The United Kingdom:
Declining Capitalism

 

I.    Relative Economic Decline - U.K. was the economic/military superpower of the nineteenth century.  Now, 22 countries have higher per capita GDP (at PPP), and 25 have higher HDIs. 

However, the relative decline may have ended. British economic performance during 2000-2015 better than the average for the Euro area or other OECD economies.

Economic Performance, 2000-2015

Real GDP Growth
(%/year)

Unemployment Rate
(%)

Belgium

1.4

7.8

France

1.3

9.0

Germany

1.3

7.6

Italy

0.2

9.0

Luxembourg

3.3

4.7

Netherlands

1.3

5.1

Sweden

2.2

7.2

United Kingdom

1.9

6.1

United States

1.9

6.3

Euro Area

1.2

9.6

OECD

1.8

6.8

Source: OECD Outlook Database, October 2015

 

II.   Possible Reasons for Relative Decline 

A.  Disadvantages of a head start - After Industrial Revolution, Britain saddled with an outdated capital stock. 

B.  Policy of laissez faire - In 19th C., U.S. and others protected key industries and pursued industrial policies.

C.  Foreign policy - Domestic policy goals sometimes sacrificed for foreign policy.  Empire required heavy military spending (habits die hard) and reduced competitive pressure. Loss of empire had various effects.

D.  Stop-go fiscal policy - Alternating unemployment and balance of payments crises. Hansen found the British government was the only one that destabilized the domestic economy.

E.   High marginal tax rates - Before Thatcher (in 1976), had 41% avg. rate (32% in U.S. and 21% in Japan).

F.   Sociological problems- Entrepreneurial spirit dwindled with successive generations.  Labor productivity was stifled by the trade union establishment.  The educational system serves upper classes and deemphasizes natural science, engineering, and business.

 

III. The Labor Market and Labor Relations -

A.  Labor Unions

1.   Cover about 25% of the labor force in 2014, down from 50% in 1980 and 32% in 1995, but much larger than the 11% U.S. share.

2.   Traditionally, strong political role through the Labor Party.

3.   A strong democratic socialist tradition.

4.   All major unions are members of the Trades Union Congress.

5.   Antiquated union structure.  Not organized by industry; labor negotiations are complicated.

B.  Labor Legislation and Union Growth -

1.   Before 19th century, Britain maintained strict regulations against union activities. 

2.   After 1825, the unions were given more rights and membership grew rapidly.  The inflation rate, unemployment rate, and growth of money wages influenced union growth.

3.   Thatcher administration caused reduction in union membership.  Tight monetary policy decreased inflation and increased unemployment; both discourage unionism.  New legislation required secret ballot elections to approve closed shops or to approve union action, removal of legal immunities of union leaders, and reelection of executive committees every five years.

4.   Trade Union Reform and Employment Bill of 1993 gave workers more freedom of choice in membership, tightened controls on elections before strikes, abolished wage councils (institutions that administered the minimum wage), and gave women 14 weeks maternity leave and protection from dismissal.

5.   Tony Blair, who became Labor PM in 1997, praised Thatcher “modernization,” but supported return of the minimum wage.
In 1999, Blair restored the minimum wage at 3.70 [$5.37] for adults. This was initially controversial, but now the minimum wage system is supported by the Conservatives and all of the major parties. In 2017, the minimum wage is 7.50 ($9.27) for adults aged 25 and over, 7.05 ($8.71) for ages 21-24-21, 5.60 ($6.92) for ages 18-20, £4.05 ($5.00) for ages under 18, and
3.50 ($4.32) for apprentices, and these have been changed every year. The U.S. federal minimum wage, of course, is $7.25, and has been unchanged since 2009. Unemployment rates are currently Spring 2017) tied in both countries at a low 4.7%.

IV. Financial Sector - London is world's most important center for international lending, insurance, shipping contracts, and trading of gold bullion, Eurocurrencies, and Eurobonds, and has the third largest stock market.  Bank of England independence was granted by Labour (opposed by Tories) in 1997.

 

V.  Governmental Sector

A.  Before World War II, government played small economic role.  During the war, Beveridge Committee recommended welfare state.  The Attlee government established National Health Service and nationalized Bank of England, steel, public utilities, and transport.  Some programs terminated by Thatcher, but some remain, such as the National Health Service and allowances for children.

B.  The Nationalized Industries -

1.   Reasons for nationalization: ideology, national security, maintain employment, regulate natural monopolies, provide for external benefits in industries such as health care

2.   Problems - Many of the nationalized industries fail to turn a profit and require subsidies.  However, they were often nationalized to pursue goals other than profit maximization.

3.   Privatization - Beginning with Thatcher, several industries sold to stockholders.  Some have become profitable.  Raised revenue for budget and created new group of stockholders. Critics say that the government sold the assets too cheaply, that profits are excessive, and that firms should not be allowed to exercise monopoly power.

C.  Redistribution of Income and Wealth - The British tax system is relatively progressive, and social welfare programs have been accompanied by a decline in inequality of income and wealth since World War II.

D.  National Health Service - Created in 1948, the NHS is the oldest and largest single-payer health care system in the world. Doctors paid on capitation basis.  Patient and doctor choice.  Recent reforms are designed to separate public funding from public control; allow doctors to handle own budgets and contract with hospitals. In a 2016 survey, the NHS was at the top of the list of "things that make us proud to be British (50%), ahead of "our history" (43%) and the Royal Family (31%).

 

VI.  Brexit

A.  Concerns include disruption of trade ties when UK is no longer in the customs union, establishment of new product quality and safety standards that may not be consistent with the EU, disruption of the ability of Brits to work easily in EU countries, the potential impact on financial markets in London, and the possibility of Scottish secession from the UK.

B.  On the other hand, a recent study of global growth projections to 2050 by PwC suggests that the UK could grow faster than most other large EU countries in the long-run, despite a medium-term drag from Brexit:
"The UK holds its position in the GDP rankings relatively well compared to other advanced economies despite the medium term dampening impact on growth from Brexit, falling just one place from 9th in 2016 to 10th in 2050 (at PPPs). The UK’s position is sustained by its relatively larger projected working age share of the population, although this does depend on the country remaining open to talented people from around the world after Brexit. In comparison, Germany and France could both fall to 9th and 11th places respectively and Japan is likely to fall out of the top 5 to 8th place by 2050. In these countries, it is not the case that their economic fundamentals decline significantly over time, but rather that their performance relative to certain emerging markets has worsened. Italy falls the furthest down the rankings of the G7, dropping 9 places to 21st, as its ageing population and slow productivity growth take their toll and it is overtaken by many faster-growing emerging economies.".