Perspectives on the UK’s productivity problem: the end of the puzzle?

workersThe UK’s productivity problem continues. Output per worker has barely grown since the beginning of the financial crisis in 2008. Why is this a problem? Because if we want rising living standards, we must have rising productivity over time.

In theory, rising productivity in our economy gives us choices between increased income and increased leisure time. We can choose on a spectrum between more income for the same hours worked and the same income for fewer hours worked, in other words, more leisure time. Depending on how we in society value work and leisure, increased productivity should make possible increases in human welfare.

Today, output per hour worked in the US is at a similar level to that in France and Germany. However, total hours worked per head in the US have tended to outstrip those in the latter two countries, meaning that output per head remains higher there.

Americans are on average richer (although greater inequality means that many of them are not), but they achieve these greater riches by working longer, while their French and German counterparts have more leisure time, including a shorter working day and longer holidays. This is down to collective economic and social choices, although these are also necessarily political in nature, and far away from simple choices freely made by individuals, as some might choose to believe. Continue reading

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Free trade, trade policy and the WTO

“Free trade is the sensible rule of thumb most of the time in most sectors. It is sensible because the efficiency gains are often real, even if the theory of comparative advantage over-generalizes them; and it is a simpler rule for any state and for inter-state agreements than rules for managed trade. But the argument…about production and employment, in the context of economic growth rather than static resource efficiency, suggests that inter-state agreements, including the rules of the WTO, should be revised to permit more government “leadership” and “followership” of the market – sometimes by leading the production structure into activities the private sector would not undertake on its own, sometimes by making bets on initiatives already underway in the private sector to assist those initiatives to scale up. This contrasts with the current situation, in which the WTO restricts the use of instruments relevant to developing countries’ efforts to upgrade the national production structure – including tariffs, non-tariff barriers, and direct industry subsidies – while allowing instruments relevant to advanced countries’ efforts to grow new activities on the world frontier, such as R&D subsidies. The WTO is, put crudely, an industrial upgrading device for advanced countries, an industrial downgrading device for developing countries. President Trump surely does not intend his skepticism of free trade to benefit developing countries, but it gives the potential for others to modify international rules towards more “policy space””.

Robert H. Wade (2017), Is Trump wrong on trade? A partial defense based on production and employment, in E. Fullbrook and J. Morgan (eds.), Trumponomics – Causes and Consequences, College Publications and World Economic Association, p.97

The full article can be viewed for free here.

When protectionism worked (and why it probably won’t today)

The Guardian’s economics editor Larry Elliott writes here about the potential of Trump’s trade war to herald a return to the 1930s, a decade of rising protectionism and shrinking world trade.

He makes the important point that the EU and China run trade surpluses, and are therefore likely to suffer more than the US from tit-for-tat protectionist policies. However this does not mean that, to quote Mr Trump, trade wars are ‘good and easy to win’.

I have often written about the case for selective and temporary protection for infant industries in developing countries. For several decades after World War Two, the threat of the spread of communism gave the US, as global capitalist hegemon, a strong incentive to promote successful capitalist development across the world. Developing countries were therefore given policy space to promote their domestic industries, even as trade became more free in the rich world. Continue reading

On catch-up industrialisation

In a number of previous posts on development and industrial policy, I have mentioned the concept of ‘catch-up’. I thought it might be useful to define it in some detail, so here is Akira Suehiro of the University of Tokyo, taken from his comprehensive work Catch-Up Industrialization (2008, p.3-4):

“Catch-up industrialization is a pattern of industrialization frequently, indeed necessarily, adopted by late-industrializing countries and late-starting industries. It is an essential aspect of any attempt to reduce the gap in national wealth between developing and developed countries.

The many varieties of catch-up industrialization generally have the following two points in common.

First, latecomers to industrialization enjoy the advantages of “economic backwardness”, or the advantage of being able to make use of technologies and knowledge systems developed by countries that have gone before. It is expensive and time-consuming for any country to independently develop new technologies and products, not to mention new industrial structures or management organizations. Latecomer countries can achieve great savings of time and capital by adopting the necessary technology and know-how from countries that have already industrialized.

