Squalls face world's role model
While the Anglo-American system seems to be gaining ground in the sense that many of its facets are being adopted elsewhere it would be astounding were there not some kind of backlash
Tuesday 29 April 1997
And while the Anglo-American system seems to be gaining ground internationally in the sense that many of its facets are being adopted by continental Europe and Japan, it would be astounding were there not some kind of backlash. Here in Britain, we may see some of that backlash this week: not just a change of political direction, but at least some hopes among many voters of a change in economic direction too. But in the US there is nothing of this. Administrations change, but the economic model is virtually unquestioned. Why?
One part of the answer must surely lie in the success of the US economy in creating jobs. By comparison to continental Europe the UK has been relatively successful at getting its unemployment rate down, and it is now creating jobs at a reasonable rate. But it is nothing like as impressive an engine of job-creation as the US.
In the past six years the US has created 12.5 million new jobs, an increase of more than 11 per cent. A little over 1 million were in the public sector, and the largest single new group were in private sector services, mostly in small and medium-sized firms. The growth of the past decade is shown in the chart on the right.
But there have been no net new jobs in manufacturing. Of course there have been some new manufacturing jobs, but gains have been more than offset by losses with the result that total manufacturing employment is below the level of 1991. No new jobs and rising output has resulted in excellent productivity gains, since 1991 averaging around 4 per cent. Output per person/hour in manufacturing in the US is 21 per cent higher than it was in 1991. The result of this is that unit labour costs have hardly risen since 1991 (see left-hand chart). The economy as a whole has created jobs without creating excessive inflation.
This raises a number of questions. One, posed by the economic team at Kleinwort Benson, which dug out the statistics noted above, is whether this performance can continue. They believe it can. The present growth will slow and so price/wage pressures will be contained; wage inflation will not increase much. And the productivity gains will continue. If that is right, and the good US performance is not largely a cyclical phenomenon - the result of a long expansion - then expect facets of the US economy to continue to be exported into the Continent and Japan.
But that is the American part of the model. What about the "Anglo" bit? One part of the market reforms embraced by Britain but not by the US is reform of the state sector, in particular privatisation. The US did not privatise because not having nationalised in the first place, it didn't need to. That will clearly continue outside the UK, and perhaps within it. (One of the reasons for the early election in France is to seek voter support not just for the single currency but also for continuation of the privatisation programme, which has been pushed back by opposition from the left.)
Whether other features of the Anglo-American system continue, like reliance on stock market finance rather than bank finance and flexible labour markets, will depend on whether the two economies continue to be perceived from abroad as successes. If they continue to grow faster than continental Europe and Japan - if the present performance is not just a cyclical phenomenon - they presumably will. If the European economies catch up, the model will come to be less admired.
Medium- and long-term forecasts of growth are either brave or useless, or perhaps both. But I was interested by some numbers in the annual "Strategy 2000" exercise carried out by BZW, which tries to apply a long-term view to investment. The logic of this is to try and look at which countries and which sectors will do well over the next few years, and then to draw investment conclusions from that.
As part of this exercise, BZW did two things. One was to come up with some five-year growth forecasts; the other to put a whole series of variables together, from demography to scientific achievement, and see what that implied for living standards.
On the forecasts, the Group of Seven order ran as follows: Canada (3.2 per cent trend growth), Japan (2.8 per cent), US and UK (2.5 per cent), Italy (2.4 per cent), and France and Germany (2.2 per cent).
That is quite interesting in the sense that the US and UK do come out a touch higher than the large continental economies, but the margin is small and in any case Canada and Japan do better.
On the less precise assessment of changes in living standards, though, the US and UK come out clearly top, while at the bottom come Japan and Germany. The criteria are: changes in the dependency ratio, imports of capital goods, access to information, labour market flexibility and number of scientific citations. These may seem an arbitrary set of variables, and of course they are. Nevertheless the results are interesting in the sense that the Anglo-American model appears the best at generating a rise in living standards - or rather the most likely to generate a rise - over the next decade.
What should one conclude from all this? I think the main message is there is still great momentum in the intellectual sea-change which took place during the early 1980s on how developed economies should be run, and that accordingly the Anglo-American model will continue to be applied elsewhere. That is not to claim that the model is optimal; rather it is to say that the onus in on the opponents to come up with something better. If they don't, the model rolls on.
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