Chapter 12 Flashcards
(44 cards)
Growth between 1950-1973:
Average 2.9% GDP per capita growth.
African growth between 1950-1973
Colonies gaining independence from colonial rule -> possible positive developmental implications.
1950-73: 2.1% GDP per capita growth.
1973-98: Growth disappears.
Dominions growth between 1950-1973
(USA, Canada and Australia)
Less pronounced growth than global trend but still substantial
2.4% GDP per capita growth.
Latin America growth between 1950-1973
2.5% GDP per capita growth
Asian growth
Excluding Japan
1950-73: 2.9% GDP per capita growth
1973-98: 3.5% GDP per capita growth -> continued rapid growth post- Golden Age era
Growth in Eastern Europe and USSR growth between 1950-1973
1950-73: 3.5% GDP per capita growth
1973-98: -1.1% GDP per capita growth -> negative growth
Wsterne Europe growth between 1950-1973
1913-50: 0.8% GDP per capita growth (depression and wars)
1950-1973: 4.1% GDP per capita growth.
4.6% real GDP growth
Japan growth between 1950-1973
1950-1973: 8.1% GDP per capita -> above world trend -> Abramovitzian elements of growth -> social capabilities for technological catch-up.
Leisure between 1950-1973
Hours worked per person (not worker) decreased in UK (-22%), Germany (-31%), France (-36%) and increased in US (+4.6%)
Indicates higher income with more leisure time ◊ output per hour increased ◊ indicates significant productivity increase.
Catch-up growth
- European nations lag behind US:
- Post-war US technology lead allowed large potential for catch-up growth of “follower” nations
- Physical and human capital destruction of war in Europe more severe (temporary) -> but social capabilities remain (underlying potential exists)
- But catch-up growth is uneven across Europe -> UK not catching up, while continental Europe thrives -> suggests catch-up growth is less important.
- Larger the gap between leader and followers: more potential for catch-up:
- Countries with lowest initial level of GDP per capita relative to US (1950) -> greatest potential for catch-up growth
- Negative relationship between initial level of per capita income and subsequent growth
- Spain: 75% lower than US (1950) -> 6% growth (1950-73)
- Germany: 60% lower than US (1950) -> 5% growth (1950-73)
- Germany: performed better than predicted by catch-up model -> “Wirtschaftswunder”
- UK: only 30% lower than US (1950) -> 2% growth (1950-73)
- UK: did worse than predicted by catch-up model -> British relative failure
- US: 2.5% growth (1950-73)
- German impressive and UK lagging growth rates -> suggest other causes of European golden age post-war -> not just technological catch-up (played some role)
How growth occured?
Growth of inputs
Includes: Labour, capital, education (human capital) and other inputs.
Capital was the most important source of TFI growth
Suggests post-war investment boom important for convergence.
How growth occured: Growth of efficency
Includes: technology transfer (catch-up), foreign trade, structural reform (shift of economy) and other
“Other sources” most important for TFP growth
Better productivity
Growth accounting between 1950-1973
- Germany -> highest GDP growth
- Most rapid TFP growth = TFP > TFI -> efficiency gains in productivity
- Capital TFI: accounted for 2% of growth
- Structural TFP higher than other regions -> 1950s labour moved out of unproductive sectors like peasant farming -> Germany maintained agricultural protectionism since 1879 (Bismarck) so retained larger share of agriculture
- US (technological “leader”)
- Growth split between TFP and TFI growth
- Education component important.
- UK (slowest growing economy)
- TFI > TFP -> sluggish TFP growth (suggests lack of innovation and dynamism)
- Suggests importance of productivity improvements
Labour productivity
- Germany, France, UK, Japan catch up with US in GDP per hour:
- Germany: 40% to 75% productivity per hour of US
- UK: 50% to 60% productivity per hour of US
- Most important factor: higher capital intensity (capital to labour ratio).
- Germany: 30% to 76% (capital/labour ratio of US) -> CONVERGENCE
- UK: 30% to 60% (capital/labour ratio of US) -> CONVERGENCE
- France and Germany also caught up with US in terms of TFP: higher efficiency gains -> not seen in UK and Japan.
- Germany: 60% to 75% (TFP of US) -> CONVERGENCE
- UK: 75% to 65% (TFP of US) -> DIVERGENCE
Avoid the mistakes of interwar years
Bretton woods
Fixed exchange system pegged to dollar – instead of 1930s return to gold
Trilemma options change -> sacrifice free capital mobility -> Allowed independent monetary policy -> increased confidence and cooperation
Avoiding the mistakes of the interwar years
Creationg of GATT
Agreement among trading partners on the reduction of tariffs and other trade barriers -> succeeded by WTO.
Institution to increase in trade openness and lower tariffs – instead of 1930s rise in protectionism and tariffs (Smoot-Hawley Tariff)
Members commit to MFN status -> encourage multilateral trade and reduce beggar-thy-neighbour trade policies.
