Monday, 6 June 2011

Competition cured the “British Disease”

Many may wonder if being British really can be cured!!! But in this article from Nicholas Crafts argues that the "British Disease" can be cured and competition is the way to do it.
Britain’s relative economic decline throughout the 20th century – the so-called “British disease” – was a national embarrassment that only went away in the 1980s. This column presents new research showing that competition provided the cure. Only when Britain returned to a regime of competition and openness similar to that which had prevailed before World War I did productivity growth resume.
This has obvious implications for New Zealand. An effort to increase market competition and making sure we maintain our openness to foreign trade will help in the New Zealand's efforts to boost productivity. Crafts argues that
Over the last 20 years or so, there has been a big change in the way economists look at the relationship between competition in product markets and economic growth. Nowadays, at least for “close-to-the-frontier” advanced economies, it is widely accepted that a strong competition policy promotes productivity growth.

[...] Once it is recognised that competition plays this role, the range of relevant policies expands beyond competition policy narrowly defined to include, for example, deregulation and trade liberalisation – both of which impact on barriers to entry.
There are a number of channels vis which competition and productivity are linked.
  1. Stimulating innovation to sustain rents close to the technology frontier;
  2. Acting as an antidote to corporate governance problems arising from weak shareholders and the separation of ownership and control;
  3. Acting as a discipline which leads to better management practices; and
  4. Removing the basis for low-productivity effort bargains between firms and their workers.
Next Crafts asks, What caused the British Disease? His answer,
These ideas help make sense of the “British Disease” which was particularly virulent from the 1950s through the 1970s. The term refers to the relative economic decline which Britain experienced when other European countries grew more quickly and Britain was overtaken by many of them. The symptoms of “British Disease” included debilitating industrial relations and self-indulgent management. In turn, this episode of British economic history, and the way in which it came to an end, offer further support for the claim that weak competition impairs productivity growth in advanced economies.
The retreat from competition in the British economy was triggered by the 1930s crisis but was not fully reversed until the 1980s. Early postwar Britain was notable for cartelisation, nationalisation, weak competition policy, and protectionism. [...]

The weakness of competition in product markets interacted with two aspects of British exceptionalism in terms of institutions, namely, corporate governance, and industrial relations. The former was characterised by the absence of strong shareholders and an ineffective market for corporate control, the latter by the presence of craft control, multi-unionism, and legal immunities which underpinned trade-union bargaining power. The evidence is that, in these circumstances, weak competition led to poor productivity outcomes. Competition policy was largely neglected which was clearly a mistake. On the one occasion where a serious reform was made, the Restrictive Practices Act in 1956 which led to the abandonment of collusion in many sectors, there was a significant impact on productivity performance.
Given the problems with productivity in the U.K. in the period from the end of World War Two up until roughly 1980, what changed in the 1980s to reverse things?
The results of the “Thatcher Experiment” in the 1980s make the case and paved the way for reversing relative economic decline. Competition was much strengthened by ongoing trade liberalisation, deregulation, and discontinuing 1970s’ industrial policy. As competition strengthened, there were major changes in industrial relations which were associated with organisational change, together with divestment and restructuring in large firms.

At the sectoral level, stronger competition and greater openness were correlated with improved productivity performance. As the age of information and communication technology came along, Britain was able to embrace the opportunities associated with rapid diffusion of the new technologies, which required big changes in working practices and management hierarchies, better than its continental-European peer group. This would not have happened with 1970s-style industrial relations and a heavily-regulated service sector.

Some reflections on this story are worth remembering.
  • First, it was not just Thatcherism that made the difference.
Trade liberalisation was well under way already and the reform of British anti-trust policy was only seriously undertaken by the Labour government in Acts of 1998 and 2002.
  • Second, by implication, it is clear that Britain’s failure to sign the Treaty of Rome in 1957 had a substantial cost in terms of its adverse impact on productivity performance.
  • Third, although Britain is an egregious example of the long-lasting damage that the 1930s did to supply-side policy, somewhat similar impacts of that financial crisis were felt across the OECD countries.
Fortunately, this time it has been different.

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