1. The Changing Place of Britain in the World Economy: a Long-Term Perspective Nick Crafts Leverhulme Globalisation Lecture, University of Nottingham, November 19, 2008

2. Themes Relative Economic Decline De-Industrialisation Regional Disparities Adjusting to Changing Comparative Advantage Policy Implications

3. Real GDP/Person UK/USA UK/West Germany UK/France 1870 130173170 1913 93135141 1950 73162132 1979 708688 2007 75109104

4. Relative Economic Decline Was most apparent from the 1950s through the 1970s Was associated with a period of protectionism and weak competition Has possibly been reversed in the recent past Britains time as the workshop of the world has gone; de-industrialisation is a fact of life and there is a new international division of labour

5. Shares of World Manufacturing Production 18801913195519732007 UK 2314853 China 1242411

6. Shares of World Manufactured Exports 18801913195319732007 UK 38271874 China 0.60.711

7. De-Industrialisation Common experience of advanced economies and has been continuous in Britain since the late 1960s Reflects income elasticities of demand, productivity growth, comparative advantage and trade policy Accelerated with move away from high tariffs and then Thatcherism Structure of employment has changed greatly over the long run

8. Employment Shares (%) 1911195119792008 Agriculture 11.86.42.80.9 Industry 44.144.537.015.9 Services 44.149.160.283.2

9. Detailed Employment Shares (1) Percent 1911195119792008 Textiles & Clothing 12.47.12.90.4 Engineering 6.711.28.62.8 Metal Manufactures 4.14.64.91.4

10. Detailed Employment Shares (2) Percent 1911195119792008 Financial & Business Services 1.13.59.221.2 Education 1.5 5.88.9 Health 0.71.75.612.7

11. Reversing Relative Economic Decline Required improved incentive structures to improve TFP and reduce NAIRU TFP gaps have been much reduced and Beveridge Curve shifts in

12. The Beveridge Curve UV1 UV2 Unemployment rate Vacancy rate

13. Reversing Relative Economic Decline Required improved incentive structures to improve TFP and reduce NAIRU TFP gaps have been much reduced and Beveridge Curve shifts in Key ingredient was increasing competition in product markets Openness in both capital and trade flows matters Realising gains from trade is important

14. Trade Exposure [(X+M)/GDP] (%) 183017.6 187040.3 191044.0 196040.0 200056.8

15. The Payoff from Globalisation (% GDP) 1830-7038.7 1870-19102.7 1910-1960-2.7 1960-200012.5 Based on similar assumptions to HMT (2003) and Bradford et al. (2006)

16. UK Comparative Advantage Has changed markedly over time Victorian staples were neither high-tech nor human-capital intensive but todays manufactured exports are often both World market share in services in now twice that in manufactures Responding to these changes requires both sectoral and spatial adjustment Agglomeration plays a key role

17. Revealed Comparative Advantage in Manufacturing: Top 3 sectors 1913193719792006 Rail & Ship Alcohol & Tobacco AerospacePharmaceuticals Textiles PharmaceuticalsAerospace Iron & SteelRail & ShipOffice Machinery Electrical & Electronic Equipment

18. Lancashire Textiles and Globalization (Leunig, 2005) Lancashire a high wage industry: 6 x India and Japan in 1910 But continued to dominate world trade (60% world market share in cottons in 1910) Unit costs lower than India or Japan even before adjusting for output quality Lancashire flourished because of agglomeration benefits..... its productivity exceeded other British locations by 33%

19. Revealed Comparative Advantage, 2006: Top 6, All Sectors Financial Services 4.68 IT Services 2.37 Communication Services 2.26 Personal, Cultural & Recreational Services 2.09 Other Business Services 2.07 Pharmaceuticals 1.84

20. Regional Implications of Globalization Contraction of tradables that lose comparative advantage hurts East Anglia (then), West Midlands (now) Growth of invisibles boosts London (then and now) and South East and East Anglia (now) Globalization undermines North West which has been in long term relative economic decline since mid-19 th century

