Wednesday, June 12, 2019

From economic heyday of British Empire to EU and Brexit

Boris Johnson, a possible prime minister of the United Kingdom, wrote in a column in the Daily Telegraph in May 2016:

“Yes, let us talk about economics. Let’s look at the real economic impact of the European Union on Britain and Europe…The EU is a graveyard of low growth; the only continent with lower growth is currently Antarctica. That is partly because of the sclerotic one-size-fits-all Brussels approach to regulation; but, worse, in the last decade the EU has been suffering from a self-inflicted economic disaster – the euro.”

The UK, Denmark and Ireland joined what was then the European Economic Community in 1973. Ireland was the poorest economy in Western Europe while among the big economies Britain had the worst economic performance in the period 1950-73.

Greece was the star performer with average annual growth above 6% while Italy grew at an average of 5% annually – the same rate as West Germany’s. UK average annual GDP growth was 2.9%.

According to the Financial Times, by the late 1960s, France, West Germany and Italy — the three founder members closest in size to the UK — “produced more per person than it did and the gap grew larger every year. Between 1958, when the EEC was set up, and Britain’s entry in 1973, gross domestic product per head rose 95% in these three countries compared with only 50% in Britain.”

My chart above based on Organisation for Economic Cooperation and Development (OECD) inflation and purchasing power parity (PPP)-adjusted data show that in real rises in GDP (gross domestic product) per capita, the following were the gains for the 8 countries in 1973-2018 with the UK having a 3rd ranking.

Japan 135%
Germany 127%
United Kingdom 125%
United States 121%
Australia 116%
France 102%
Denmark 95%
Italy 92%

Data published by Angus Maddison (1926-2010), the renowned British economic historian, show that real GDP per capita in Britain grew by 61% in the period 1950-1972 compared with 196% in West Germany.

The British Empire

Using reconstructed data as per the chart below, the real rise in GDP per capita in the 45 years 1868-1913 was 62% compared with 112% as a member of the EU (this, of course, is a rough approximation).

In 1913 the UK had the highest annual national income in Europe based on GDP per capita (the income distribution was lopsided) and the UK GDP per capita was 35% higher than Germany's based on estimates by Angus Maddison. Germany had a population of 68m in 1913 compared with the UK's 46m while estimated total GDP was slightly lower in the UK than Germany's. .

Both Australia and New Zealand were richer based on annual national income than the imperial leader as was the United States.

While the wealth chart below indicates that Germany had a higher share of global wealth in 1913 with it's bigger population, according to a 2018 paper, "British net foreign assets went up from less than 50% of GDP in 1850s to 180% on the eve of the First World War. French net foreign assets were about equal to its GDP throughout and German net foreign assets increased from 0 in 1870s to about 50% of GDP just before the war.  

When George Macartney, a native of Antrim and graduate of Trinity College Dublin, in 1773 wrote a book on his period in office as chief secretary of Ireland, the Industrial Revolution in Britain was in its early period. Macartney was a member of both the Irish and British parliaments and he made clear that Ireland formed part of “a vast empire on which the sun never sets and whose bounds nature has not yet ascertained."

Data from 'The Tragedy of Great Power Politics' by John Mearsheimer (updated 2014)

Even though other countries caught up with Britain's manufacturing, it was the leader in foreign investment accounting for 44% of the global total in 1914 while its merchant fleet was bigger than the fleets of the rest of Europe combined.

In 1900, more than 70% of the world’s steamship had been built in the UK.  

First British lost decade since 1860s

In December 2016, Mark Carney, governor of the Bank of England, gave his first major speech since the shock Brexit result in late June of that year. 

Carney told an audience in Liverpool that Britain had suffered its “first lost decade since the 1860s” when “Karl Marx was scribbling in the British Library.” The governor continued:

"Real incomes falling for a decade; the legacy of a searing financial crisis weighing on confidence and growth. The very nature of work disrupted by a technological revolution —  This was the middle of the 19th century. Liverpool was in the midst of a golden age; its Custom House was the national Exchequer’s biggest source of revenue."

The governor said that in the quarter of a century to 2016, there had been a series of profound disruptions to the way we work, trade, consume and live: the rise of China, technological advances and globally, since 1960, real per capita GDP had risen more than two-and-a-half times, while average incomes had begun to converge, with life expectancy increasing by nearly two decades.

"Despite such immense progress, many citizens in advanced economies are facing heightened uncertainty, lamenting a loss of control and losing trust in the system. To them, measures of aggregate progress bear little relation to their own experience. Rather than a new golden era, globalisation is associated with low wages, insecure employment, stateless corporations and striking inequalities. These anxieties have been compounded by the twin crises of solvency and integrity at the heart of finance. When the financial crisis hit, the world’s largest banks were shown to be operating in a 'heads-I-win-tails you-lose' bubble; widespread rigging of some core markets was exposed;and masters of the universe became minions. Few in positions of responsibility took theirs. Shareholders, taxpayers and citizens paid the heavy price. As a consequence of all these developments, public support for open markets is under threat."

Carney said that the biggest problem was not the distribution of gains, but the lack of UK income growth, associated with a 16% shortfall of productivity growth since 2008 compared with the trend.

Even though real pay has risen in 2019, average UK pay is still below the pre-recession period in 2008 while productivity remains a problem.

The headline UK unemployment rate was at 3.8% in the 3 months to April 2019 – its lowest since October and December 1974.