In 1890, the UK was the largest and most powerful economy in the world; now, a century later, it is not. Certainly, if you start from the top, there is only one way to go. But our relative decline goes beyond the convergence of national growth rates. Since 1960, several similar European economies, notably Germany and France, have caught and overtaken us, sustaining substantially higher rates of growth. Further afield, Japan and others have also thrived.
Four articles in a recent issue of the Economic Journal explore the causes of the poor UK industrial performance since 1960, with a particular focus on the significance of deindustrialization and the role of policy in the relative decline.
Among their findings:
l The stagnation of British manufacturing over the past two decades has been almost total: Michael Kitson and Jonathan Michie note that between 1973 and 1992, the total increase in manufactured output was only 1.3%. In the same time, manufactured output rose 68.9% in Japan, 68.6% in Italy, 55.2% in the United States, 32.1% in West Germany and 16.5% in France. Kitson and Michie argue that poor industrial performance acts as a brake on the
whole economy and is a result of a fundamental underinvestment problem. While output growth has been bad, productivity growth has been creditable: output per person employed in UK manufacturing rose by 78% between 1979 and 1995. Nick Crafts points out that while in 1979, West German output per person hour was 40% above Britain, by 1989, the advantage was down to 17%. He sees some evidence of a limited reversal of the relative decline as a result of the Thatcherite reforms of the 1980s. The combination of fast productivity growth and virtually no increase in output had the inevitable consequences of job losses and declining shares of manufacturing in gross domestic product (GDP). Between the cycles of 1964-73 and 1979-89, UK employment in manufacturing declined by a third (2.5 million jobs) compared with only 10-13% in France and Germany. The share of manufacturing in GDP fell from 32% in 1973 to 28% in 1979 and 21% in 1993. Crafts argues that this phenomenon of deindustrialization is not in itself important.
Walter Eltis believes that the relative decline of manufacturing is important. He focuses on the failure to develop new products and the resultant loss of world market share: ''few can doubt that the UK would have achieved a higher GDP and a lower natural rate of unemployment if manufacturing industry had been able to win a higher share of world markets and the UK home market''.
Barry Eichengreen places more emphasis on the historical and institutional perspective. Because the UK was not occupied and won the war, there was a continuity of institutions that failed to adapt to the post-war opportunities. He argues that the Thatcher revolution has led to an ''Americanization'' of the UK financial markets, but remains open as to whether the American or German model will prove most appropriate for the twenty-first century.
''Controversy: Deindustrialization and Britain''s Industrial Performance since 1960'' is published in the January 1996 issue of the Economic Journal. The four papers are ''Deindustrialization and Economic Growth'' by Nick Crafts; ''How Low Profitability and Weak Innovativeness Undermines UK Industrial Growth'' by Walter Eltis; ''Britain''s Industrial Performance since 1960: Underinvestment and Relative Decline'' by Michael Kitson and Jonathan Michie; and ''Explaining Britain''s Economic Performance: A Critical Note'' by Barry Eichengreen.