It follows that an important challenge for governments and enterprises in latecomer countries is how to go about importing, adapting, and improving foreign technologies and systems as smoothly as possible. From this fact of life stem many of the most striking features of catch-up industrialization: strong government leadership, positive involvement by financial institutions (with corporate finance through commercial banks rather than stock-markets), development of information-sharing systems between government and private sector and between assemblers and suppliers (intermediate organizations, keiretsu, etc.), the continuation of family businesses such as zaibatsu in corporate management, and the development of distinctive production management control systems in the workplace (the kaizen and just-in-time systems, workers’ commitment to management, etc.).

The second common feature among latecomers to industrialization is that they have to start by importing most industrial products. For some time they have to earn the foreign currency to pay for these imports through exports of primary products such as mineral and agricultural products. In order to reduce imports, the latecomer countries launch a policy of domestic production and import substitution, starting with relatively low-tech, labor-intensive industries. Consider, for instance, the case of textile products. If a country has just commenced domestic production of synthetic fiber products, that necessitates imports of the chemical raw materials, plus the machinery and equipment to process them. The country has to export textile products to get the necessary foreign currency for these imports, while also commencing production of chemical products and machinery at home.

A cycle consequently develops: from importing to domestic production, then to exporting (or overseas production), then to re-importing. At the same time it is important to establish a trade policy centered on import substitution and export promotion, and an industrial policy aimed at the protection and fostering of domestic industries. In short, trade and industry are inextricably interlinked. It follows that under the conditions of this first phase, with its dependence on imports and its need to conserve limited supplies of foreign currency, an important challenge for those who would catch up is the effective distribution and control of available economic resources. This means that a set of policy structures – regulations on trade, tariffs and investment, export-led industrialization, tie-ups with foreign capital to foster export-oriented industries, etc. – constitute another feature of catch-up industrialization.”

Sun hats and development

I recently bought a new sun hat (stay with me). A label inside reads ‘made in China’. Replacing my previous hat was well overdue, as it was more than 20 years old. Out of curiosity and before getting rid of it, I checked inside and saw a label, which also read ‘made in China’. I must be something of a geek, as this got me thinking about the manufacture of clothing and development processes.

It is notable that China is manufacturing and exporting clothing such as this, just as it was twenty years ago. The hats are not dissimilar. Of course, the Chinese economy is the largest manufacturing nation in the world and exports a huge amount of goods of all kinds. But according to this experience, companies there are still involved in the manufacture of quite basic clothing. Continue reading

Michael Pettis on rising trade tensions

With Donald Trump’s apparently escalating trade war very much in the news, here are some wise words from Peking University’s Michael Pettis, taken from the final pages of his 2013 book The Great Rebalancing – Trade, Conflict, and the Perilous Road Ahead for the World Economy (p.192-194). They seem particularly relevant right now.
Continue reading

Industrial policy and Chinese development

The rapid growth and transformation of the Chinese economy since 1978, when policymakers began a programme of economic reforms, has been extraordinary. Up until the last few years, GDP growth averaged around 10% per year, lifting hundreds of millions out of poverty. This represents the largest episode of poverty reduction in human history. China, as the largest manufacturing nation, has become the ‘workshop of the world’.

With a population of 1.4 billion, and an economy relatively open to international trade, these changes have and will continue to have an enormous impact on the rest of the rest of the world. For this reason, we should take a great interest in China’s continuing evolution.

Donald Trump, both on the campaign trail and since becoming US President, has placed great emphasis on getting some sort of ‘better deal’ between the US and Chinese economies. His administration has criticised China for taking advantage of the US on trade and the use of technology. But should China’s rise be a worry in these respects? Or is the US being hypocritical? In fact today’s rich countries all intervened in the economy and used forms of trade, industrial and technology policy to promote their growth and enable periods of ‘catch up’ with those at the frontier. China has been no exception. Continue reading