21. Source: Crafts (2005) Regional GDP/Person (% deviation from British average)

22. Source: ONS Regional GDP/Person (% deviation from British average)

23. Source: Rice & Venables (2003) Correlations When One City has Higher Productivity Y/LSkillsWDensityHP Y/L 1++++ Skills 1+++ W 1++ Density 1+ HP 1

24. Equilibrium Regional Disparities These regional differences are consistent with an equilibrium …. no market failure Real earnings for each skill level converge quickly across regions (Duranton & Monastiriotis, 2002) Can only be eliminated if productivity gap is closed If that is impossible, best to let favoured city get bigger

25. Sub-Optimal Size of British Cities Optimal locations for big cities today different from mid-19 th century Successful 19 th century cities expanded dramatically but not allowed today; (Blackburn and Preston vs. Oxford and Cambridge) Both expansion and contraction distorted by policy interventions Key symptom of city that is too small; high urban land values

26. Death of Distance? Transport and communications costs melt away: all locations equally good, so go where labour is cheap Greatly exaggerated; ICT is rearranging geography not abolishing it Agglomeration benefits still matter a lot Offshoring offers gains from trade in services not decimation of British economy

27. Source: UBS (2008) Wage Levels, 2008 (New York = 100)

28. Source: A. T.Kearney (2007) Top 10 Offshoring Locations 1)India 2) China 3) Malaysia 4) Thailand 5) Brazil 6)Indonesia 7)Chile 8)Philippines 9)Bulgaria 10)Mexico Note: based on financial attractiveness (40%), people and skills (30%), and business environment (30%)

29. Offshoring: Evidence 14 million US service sector jobs vulnerable (96 million not) Offshoring of business services grew 20-fold in 5 years to 2007; typical cost saving 20%- 40% Offshoring works for routine activities where performance is easy to verify and face to face interaction is not needed Payroll services, IT services, transaction processing, telemarketing etc It is win-win when markets work well

30. London as a Financial Centre Agglomeration where size matters Benefits from thick labour markets and importance of proximity for deal-making Clerical jobs will increasingly be offshored This will strengthen the core business

31. UK Asset Management: Core Business OXERA (2005) ImportanceScore Financial Infrastructure 4.003.96 Size of Labour Pool 3.964.24 Quality of Life 3.773.36 Market Liquidity 3.694.29 Regulatory Regime 3.693.40

32. UK Asset Management: Back-Office OXERA (2005) ImportanceScore Total Labour Cost 4.002.74 Size of Labour Pool 3.924.08 Flexibility of Labour Market 3.893.22 Property Rentals 3.592.11 Financial Infrastructure 3.423.85

33. Agglomeration Economies External economies of scale from localisation and urbanisation economies Increase with city size (though not without limit) Much bigger in services: financial services = 0.25, manufacturing = 0.04 (Graham, 2007) Central to British competitive advantage under globalisation Are foregone if transport inadequate or city size restricted

34. Source: Leunig & Overman (2008) Welfare Loss NW 3 NW 2 NW 1 NANA NBNB N New Net Wage Curve Welfare Loss Old Net Wage Curve A B A1A1 NW

35. Planning Laws Need a Major Re-Think UK is failing to take full advantage of the opportunities presented by globalisation Spatial adjustment is severely constrained Planning restrictions imply massive distortions in land use: housing/agricultural land values 400/1 (Cheshire & Sheppard, 2005); office space more expensive in Manchester than in New York (Cheshire & Hilber, 2008) Local Communities, especially in the South East, can and should be incentivised to want development

36. Conclusions Positive response to globalisation has been important in reversing relative economic decline Regional disparities are an inherent part of this and per se do not signal need for policy intervention Flexible adjustment to globalisation was the hallmark of 19 th -century Britain and needs to be facilitated in 21 st -century Britain