UK slowly slips down economic league tables

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The Independent Online
The performance of the British economy is routinely accorded centre stage in any election campaign, but hardly ever do the protagonists land a knock-out punch. The complex nature of economics means that it is always possible for both sides to select variables, or time periods, which show that the other lot could not manage the proverbial celebration in a brewery, at least when compared to some foreign country, or to this country over some appropriate previous period. Sensible electors probably regard this as so much noise, and go about their daily business without further ado.

However, for those genuinely interested in our national performance, I recommend Britain's Relative Economic Decline, 1870-1995, the latest work of Professor Nicholas Crafts of the London School of Economics, published by the Social Market Foundation. Professor Crafts, as usual, assesses the evidence in the most neutral way possible (which perhaps just means that I share his prejudices), and provides a series of broad judgments, based on a mass of data, rather than selecting a few convenient comparisons which happen to support his viewpoint.

The conclusion, according to Professor Crafts, is that Britain has been in relative economic decline at least since 1870. At that time, real GDP per head in this country was the second highest in the world. This slipped to 11th in 1979, and to 17th in 1994, which suggests that the Tory years have not significantly arrested the speed of relative decline. However, there are some caveats which are worth noting.

First, economic theory suggests that we should take account of changes in hours worked, since an economy which is opting for more leisure time might be providing higher levels of overall welfare, even if these are not apparent in GDP statistics. (In other words, leisure has a positive value, which is unrecorded in the national accounts.) This does indeed appear to be true of the UK, which does rather better when allowance is made of the decline in the average working week. On this basis, we appear to have maintained the 11th place in the world which we acquired in the 1970s, though some people might retort that they would like to work longer hours if that option were available.

The second caveat is that some of the economies which have overtaken the UK since 1979 in terms of GDP per head are not directly comparable with us, such as Hong Kong and Singapore. Relative to the comparable economies of western Europe, we seem to have done less badly, though there are still some examples, like Italy and Belgium, of countries which have overhauled us since 1979. Relative to Europe, we seem to have lost rather more ground in the "golden" period from 1950-73 than we have done since, but even so there seems little support for the claim that the UK has been "the strongest economy in Europe" during the latest Conservative era.

The final caveat concerns the distribution of income. Many economists would argue that it is insufficient just to examine the behaviour of average income per head, since the extra welfare derived from each additional unit of income declines as one gets richer. Consequently, the overall welfare of the nation might actually go down if the distribution of income becomes more uneven. More uneven it has certainly become since 1979, and by a much greater margin than in the rest of Europe. So this would be another point suggesting that the relative performance of the UK since 1979 has been far from impressive.

More important than this, however, is the future. Relative performance in the past two or three years has been good. Does this suggest that the Tory reforms are finally working, so that the UK economy will grow rapidly from now on? For an answer to this question, we can turn to The Global Competitiveness Report, 1996, produced by the World Economic Forum (WEF). This is a painstaking attempt, undertaken each year, to rank around 50 important countries according to their medium-term growth potential.

The methodology is as follows. Recent economic research has pointed to a series of underlying economic determinants of economic growth, and the WEF concentrates on eight main categories. Four of these - openness to international trade, the stance of government, the sophistication of financial markets, and the flexibility/skill content of labour markets - can be measured by published quantitative data.

The other four - the quality of infrastructure, technology, management and the judicial process - are not subject to standard economic measurement, so the WEF has conducted a survey of more than 2,000 businessmen in the countries concerned in order to rank performance. All eight of the different inputs to growth potential are then given weights according to their importance for growth, and a competitiveness index is produced. (The potential for poorer countries to catch up with richer countries is also included in the calculation.)

The resulting competitiveness index is shown in the graph, and is plotted against actual growth performance in the years 1992-95 to check that it works. It is obvious that there is indeed a broad correspondence between GDP growth and the index; countries above the line have been growing somewhat faster than the index would suggest, while those below the line are doing the opposite.

What does this imply about the UK? First, the UK is in 24th position in the global league table, which is almost halfway down. This is not encouraging. However, on a more upbeat note, most of the countries above the UK are emerging economies which are not directly comparable with us. If we take broadly comparable developed economies, the UK's relative performance looks quite respectable. We are behind countries like the US (14th), Norway (18th), Canada (19th), Australia (22nd) and Denmark (23rd), but we are ahead of Japan (27th), France (38th), Germany (40th), and Italy (47th). We are also ahead of most of the other countries in the EU - it is interesting to note the whole of the EU is lagging behind the Anglo-Saxon economies according to the competitiveness index.

If the index is right, then the UK should grow relatively rapidly by European standards in the next five to 10 years. But before the government runs off with too much of the credit for this, we should take a closer look at the components of the index. Where do we score well, and where do we score badly? Compared to our overall ranking, we score above average on openness to trade, finance, market flexibility and judicial institutions, and that is the main reason for doing well overall. But we score below average on government (especially fiscal policy and savings), on infrastructure, on technology (especially technical skills), and on the labour force (especially education standards).

Where does all this leave us? The UK's performance since 1979 has been about average for a European country, but the competitiveness index suggests we may do better in the next five years. It also suggests that we could do even better still if we paid more attention to investment, infrastructure, education and skills. If we could find a way of adding these extra elements to the reforms the Tories have already achieved, that may be the right way forward.