Academic journal article National Institute Economic Review

Britain's Productivity Gap with the United States Abd Europe: A Historical Perspective

Academic journal article National Institute Economic Review

Britain's Productivity Gap with the United States Abd Europe: A Historical Perspective

Article excerpt

Since the mid-1990s, an almost universal belief has developed amongst economic commentators that the United States has undergone a productivity miracle and that European economies are now suffering from chronic sclerosis. As a result, the 'American model' dominates the agenda of policy towards growth and productivity performance in Britain. This paper urges caution here, given the disappointing experience of earlier British growth policies based on borrowing from the fashionable economy of the moment, including the Japanese and German economies during the 1970s and 1980s, and the American economy (again) during the 1950s and 1960s. A historical perspective suggests that: (I) successful productivity performance requires a stable institutional framework for long-term investments in human and physical capital, which the European model has been particularly good at providing over the last half century; (2) a country is constrained by its geography, so that copying without adaptation to local circumstances is rarely a good policy; (3) it is important to pay attention to the different sectors of the economy when formulating policy.

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"It is but too clear, then, that on all hands England's industrial supremacy is tottering to its fall, and that this result is largely German work." (Williams, 1896, p. 44.)

"Another striking feature [of manufacturing establishments in the United States] is the admirable system everywhere adopted; ... this applies not only to the selection and adaptation of tools and machinery, and to the progress of the material through the manufactory, but also to the discipline and sobriety of the employed." (Report of the Committee on the Machinery of the United States of America [1855], reprinted in Rosenberg, 1969, p. 193.)

"Comparison of the available indicators of science and technology activities confirms the astonishing Japanese progress over the past 30 years in comparison with both Europe and the United States." (Freeman, 1987, p. 2.)

"If British productivity were as high as American, many (indeed most) of Britain's domestic economic problems would disappear." (Hutton, 1953, p. 18.)

"In recent years many observers have charged that American industry is not producing as well as it ought to produce, or as well as it used to produce, or as well as the industries of some other nations have learned to produce. If the charges are true and if the trend cannot be reversed, then sooner or later the American standard of living must pay the penalty." (Dertouzos et al., 1989.)

"[W]e may point to the superior natural resources of the United States or to freedom from legislative restrictions; but Germany has no such superior resources or freedom from restrictions ... By taking both [countries] we are saved from such fallacies." (Shadwell, 1906, p. 447.)

1. Introduction

The above quotes illustrate the hazards of fixing on a single country to emulate in formulating policy on economic growth. Countries fall in and out of fashion, and features identified as the secret of success in one country can be shown to be absent in other successful countries. Nevertheless, since the mid-1990s, the United States has been held up by most economic commentators as the model to emulate in policy on productivity performance, with a particular emphasis on the diffusion of ICT in the 'new economy' (HM Treasury, 2000; Baily and Kirkegaard, 2004; McKinsey Global Institute, 2002; OECD, 2003). Before that, Germany and Japan were popular models with an emphasis on 'flexible production' and 'welfare capitalism' but these countries are now widely regarded as failing (Freeman, 1987; Dore, 2000). It is perhaps less well known that the early postwar period also saw a productivity drive based on the emulation of an earlier US model (mass production). Furthermore, such cycles in fashion have not been restricted to the post-1945 world. Exhortations to follow the German model after the 'Made in Germany' scare of the late nineteenth century were hastily reversed after the First World War, albeit more for political than economic reasons (Williams, 1896). …

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