how to make western economies more competitive fourth gresham lecture douglas mcwilliams mercers...

How to make Western economies more competitive

Fourth Gresham LectureDouglas McWilliams

Mercers School Memorial Professor of Commerce at Gresham College

Centre for economics and business research ltd

Unit 1, 4 Bath Street, London EC1V 9DXt: 020 7324 2850 f: 020 7324 2855 e: [email protected] w: www.cebr.com

© Centre for economics and business research ltd, 2013 2

To discuss economic policies necessary to prevent the Western world falling into a competitiveness trap

Discuss in the UK context but conclusions applicable not only to the rest of Western Europe but also to other Western economies like the US

Objective


The earlier lectures

The new theory of economic growth

Exchange rate policy

Competitiveness policy

Counter inflation policy

The economic payoff

Overview


The ‘supercompetitiveness’ of the emerging economies;

The continuing shift in the terms of trade in favour of primary products and away from finished goods and services; and

The likelihood that overall world economic growth will be constrained because of limits from the lack of natural resources, meaning that some of the enhanced economic growth in the emerging economies will be at the expense of lower growth in the mature economies.

Key points from the earlier lectures


Economic growth is not simply a function of supplies of factors but is constrained by demand

Demand is particularly affected by the balance of payments position

Demand is also limited by inflationary tendencies – for example though its impact on the exchange rate

Factors of production are endogenous

The new growth theory


Three critical elements of policy

• Exchange rate policy

• Competitiveness policy

• Counter inflation policy


The 2020 Tax Commission’s proposals were estimated to boost GDP by 10% after 17 years

Impact on GDP compared with base case (%)


The City’s impact on the balance of payments current account

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Insurance balance 1,959 2,905 4,843 4,649 4,134 661 2,853 4,068 4,475 4,634 3,704Financial services balance 13,048 15,107 15,159 16,875 18,812 20,153 24,495 34,302 41,597 35,550 31,495Investment income 1,813 9,359 18,436 17,711 18,523 22,496 10,470 22,103 33,851 20,656 23,039TOTAL City balance of payments 16,820 27,371 38,438 39,235 41,469 43,310 37,818 60,473 79,923 60,840 58,238

£ millions per annum


Cost of living compared with the US – IMF data

Afghanistan 47.9

India 40.8

China 64.3

Russia 61.6

Greece 98.1

Korea 74.1

Spain 99.4

Italy 109.7

Japan 133.9

France 121.1

UK 109.4

Germany 111.4

Australia 153.8

Canada 124.5

Ireland 116.6

US 100.0

Singapore 75.7

Norway 158.5


Cost of living in the UK compared with the OECD average

Source: OECD

Actual individual consumption (2) 111Food and non-alcoholic beverages (3) 105Food (4) 105Bread and cereals (5) 96Meat (6) 123Fish (7) 76Milk, cheese and eggs (8) 98Oils and fats (9) 95Fruits, vegetables, potatoes (10) 120Other food (11) 95Non-alcoholic beverages (12) 116Alcoholic beverages, tobacco and narcotics (13) 156Alcoholic beverages (14) 122Tobacco (15) 211Clothing and footwear (16) 103Housing, water, electricity, gas and other fuels (17) 118Household furnishings, equipment and maintenance (18) 106Health (19) 96Transport (20) 131Personal transport equipment (21) 108Communication (22) 97Recreation and culture (23) 114Education (24) 108Restaurants and hotels (25) 112Miscellaneous goods and services (26) 115

Actual individual consumption (2) 111Food and non-alcoholic beverages (3) 105Food (4) 105Bread and cereals (5) 96Meat (6) 123Fish (7) 76Milk, cheese and eggs (8) 98Oils and fats (9) 95Fruits, vegetables, potatoes (10) 120Other food (11) 95Non-alcoholic beverages (12) 116Alcoholic beverages, tobacco and narcotics (13) 156Alcoholic beverages (14) 122Tobacco (15) 211Clothing and footwear (16) 103Housing, water, electricity, gas and other fuels (17) 118Household furnishings, equipment and maintenance (18) 106Health (19) 96Transport (20) 131Personal transport equipment (21) 108Communication (22) 97Recreation and culture (23) 114Education (24) 108Restaurants and hotels (25) 112Miscellaneous goods and services (26) 115

OECD average = 100


Inhabitants per km2South Holland (NL) 1,254North Holland (NL) 1,008Utrecht (NL) 887 Zug (CH) 535 Basel-Landschaft (CH) 527North Rhine-Westphalia (DE) 524Limburg (NL) 522Noord-Brabant (NL) 499Flanders (BE) 462Aargau (CH) 430South-East (UK) 425West Midlands (UK) 410Saarland (DE) 398Overijssel (NL) 341Yorkshire and the Humber (UK) 327Solothurn (CH) 320Baden-Württemberg (DE) 301

Regional population density, the Netherlands, Switzerland, Germany, Belgium and the UK

Sources: ONS (2006), Centraal Bureau voor de Statistiek (2011), Statistische Ämterdes Bundes und der Länder (2011), Research Centre of the Flemish Government(2011), Bundesamt für Statistik (2009)


The gains from a counter inflation policy

• Prices lower by 8%

• Real income gain of £2,000 per household

• GDP 15% higher after 10 years

How to make Western economies more competitive

Fourth Gresham LectureDouglas McWilliams

Mercers School Memorial Professor of Commerce at Gresham College

Centre for economics and business research ltd

Unit 1, 4 Bath Street, London EC1V 9DXt: 020 7324 2850 f: 020 7324 2855 e: [email protected] w: www.cebr.com

how to make western economies more competitive fourth gresham lecture douglas mcwilliams mercers...

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