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Where will economic growth come from
 

Where will economic growth come from

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    Where will economic growth come from Where will economic growth come from Presentation Transcript

    • Where will growth come from?
      Notes from lecture given by Prof John Van Reenen (LSE)
      Spring 2011
    • A ‘V’ shaped recovery ... For now
    • Recent growth experience
      A 6.5% decline in real GDP during the first 12 months of the recession – a decline of 1930s dimensions
      But the subsequent recovery (of sorts) puts the recent UK recession on a par with of that the early 1980s
      The coalition’s fiscal austerity program is the biggest budget cut since WWII
      Austerity plan is to reduce deficit by 7% of GDP by 2015-16 with much of the pain front-loaded to 2011-12
      George Osborne believes we don’t need a plan B but Van Reenen argues that we need a Plan V if trend growth is to be sustained
    • Damaging effects of recession
      Has there been a permanent fall in output?
      Lots of uncertainty about this and the size of the output gap
      Loss of output could be anywhere between 2-10% of GDP
      Trend growth rate will have diminished – 2% may be the new normal for the UK due to hysteresis effects:
      Scrapping of human capital / people leaving the labour force
      Long term unemployment now 1/3rd of the total
      Scrapping of fixed capital / steep decline in capital spending
      Increased risk aversion of the financial system
      Micro policies of the Coalition may also be undermining trend growth e.g. Universities and immigration caps
      But recession and business shake-out may have lifted efficiency
    • A fall in trend growth estimates
    • And high long term unemployment
    • Investment and Productivity
    • Fiscal austerity & public sector jobs
    • Relative international performance
      Using data for % annual change in GDP per capita from 1997-2010
      The UK does not come out too badly!
      UK 1.19%
      USA 1.05%
      Germany 1.03%
      Japan 0.77%
      Improved employment rates have helped
      But key in the long run is higher productivity from our factor inputs and productivity gap remains
    • Relative Productivity Improves
      UK remains 13% less productive than the USA measured by GDP per hour, $PPP
      There have been some improvements in overall GDP per capita in the UK
      The GDP has closed with Germany and on some measures we have now overtaken them
      Reasons:
      % of UK workers with a college degree has risen by 12% from 1997-2010 – up-skilling of labour force
      Increased intensity of competition in product markets
      Impact of foreign direct investment
      Better management practices from private equity boom
    • Productivity Improvements
    • Output per person hour
    • But Productivity Gap Remains
      1/ UK has an innovation deficit
      UK 2nd to US in terms of top scientific papers cited
      But commercialisation of innovation is weak – i.e. turning R&D into commercial patents with real value
      R&D as a share of GDP remains low and has actually fallen over the last 20 years despite many tax incentives
      Deep-rooted failures in the market for knowledge because ideas are promiscuous and the free-rider effect is hard to avoid
      2/ Weaknesses in management practices apparent
      US firms seem to use ICT more effectively in long run
      UK management is mid-table by international standards on a par with Canada, Italy & Australia
      US economy appears better at weeding out weaker firms
    • Intensity of competition does influence the quality of management
      When market competition is fierce:
      Badly run firms more likely to exit (selection effect)
      Forces badly run firms to try harder to survive in their market (effort effect)
      Family-run firms which are passed on tend to be relatively badly run
      Smaller pool of people to select CEO from
      Possible “Carnegie Effect” on future CEOs - if you know you will inherit the firm one day
      Less career incentives for non-family managers
      Might also be a lack of fundamental dynamism especially in small to medium sized family run enterprises
    • Britain needs a Plan V (Viagra!)
      Get the conditions right for long term growth
      Stronger commitment to trade and competition
      Incentivise R&D as social return is twice the private return
      Tax reforms to remove 100% inheritance tax exemptions for family businesses to encourage improved management
      Focus human capital investment at lower skilled and younger workers E.g., expanded apprenticeships
      Avoid damaging migration caps and removal of teaching subsidies for universities – in a global war for talent
      Focus on sector growth in industries where competitive advantage can be successfully nurtured and exploited. Namely...healthcare, niche manufacturing, green energy, universities, bio-pharmaceuticals, creative industries
    • What else would you want to put into Plan V?