Avoiding the mistakes of the interwar period
Marshall plan
Instead of 1930s isolationism and Treaty of Versailles
Encouraged economic integration between nations -> precursors of European Union, trade between France and Germany (ECSC)
Aid offered by US aiming at reconstruction of Western Europe -> $13 billion provided in form of grants and commodities (0.5% of recipients total GDP)
Conditions attached important: balanced budget, financial stability, stable exchange rates -> facilitate more trade, competition and market based economy
Indirect effects more important: contributed to financial stability, free market forces strengthened, enabled domestic social contract (made investment returns more profitable).
Avoiding the mistakes of the past
Keynesian demand management
Government intervention compared to 1930s lack of counter-cyclical economic policies.
Active role of dampening boom and bust
Commitment by governments -> encouraged new willingness for firms and workers to be less confrontational -> wage moderation and social contracts reinforced
Why growth occured: Government intervention
Government provision of service -> raise expected returns to private investment to complement wage moderation -> e.g. infrastructure
But: requires taxation for financing -> taxation can reduce incentives and returns to investment
Non-consumption taxes in Europe averaged 19% of GDP.
Effect of 10% tax rise on growth in OECD countries: 0.5% to 1.3%
But: risk of crowding out of private sector (adverse effect)
Government spending (% of GDP) increases everywhere: Germany: 15% to 50%, France: 20% to 55%, UK: 13% to 40%
Government purchases (more productive) or transfers (redistribution of income ◊ incentives reduced)
Government redistribution (Transfers as % of GDP)
1937: Low government transfers worldwide
1960-80: Germany 20% to 25%, France: 13% to 30%, UK: 10% to 15%
Less efficient as reduces incentives for workers -> but useful to allow agreement (Social contracts and cooperation between workers and firms)
Keynesian demand policies scarcely used over Europe (outside UK, a relative failure) in 1950 -> less significant factor.
Improved trade and technology flows
Tariffs falling under GATT (General Agreement on Trade and Tariffs) to 7% by 1987
Boosted growth of world trade, intra-European trade growth and integration.
Tariff cuts through several rounds -> differing levels of success.
US tariffs: fell 35%
German tariffs: fell 70%
UK tariffs: fell 67%
Trade grew faster than GDP -> in contrast to interwar period -> allowed national restructuring along export-oriented lines -> fuller exploitation of comparative advantage enhancing investment profitability -> complementing social contracts.
Direct impact less significant but provided important reference about direction of trade policies and cooperation attitudes -> preventing protectionist tendencies and protect commitment to openness.
Western European exports grew 9% per annum during 1950s and 60s
European payment union
Reduce opportunity cost of trading -> enabled currency convertibility allowing multilateral trades in Europe
Trades and liabilities not between individual countries but whole union -> made identity of trading partner less important.
Relied upon $350 million of Marshall Aid -> Reduced likelihood of debtor nations reneging on commitment to openness.
Participants required to increase share of quota-free trade to 90% by 1955
Value of intra-European trade increased from $10 billion to $23 billion (1950-59) under EPU
Transfer of best-practice technology
MNCs and regional integration helped transfer -> encouraged catch-up growth
Lower barriers to trade and investment -> US firms invest abroad (FDI flows) -> New US owned manufacturing operations in UK per year increased to 25 per year from 5 (1930-1948) -> spread of best practice technology
Common market makes Europe more suited to mass production -> large-scale investment.
Wealthier Europe -> larger market size -> economies of scale and specialisation possibilities.
Reasosns for growth: Social contract
- Domestic consensus between workers and capitalists about wage moderation allowing re-investment of profits (instead of dividend payouts)
- Explicit or implicit economy-wide deal between labour and capital to allow wage moderation in exchange for investing profits to encourage productivity growth and higher future incomes.
- Workers agree to wage moderation -> extra profits channelled to investment -> investment strategy encourages productivity growth -> wage increases in future
- Stimulated demand for investment by making it more profitable and stimulated supply by making available the profits to finance.
- Institutions prevented a non-cooperative equilibrium (prevent reneging) -> to provide commitment mechanisms:
- Workers monitoring investment decisions e.g. 1951 Co-Determination Law allowing labour representatives on boards of 100 firms.
- Creation of bonds lost in event of reneging e.g. Belgium social security in return for labour adherence to 1944 Social Pact.
- Centralised negotiations meant wage determination occurred economy-wide -> meant individual firms’ investment decisions less significant.
- Not seen in UK and Ireland
- Intense wage pressure limited profits -> investment and growth rates relatively disappointing during 1950s.
German Wirtschaftswunder (Economic Miracle)
- Immigration from East Germany and Eastern Europe -> increase in TFI (labour inputs)
- Social contracts and industrial relations
- e.g. 1951 Co-Determination Act
- Large and organised unions
- Effective vocational education -> investment in human capital.
- Market friendly policies -> competition oriented growth of small firms.
- European integration encouraged -> European Coal and Steel Community -> guaranteed access to French iron ore in Lorraine.
