Where will growth come from?<br />Notes from lecture given by Prof John Van Reenen (LSE)<br />Spring 2011<br />
A ‘V’ shaped recovery ... For now <br />
Recent growth experience<br />A 6.5% decline in real GDP during the first 12 months of the recession – a decline of 1930s ...
Damaging effects of recession<br />Has there been a permanent fall in output?<br />Lots of uncertainty about this and the ...
A fall in trend growth estimates<br />
And high long term unemployment<br />
Investment and Productivity<br />
Fiscal austerity & public sector jobs<br />
Relative international performance<br />Using data for % annual change in GDP per capita from 1997-2010<br />The UK does n...
Relative Productivity Improves<br />UK remains 13% less productive than the USA measured by GDP per hour, $PPP<br />There ...
Productivity Improvements<br />
Output per person hour<br />
But Productivity Gap Remains<br />1/ UK has an innovation deficit<br />UK 2nd to US in terms of top scientific papers cite...
Intensity of competition does influence the quality of management<br />When market competition is fierce:<br />Badly run f...
Britain needs a Plan V (Viagra!)<br />Get the conditions right for long term growth<br />Stronger commitment to trade and ...
What else would you want to put into Plan V?<br />
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Where will economic growth come from

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Where will economic growth come from

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

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