Economic Growth and Development:

A 20th Century Perspective

Lecture 1
Introduction

Dr Matthias Morys
Overview (from Toniolo 1998)
 1950-1973
• Acceleration of growth (not only in Europe)
• Full employment
• Low inflation
• Trade grows faster than output
• Intra-European trade grows faster than
world trade
• But (?): capital controls
 Characteristics of the 1970s growth
slowdown
• Golden Age = growth rates of real GDP/person: 3.8%
(Germany, Italy: 5.0%; France: 4.0%; UK: 2.5%) combined with
high investment rates, relatively low unemployment, and low
inflation

• Growth rate: 1973-9 : 2%, in 1979-90: 2.6%

• Investment rates: declined by 3% for the whole
business sector
• High Unemployment:
• High Inflation: early ‘70s:7%, 1974-75:over
13%, 1979: 10%
•  stagflation
 Explanations for Golden Age

• Catch up and social capabilities

(Abramovitz, Wright and Nelson)
• Structural change (Temin)
• Institutions (Olson, Eichengreen)
 Catch up in Europe I
7

5
Rate of GDP cap growth 1950-70

0
1000 2000 3000 4000 5000 6000 7000 8000 9000 10000
GDP per capita in 1950
 Catch up in Europe II
• By 1950, huge productivity lead of US over
Western Europe
• Better technology and better human
capital.
• Mass production
• Catch up in Europe linked to openness
(economies of scale are necessary)
 TFP growth (from Nick Crafts)
• France: 5 % GDP growth p.a.
– Growth of K stock explains 32 %
– Increases in labour force: 6 %
– Residual / TFP: 62%
• UK GDP: 3 % p.a.
– K: 53%
– L: 7%
– TFP: 40 %
• West Germany GDP: 6 % p.a.
– K: 37 %
– L: 8 %
– TFP: 55 %
 Openness
• Rapid trade liberalization in manufacturing
(not in agriculture).
• Tariff barriers fell (non-tariff barriers?),
within Europe and between Europe and
rest of the world.
Temin: Golden Age is exceptional in
• Potential for growth is huge because of interwar
years and WW2, no convergence
• Protection of agricultural incomes plus disruption
of trade during the interwar years generates
disequilibrium in the industrialization of
European countries, while US keeps pushing
outwards the technological frontier. European
countries keep agricultural employment at too
high a level given their level of development.
Large potential benefits of just re-allocating
resources.
Temin II: growth rate, initial share of
labour force in agriculture
Institutional explanations (Olson, Eichengreen)

• Olson and organized interests (unions and

employers’ associations).
• Eichengreen (social contract)
– Commitment mechanism exists whereby
• Firms commit to high investment (instead of
distributing profits)
• Workers commit to restrain wage demands, ie
commit to not capturing the rents of high
productivity
How to achieve Eichengreen’s social contract?

• Workers’ participation and informational asymmetries.

German co-determination model.
• Interaction of catch-up and sustainability of cooperative
arrangements. Both sides incentives to defer current
compensation for future gains.
• Breaks down in late 1960s
• If catch-up sustains co-operation, then institutions cannot
be an explanation.
• See them as complimentary factors reinforcing one
another.
Reasons for slowdown after 1970s
(1) catch-up potential was undermined by 1970s
• reasons for American lead had not completely eroded
(importance of natural resources + more standardized
consumer’s taste)
(2) reversal to trade liberalisation: imposition of non-tariff
barriers to trade
(3) breakdown of Bretton Woods
• loose US monetary policy in the wake of the Vietnam
War ( demand inflation) and the First Oil Price Shock
• floating exchange rates create a vicious circle of inflation
in some countries (eg, Italy)
(4) economic crisis of 1973
• retaliation of the oil producing countries for the support
of Western countries to Israel in the Yom Kippur war
• “catalyst which sparkled off the crisis” (Boltho)
• oil prices rose from autumn 1973 to spring 1974 400%
 bop-problems
• wages pushes
(5) expensive raw materials in general
(6) competition with East Asia
(7) breakdown of the social contract
• labour supply comes to an end  conditions of
almost full employment improve the trade
unions’ position  wage explosions (France:
1968; Italy: 1969; Germany: 1970)
• strikes reappear
• wages explosions can be passed on in the form
of higher prices only to a certain extent  lower
investment rates
(8) end of structural change
(9) no further enlargement in social
competence
(10) rising share of government consumption
(11) service sector has slower productivity
growth relative to the manufacturing
sector
(12) reduction of hours worked per person