.2% a year over the next half century, better than America, Germany and France, all perhaps surprisingly on 2%, Italy on 1.7% and Japan at only 1.5%. Nobody would bet on these numbers being right but from a UK perspective they are certainly encouraging.

Apart from a long period of growth and falling unemployment, low inflation, averaging just 2.5% over the past 10 years, has been the other big golden-age development. In that time I have lost count of the number of people warning that inflation was about to take off again. So undoubtedly, has Roger Bootle, head of Capital Economics, another of the authors.

As he points out, there have been many occasions, particularly in the 1970s and 1980s, when economists predicting a return to inflation rates of 2% or so would have been thought of as mildly barking. I would add that had they combined it with a prediction of a return to full employment, they would have been carted off to the nearest funny farm.

Bootle's concern is that, while low inflation has been the norm for the past decade, it may not last. This is not, he hastens to point out, because he fears a return to the high inflation of the 1970s and 1980s but because this time inflation is likely to break on the downside, giving us deflation, or falling prices. In this respect, it may not be so much a return to the 1950s as back to the 1930s.

Golden ages do not last for ever. Central banks are alert to the deflation danger, which is one reason why last week's cut from the Bank is unlikely to be the last.

The big question, as discussed last Sunday, is whether such monetary-policy activism will be enough. And on this, the jury's still out.

PS: Speaking at a seminar in Geneva recently, I was extolling the virtues of free trade as the only sustainable route out of poverty. One of the participants, a WTO (World Trade Organisation) representative from West Africa, said simply: "What about Africa?"

Africa, where George Bush has been on a whistle-stop tour, appears to be the continent that trade left behind. Pretty well every part of the world got richer during the US-led global boom of the 1990s. Japan was the exception in the developed world. African nations were the main exception among less-developed countries.

The UN Development Programme's annual human development report, published last week (, tells the story. In sub-Saharan Africa the proportion of the population living on a dollar a day or less has risen to nearly 50% in the past decade. The so-called millennium development goals of reducing poverty and child mortality, intended to be achieved by 2015, won't at present rates be achieved for Africa until 2147 and 2165, the UNDP says.

Why doesn't trade work for Africa? The conventional explanation is that the world trade rules are skewed so far in favour of the rich countries that it does not have a chance. Led by the Common Agricultural Policy, western countries subsidise their farmers to the tune of $300billion (180billion) a year. The US government gives its cotton farmers three times as much as it gives in aid to sub-Saharan Africa.

Nobody would deny that trade needs to be made fairer to help Africa but the continent's problems go deeper. Climate, disease, geography, the absence of a business tradition or culture, together with corrupt leaders and misguided policies, add up to a recipe for long-run failure. This was explored brilliantly by David Landes in his The Wealth and Poverty of Nations (Abacus). Aid, even when more generous, did not help Africa. A depressing thought is that trade might not help much either.

From The Sunday Times, July 13 2003

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