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The UK's relative economic performance has improved dramatically over the past 25 years, according to new ESRC-funded research by Cliff Pratten of the University of Cambridge. His comparison of the UK and Swedish economies since the mid-1970s shows that the UK has closed what was a huge performance gap. And the key driving forces behind this 'economic miracle' have been North Sea oil, the City and foreign investment. At the same time, Government policy and recessions have reduced the drag on performance of difficult labour relations, and encouraged inward investment and a resurgence of small and medium-sized enterprises.
As Pratten noted in a similar comparative study he conducted in the mid-1970s, then Sweden combined a highly successful industrial economy with a pioneering welfare state. Now it is interesting from a different perspective: is the deterioration in Sweden's economic performance relative to the UK's attributable to differences in economic policies pursued by Swedish and UK Governments? Pratten concludes that the extent to which the UK has caught up suggests that the Swedish experiment was a handicap for the Swedish economy and the Thatcher experiment did improve the UK economy.
Comparing macroeconomic performance
The usual way of comparing the output of economies is based on GDP per head converted to a common currency using Purchasing Power Parities (PPPs); the performance of economies through time can be compared using rates of growth of real GDP. According to PPP comparisons, Sweden's lead over the UK in 1972 in terms of GDP per head was 13 per cent; by 1998, the difference was one per cent. But these comparisons are an inadequate summary of the performance of the two economies. In 1972, Swedish GDP per head converted atcurrent exchangerates was 63 per cent above the UK level; by 1998, this difference had shrunk to 13 per cent.
The obvious implication is that Swedish prices fell relative to UK prices. But changes in prices alone are an inadequate explanation. One explanation is the improvement in the quality of manufactures produced in the UK, which should be reflected in output data but are notoriously difficult to measure. At the same time, there was a reverse movement in Sweden: in 1972, many Swedish firms were able to charge premium prices for the quality of their products. The introduction of Japanese and Korean competition in important industries for Sweden - shipbuilding, cars, bearings, steel - was one factor lowering the quality premium for Swedish products.
The important point is that changes in prices are not simply a veil drawn over changes in output. To assess fully the performance of economies, it is necessary to consider the explanations for changes in relative prices. And the relative improvement in the UK economy's performance was greater than the usual measures show. At the same time, changes in the terms of trade, which were related to the movement in prices, made a significant contribution to the difference in the growth of household consumption, which rose by 84 per cent in the UK between 1975 and 1998 and by only 28 per cent in Sweden.
Comparing corporate and labour relations performance
In any one year, only a small proportion of UK companies is taken over. But over 25 years, the attrition is surprising: less than a quarter of the UK quoted companies in Pratten's 1975 study were independent quoted companies in 1998. One driver for many of these changes of ownership was managers' quest for larger scale and to increase control of their markets. With the advantage of hindsight, it is clear that some of the acquisitions did not achieve the expected results. Inevitably, there is uncertainty about the effects of proposed mergers - managers experiment and make some mistakes. Another explanation may be the pervasive stock market under-valuation of the shares of industrial companies and particularly the shares of many smaller industrial companies, which is partly caused by biases in the UK tax system.
Pratten's new study compares the performance of pairs of UK and Swedish companies in terms of survivorship and growth. (Where firms had been taken over, the acquirers were included.) The Swedish companies win in the ratio of nearly two to one, a result that is not surprising because in 1975 the Swedish companies were more integrated into the international economy than the UK companies. In addition, the UK companies have had to contend with a rising real exchange rate.
From the Swedish perspective, the Swedish companies have had much higher labour costs. In the UK, there have been revolutionary changes in labour relations in the past 25 years. Union membership has collapsed, few days are now lost because of strikes and in most industries, centralised bargaining has been replaced by factory-based negotiations. In Sweden, union membership has held up and bargaining is still centralised, though with a greater element of local flexibility. Nevertheless, Swedish managers reported that there have been substantial changes in labour relations. One interesting feature of the changes in labour relations is that in both countries, improvements followed deep recessions.
The structure of boards of directors in the two countries is now similar. UK companies still have unitary boards in contrast to Swedish companies, which have supervisory and management boards. But the number of internal directors and retired internal directors on UK boards has fallen and the external directors, who are more numerous now than in 1975, perform a similar role to Swedish supervisory boards.
For further information, contact Cliff Pratten on 01223-335200, fax: 01223-335299; or email: am225@econ.cam.ac.uk.
Or Lesley Lilley or Karen Emerton, External Relations ESRC, on 01793 413119/413122.
Notes for Editors
1. The research report 'A New Comparison of the Performance of Swedish and UK Companies' by Cliff Pratten was funded by the Economic and Social Research Council (ESRC) as part of its 'Understanding the Evolving Macroeconomy' Research Programme. Cliff Pratten is in the Department of Applied Economics at the University of Cambridge.
2. The ESRC is the UK's largest funding agency for research and postgraduate training relating to social and economic issues. It has a track record of providing high-quality, relevant research to business, the public sector and Government. The ESRC invests more than £46 million every year in social sciences research. At any time, its range of funding schemes may be supporting 2,000 researchers within academic institutions and research policy institutes. It also funds postgraduate training within the social sciences, thereby nurturing the researchers of tomorrow. The ESRC website address is www.esrc.ac.uk.