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The slow growth of GDP and productivity in the Single Market 1993-2013

From the beginning, EU membership was supposed to improve UK productivity. There is no evidence that it has ever done so, for the UK or anyone else


One of the main aims of the UK when joining the Common Market was to raise the level of productivity to equal that of its six founder members.[1]

… the Government are confident that membership of the enlarged Community will ‘lead to much improved efficiency and productivity in British industry.[2]

One of the main goals of the Single Market was to improve the productivity of the labour force in member countries. In 1988 the Cecchini report, its founding charter, predicted GDP gains of up to 6.5 or 7 per cent over five or six years, and confidently referred to the productivity gains that would follow the creation of a Single Market.[3]

Somehow or other these predictions have been forgotten and hence when the problem of the UK’s low productivity made a brief appearance in the headlines in the autumn of 2015, no one considered it might be a part of the EU debate or asked why membership didn’t deliver the promised and predicted increases. It had somehow become an exclusively British problem.

World Bank data on real GDP growth per capita in $US (2005) over the 21 years, 1993-2013, shown in Figure 24.1, compares the 12 founder members of the Single Market with 10 independent countries, consisting of nine OECD members plus Singapore. The three of these OECD countries in Europe – Switzerland, Norway and Iceland – are also shown separately. It may be seen that real growth of GDP per capita, or productivity, of the founder members of the Single Market has been slower than both.

Chapter 24 - graph

Table 24.1 gives the CAGR of individual countries over the period, and the weighted means of both groups. Only three member countries, Ireland, Luxembourg and the UK have exceeded the mean growth rate of the ten other OECD countries.

Chapter 24 - table 1On several occasions the Commission staff report of 2007 referred to the lagging productivity growth of member countries compared with the US. The OECD database provides an updated measure of this productivity gap, by showing, in percentage terms, how far the productivity of each member country falls short of, or exceeds, that of the U.S. This data uses the more familiar measure of productivity as output per member of the labour force, or per hour worked, rather than per capita. Table 24.2 shows how the gap has narrowed or widened over the 21 years, 1993 to 2013.

One member country, Luxembourg, had no productivity gap with the US in 1993, though in comparisons of industrial productivity, as in other respects, it bears more resemblance to an Offshore Financial Centre (OFC) than to a normal industrial economy. Three other member countries have seen the gap narrow: Ireland most strikingly, Portugal by over five percentage points, and Denmark by nearly three points. The other eight member countries, which include the larger EU economies, have all fallen back in terms of productivity versus the US, most by rather small amounts, though Belgium by more than 13 points, Italy by more than 11, and the UK, the third largest decline, by six.

None of this evidence suggests that the Single Market programme has had a distinctive and positive impact on productivity which has been shared by its members, but then there has been no regular analysis of productivity within the Single Market, or why it has fallen short of Cecchini’s predictions. It seems to have been just one more of those predictions which has served its purpose once pronounced and used to justify further policies, regulations and directives.

Overall, the wide variations among member Chapter 24 - table 2countries suggest that the determinants of productivity growth may have rather little to do with Europe or the Single Market, and that they are peculiar to the economic, political and cultural context of each nation. Members’ results are no less varied than those of non-member countries. Among non-members, decisive gains were registered by Norway (+27), Korea (+17.8), and Chile (+15.2). Others, such as Switzerland (+1.4) and Australia (0) remained much the same, while New Zealand (-2.9) and Canada (-8.9) both declined.

A further hope, and prediction, of the founders of the Single Market was that as member countries became more integrated they would also become more alike; partly as a result of normal competitive pressures, and partly because they would learn from their fellow members and adopt the best practice found amongst them. This idea recurs frequently in the Lisbon Treaty.[4]

The variance of these measures of productivity gives little support to the idea that member countries have become more alike, and that their productivity has converged. In the first measure, growth of GDP per capita, in $US (2005) the standard deviation was 7,910 in 1993, whereas in 2013 it had risen to 11,964.

By the second measure, the percentage distance from the US productivity, there was a marginal convergence among member countries. In 1993 the mean gap with US productivity was -12.7%, and by 2013 had increased to -13.2%, but the standard deviation of the percentage differences from the US was 24.9% in 1993, and 23.5% in 2013.

Notes

[1] HM Government, The United Kingdom and the European Communities, (White Paper, Cmnd 4715, 1971)

[2] HM Government, The United Kingdom and the European Communities, (White Paper, Cmnd 4715, 1971), p.16

[3] . ‘Commission of the European Communities’, ‘Europe 1992: The Overall Challenge’, Brussels, 1988, Paolo Cecchini et al., SEC (88)524. http://aei.pitt.edu/3813/.

[4] See for example the frequent references to the ‘organization of exchange of best practice’ in the Treaty of Lisbon, pp c306/82, 83-84, 86, 150, Official Journal of the European Union C306, (Volume 50, 17 Dec 2007).


 

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