to two decades of unparalleled rapid economic expansion after World War 2, and not just in the high-income industrialized economies. Economic historians characterize this era as the ‘Golden Age’. This economic expansion was based on a reconstruction boom, with very large investments going into repairing the damages of war, massive house-building programmes and creating the infrastructure for a new age of mass consumption, automobilization and suburbanization. This sustained economic progress was made possible by the productivity gains generated by the deployment of the Mass Production techno-economic paradigm.
However, the benefits of these stimulants to growth began to tail off. After the early 1970s, the global economic growth rate and the rate of growth in the two major economic regions (the USA and Europe) declined steadily. Figure 2.1 provides a pictorial snapshot of these post-war growth trends for the world, for the US and for those economies currently members of the European Union. The data reflect the simple average of individual economies’ growth rates, and take no account of the relative size of their economies. Eyeballing this graphical representation, three trends are clear. First, there was considerable variation between years. Second, the average growth rates of the world, the US and Europe broadly followed similar trends. Third, after 1973 the trend rates of growth declined. Given population growth this means that in recent years – on average and not taking account of the distribution of growth – there was barely any increase in per capita incomes. (In fact, as I will show in the following chapter, most of the gains from growth were reaped by the already rich. In the US, for example, real wages for the low- and middle-skilled workforce stagnated after 1979.)
Figure 2.1 The expansion of Gross Domestic Product, 1961–2018: World, US and Europe (% per annum)
Source: data from World Bank World Development Indicators
Table 2.1 decomposes these broad trends into four periods. The first reflects the high-growth phase between 1961 and 1973, the Golden Age. (In fact, the boom began during the 1950s, but a consistent database is unavailable to illustrate this.) The second period – 1974 to 1985 – was dominated by the recovery from the two oil-price shocks of 1973 and 1979. The third phase (1986–2006) was one of deepening globalization, coinciding with China’s policy of ‘Opening Out’ in 1985. This led to the unbundling of production in the high-income economies and the growth of global supply chains in China and other low-wage economies. The final period was the decade after the 2008 Financial Crisis.
Table 2.1 Average annual economic growth rates: World, US and Europe (%)
| 1961–1973 | 1974–1985 | 1986–2006 | 2007–2017 | |
|---|---|---|---|---|
| World | 5.5 | 3.2 | 3.0 | 2.6 |
| United States | 4.6 | 3.1 | 3.0 | 1.4 |
| European Union | 5.0 | 2.3 | 2.4 | 1.0 |
| China | 5.2 | 8.9 | 9.4 | 8.8 |
| India | 3.5 | 4.9 | 5.6 | 6.9 |
| Source: data from World Bank World Development Indicators | ||||
These data evidence a steady decline in economic growth rates in the US and European economies which dominated the global economy. During the Golden Age first phase, their average annual growth rates exceeded 4.5 per cent. Thereafter, they declined steadily to an annual average of around 3 per cent until 2006. After the Financial Crisis in 2008, the rate of economic growth in both the US and Europe did not even match the rate of population growth. By contrast, some developing countries, including very large economies such as China and India, experienced sustained and high rates of growth over this long time period, exceeding 8 per cent in China and 5 per cent in India for more than two decades.
2.2 What Accounts for the Fall in the Rate of Economic Growth?
Broadly speaking, economic growth arises from four sets of factors. The first is more and increasingly skilled labour; the second is more physical investment (‘capital’); the third is increased productivity as a result of improvements in equipment and in the organization of production; and the fourth is improvements in the infrastructure supporting the use of these inputs. I will predominantly focus on the first three of these growth-drivers in this chapter, but will revisit the role played by infrastructure in post-war growth in Chapter 5.
Was it a consequence of a shortage of labour?
The shortage of labour contributed little to the declining rate of economic growth after the early 1970s. There were, of course, skills shortages in particular sectors and economies. But, in general, the quantity of labour available to support investment remained in relatively abundant supply. When labour shortages did occur in the high-income industrial countries during the post-war boom, labour was imported from the developing world. For example, the UK actively encouraged both unskilled workers and skilled migrants from the Caribbean and South Asia during the 1950s and 1960s. In Western and Northern Europe, millions of migrants were drawn from North Africa and Turkey, and after the turn of the millennium both skilled and unskilled labour were sourced from Central and Eastern Europe. Further, access to labour in the high-income economies was not limited to migration. At the world level, labour was in abundant supply. The deepening of globalization after the mid-1980s took advantage of this global labour force and outsourced millions of jobs in manufacturing and services, from the high-income economies to China and other low- and middle-income economies. This enabled the corporate sector to draw on a vast global pool of cheap unskilled, and increasingly also semi-skilled, workers.
What about the contribution of investment to the growth slowdown?
In contrast to the availability of labour, the amount of new capital investment and its productivity were critically important in explaining this declining growth performance. Since 1970 (unfortunately, consistent data is not available to consider investment trends before that date), there has been a steady fall in the share of investment in all of the major high-income economies (measured as the share of new investment in Gross Domestic Product, GDP – Figure 2.2). This was particularly the case for the US. However, similar trends can be observed across the board in the major economies, especially Italy and the UK.
