Barclays Wealth Blog
Death by Labour?

Incoming economic data tells us that the UK is being left behind by an increasingly vibrant global economy. The IMF forecasts, released this week, are among those suggesting that this gap will widen in coming quarters and years. For its part, the UK economy seems to be sagging under the gathering effects of last year’s EU referendum vote. Meanwhile with the electorate mulling a lurch to the left, many are asking whether the UK is in the process of voluntarily returning itself to the state of relative decline it endured from the end of the Victorian era? A more pertinent question may be: how much of that relative decline, and its subsequent arrest at the end of the 1970s, can be attributed to changing political ideologies?

History

By the turn of the millennium, real GDP per person in the UK was more than six times the 1870 level. Someone born in 1870 could expect to live to the early forties, while a child born today could expect to live past his/her eighties. These bald statistics mask an incredible equalisation of personal welfare too. Back in 1870, the wealthy would expect to live for many more years than the poor. Now, in the 21st century, life expectation has become more equal across the income distribution. However, in spite of these dramatic improvements, the UK has spent much of this intervening period underperforming its competition, both near and far.

Some of this underperformance was unavoidable – the US overtook Britain, in terms of output per head, in the years running up to World War I – a surely inevitable byproduct of the vast advantages in raw materials per head which the US enjoyed. However, the UK also underperformed its European peers throughout the post-war decades, up to and including at least some of the 1970s. The earlier part of this underperformance can perhaps be explained by the UK starting from a higher initial level of income and productivity. However, the fact that the economy continued to lag behind its European peers even after being overtaken, hints at a more avoidable period of relative decline, one that is central to the debate on the path ahead today.

What part did politics actually play?

The temptation to commandeer chunks of economic history to support one particular ideological leaning or other is of course strong. However, the real world is routinely messier, with politicians often in yoke to the underlying economy and its pre-existing idiosyncrasies and eccentricities, rather than the other way around. Admittedly, some of the UK’s poor productivity growth during this post war period can be chalked up to the nationalisation of industries in the immediate aftermath of World War 2 by the Attlee labour government. There can be little doubt that this curtailed innovation and competition within those industries. During this time, the state also certainly had an unhealthy tendency to try and fine tune the economy, a lingering legacy of the necessities of the wartime economy. We can now see more clearly that such meddling served to destabilise the economy by accentuating, rather than attenuating downswings.

However, other, more structural, flaws played an equally significant, if not dominant, role. For example, cartelisation, which had proliferated during the 1930s and 1940s, characterised the greater part of the manufacturing sector. Inefficient plants and businesses were kept alive, leading to poor productivity growth as the incentives to innovate were diluted. This absence of competition in much of the economy was further reinforced by the legacy of inter-war protectionism and the UK’s initial refusal to join the European Economic Community (EEC), prompting British firms to concentrate their exports on the less competitive Commonwealth markets.

Accompanying all this, UK industrial relations had become increasingly dysfunctional. Britain entered the post-war era with an unreformed system characterised by multiple unionism, craft-control, legal immunities for trade unions and plant bargaining with shop stewards. Disproportionately powerful trade unions, amidst the full employment of the era, contributed to an inflexible and expensive workforce, which itself acted as a serious deterrent to investment and innovation.

It is worth noting that these structural factors were present under both Conservative and Labour parties throughout the post-war years, and they can (and do) exist in nations that are governed under all shades of the political spectrum.

Thatcherism to the rescue?

The supply-side policies implemented by Margaret Thatcher’s Conservative government between 1979-1990 were certainly helpful in reversing the UK’s relative decline. With a sweeping range of policies which included reforming industrial relations, privatising state-owned businesses, encouraging foreign investment and deregulating the economy. It is clear that supply-side reform stimulated much needed competition among British industries, leading to higher productivity growth. By the end of the 20th century, UK income levels had surpassed those of its European peers, thus putting an end to economic decline.

However, it is important to note that Thatcherism wasn’t the only reason for this turnaround. The UK was already opening its markets up to foreign competition before Prime Minister Thatcher came to power, with its entry into the European Economic Community (EEC) in 1973. Some plausibly argue that the UK’s EEC membership, and the faster productivity growth brought on by greater competition from more technologically advanced European firms, was the dominant factor in ending the UK’s relative economic slumber.

Investment conclusion

Grand historical shifts are more often than not the product of multiple interacting variables, rather than a single overriding cause. Britain’s relative economic decline and revival throughout the post-war years is a good example. Previous drags on UK economic performance had arguably less to do with the reigning political ideology of the time, and more to do with long-standing institutional flaws within the economic structure itself. Similarly, the cure to Britain’s decline was rooted in greater competition, something that can (and should be) implemented by any political party straddling either side of the political divide.

More importantly, elections are difficult to forecast (as Brexit and President Trump has shown), even by the experts. Guessing at the resulting policy changes is obviously even harder, complicated by the various constitutional defences the developed world democracies have sensibly erected in the aftermath of the Second World War. This should leave us wary of attempting to make tactical investment trades based on whichever party comes to power here in the UK. As always, the most efficient bulwark against incompetent governance is through diversification across different geographical regions, not by peddling our questionable abilities as armchair political strategists.

Brexit
UK economy
Economics

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