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Economic Growth and Development Autumn Term Lecture Notes 21/22
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Economic Growth and Development Autumn Term Lecture Notes 21/22
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Economic Growth and Development: A 20th Century Perspective1. Introduction
Overview
Toniolo (1998)
The European golden age of economic growth was between 1950 and 1973 and is shown by the
annual average growth rate of GDP per capita of 4.1. It is also important to note that the other
regions also had strong growth in this period, just not as much as Europe. By the late 1940s, most
countries are back to where they were before World War II. In 1973, there were the oil price shocks
which put the global economy under substantial strain.
1960-1973
• Most European economics experienced full employment for the period 1950-1973; until the
late 1960s there was hardly any unemployment in Western Europe.
• Inflation was low; it didn’t go above 3 or 4% due to being part of a system of fixed exchange
rates (Breton Woods system).
• Post WWII there was a period of rapid trade growth. If economies grow, trade also grows in
parallel.
• A period of rapid trade growth is characterised by trade growing faster than output, which is
what we saw in the 50s and 60s: economies were growing rapidly, but bilateral trade (the
exchange of goods between two nations promoting trade and investment) was growing
faster.
• There is a difference between intra-European trade and extra-European trade (world trade)
as the former grows much faster during this period. But, world trade grows much faster than
European and global output growth during this period.
• During this period, countries could block the inflow and outflow of capital (explained later).
It was believed, until the 1930s, that capital should be allowed to flow freely, and if it didn’t,
it was something to be corrected.
Characteristics of the 1970s growth slowdown
, • During the golden age, there were growth rates of real GDP per capita of 3.8% (Germany
and Italy: 5%, France: 4%, UK: 2.5%) combined with high investment rates, relatively low
unemployment and low inflation.
• The golden age of economic growth ended in the 1970s. In 1973, oil price shocks.
• Between 1973 and 1979, the growth rate was 2%, between 1979 and 1990 it was 2.6%.
• In the 1970s, investment rates declined by 3% for the whole business sector.
• There was also high unemployment.
• There was high inflation (early 70s: 7%, 1974-75: over 13%, 1979: 10%) and stagflation
(when the inflation rate is high, economic growth rate slows and unemployment remains
steadily high, which leads to a dilemma for economic policy, since actions intended to lower
inflation may exacerbate unemployment).
• Before the 1970s, there was a belief that there was a trade off between inflation and growth
(Philips Curve). Policymakers found out in the 1970s that you can have high inflation as well
as economic stagnation (low or even negative growth) – stagflation.
• One of the features of high and rapid growth, is that counties have high savings rates which
they channel into investment by firms through the mediating function of commercial banks.
• The investment and savings rates were very high in the 50s and 60s.
• Nowadays, countries like the US and UK have hardly any saving rates which means there is
less money for investment. This may not be such a big problem today because of the
modern gig economy – less capital investment required.
Explanations for the Golden Age
• The catch-up concept: if you are economically behind, you have a bigger ability to grow,
because you can take technology, ideas, and better business practices from the leading
economies (second-mover advantage) – adopting and adapting – you can grow very quickly.
, This requires social capabilities - not everyone can use this concept. Western Europe had the
capabilities for this hence it developed fast.
Catch-up in Europe
• Inverse relationship between initial wealth levels in 1950 (GDP per capita) and rate of
subsequent growth. Relatively strong correlation.
• By 1950, there was a huge productivity lead of the US over Western Europe due to better
technology, better human capital and mass production. This is because the US was
successful in the 1920s (interwar period) in comparison with Europe and then again better
off during WWII as Europe was more heavily affected. In the 1950s, UK productivity on the
company level, stood at 50% of US levels. Which gave an enormous catch-up potential for
European economies – they imported all the technology and with their high levels of human
capital, could put it to good use.
• One of the reasons why the US was more productive was because it had a much larger
market – mass production (e.g. cars). This was then introduced in Europe – European
markets were dominated by mass production.
Total Factor Productivity (TFP) growth (Nick Crafts)
Growth accounting: growth in capital stock, in labour force and TFP lead to growth.
• France: 5% GDP growth p.a.
o Growth in capital stock: 32%
o Increases in labour force: 6%
o TFP: 62%
• UK: 3% GDP growth p.a.
o Growth in capital stock: 53%
o Increases in labour force: 7%
o TFP: 40%
• West Germany: 6% GDP growth p.a.
, o Growth in capital stock: 37%
o Increases in labour force: 8%
o TFP: 55%
• TFP growth (technology) is better than increasing capital stock and labour force as these
require importing new resources into the economy. TFP growth is growth through adapting
better technology, switching to mass production, or adopting better management
techniques, not increasing capital or labour.
• European age of growth dominated by TFP growth.
Temin: Golden Age is exceptional
• Temin argued that the European economies in the first half of the 20 th century, retained too
much labour in the agricultural sector. By the 1950s, there was so much labour
unproductively retained in agriculture. If they shifted from agriculture to industry, the
economies would grow substantially.
• Potential for growth is huge because of the interwar years and WWII, no convergence
• Protection of agricultural incomes plus disruption of trade during the interwar years
generates disequilibrium in the industrialisation 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.
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