Recovery but they did not last. The Great

Recovery efforts after the
First World War and the Great Depression were important but they failed to
create a path back to the long-term growth trend. Only the third attempt –
post-Second World War reconstruction – was successful. For the period 1913 to
1945 the amplitude of the fluctuations increases a lot. The First World War
assisted at tough falls of GDP. The recovery efforts produced extraordinary
achievements up to 8.4 per cent growth in 1922 but they did not last. The Great
Depression hit the EU countries even harder than the First World War, but for a
shorter period. The Second World War was even worse than the Great Depression. Fortunately,
the recovery was also more exceptional.


Up to World War II all
countries had comparable levels of human- and physical capital and per capita
GDP – lower than North-Western Europe, but higher than the Near East or Russia.
The similarities ended in the post-war years, when Austria and (Western)
Germany remained part of the ‘capitalist’ half of the continent, whereas major
institutional changes (such as central planning, state redistribution) were
introduced in Eastern Europe. This had consequences for human-and physical
capital formation as well. One of the rationales of the centrally planned
economies was to invest heavily in broad capital, but apparently this did not
lead to a dramatic catching up in terms of economic growth. Indeed, while the
growth in education and physical capital over the period 1930-1990 were almost
equal (and hence the relative levels of education and physical capital in
Central Europe in 1990 were comparable), per capita GDP in 1990 was
substantially higher in Germany and Austria (Maddison 2003; Fo?ldva?ri and Van
Leeuwen 2009)

capital, and more specifically human capital, is indeed a main factor driving
long- run economic performance (Lucas 1989; Romer 1990), this suggests a
considerable decrease in productive efficiency of human capital accumulation in
Eastern Europe during socialism (i.e. Simkus and Andorka 1982; Easterly and
Fisher 1995).




Growth rates were high and
sustained for a bit more than a quarter of a century, i.e. 1946 to 1973. It is
also clear that the years of high growth display an overall declining trend
that came to an end by the late1970s. The 1974 oil crisis brought growth rates
to a sudden halt, but the declining trend continued on until much later.

The heights of 1899 and 1906
(13.0 per cent) were surpassed in 1920 and from 1924 until 1930, reaching a
high of 14.9 by 1929. Nevertheless, the Great Depression, for all the harm it
brought, was not as destructive as the world wars. The investment rate felt a
lot, but only to 9.9 per cent, and recovery pushed it up again to 15.6 by 1937.
Looking at Graph 7, there appears to be an increasing trend at work from the
late nineteenth century to the late nineteen thirties. But had this trend
really existed, it would have produced our current investment rates, not the
post-war rates.

Investment efforts after
WWII were by all means extraordinary. By 1947 the investment rate had reached
22.7 per cent. The equivalent, earlier experience was in 1920, with a high of
13.7. The investment reaction was quicker after WWII than after WWI, and it was
much stronger. Investment efforts by 1947 were more than 50 per cent higher
than the highest pre-war rates. In 1920 they were almost the same (five per
cent higher). The exceptional 1947 experience did not last longer than that of
1920. They fell the following year, but did not decline back to normal levels.
The investment rate from 1948 to 1953 remained at an astonishingly high 19 per
cent or more. To everybody’s

surprise what came next was
not an investment crisis but a further investment boom. The 19.1 per cent rate
of 1953 increased to 24.5 per cent in 1964, and it remained around the height
of 24 per cent until 1974! The European economic miracle did very much exist,
and it was founded on allocating resources to gross fixed capital formation. After
1974, investment rates went down quite quickly. By 1986 they were at the same
early 1950s level: 19 per cent. A lower level was reached in 1994, at 18.7, the
lowest level since WWII. Compared to the interwar years, these are still very
high rates. They only seem low when compared to the achievements of the Golden

The ‘trans-war’ period is definitely a
period of foreign trade reduction. This happened during the wars, but also
during the Great Depression. The years of WWI reconstruction and Great Depression
recovery are disappointing at providing more foreign trade. By 1945 foreign
trade was more than forty percent below its 1913 value. From 1945 onwards,
foreign trade grew almost without deceleration until the late 1970s. The 1980s
and early 1990s were years of deceleration, stagnation and, eventually, crisis.
Growth resumed after 1993. All in all, the pre-1913 period was one of foreign
trade expansion; the period 1913–1945 was one of foreign trade contraction; and
afterwards the dominant trend was expansive again.

On the long term, the US foreign trade has
been growing faster than the West European, but the divergence in rates is
fully centred in the war and interwar years (but the Great Depression).

The European Golden Age saw strong
contributions to labour productivity growth from both capital deepening and TFP
growth, but it is the latter that was typically larger in the poorer countries
which exhibited the fastest growth. This was not based to any significant
extent on domestic R but rather on a combination of technology transfer,
structural shift away from agriculture, economies of scale and more efficient
utilisation of factors of production. External trade liberalisation and the
increased integration of the European market were factors that speeded up technology
transfer and helped Europe to reduce the technology gap with the US.

Eichengreen shows that growth was positively
correlated across western European countries with both investment and export
growth. High levels of investment and trade were sustained by a variety of
domestic and international institutions. Domestic intuitions ensured that
workers moderated their wage demands so that profits were high and the profits
were reinvested rather than being paid out as dividends thus ensuring higher
wage growth in the future. The welfare state was one way in which workers were compensated
for wage moderation in the short run. The result was high investment, capital
deepening and high rates of tfp growth.

Uk golden age and after

The reasons for relatively slow labour
growth was weak growth in capital per worker and TFP compared with more
successful economies like west Germany. Throughout this period there were
continual efforts to persuade organised labour to accept wage moderation, not
only to encourage investment but even more to allow low levels of unemployment without
inflation at a time when politicians believed that this was crucial to
electoral success after the interwar trauma. A key feature of the golden age British
economy was the weakness of competition in product markets that has developed
in the 1930s and intensified subsequently. The lack of competition had an adverse
effect on British productivity performance during the golden age working at
least partly through industrial relations and managerial failure.

The 1980s and 1990s saw major changes in
the conduct and stricture of British industrial relations. Trade union
membership and bargaining power were seriously eroded. This was promoted partly
by high unemployment and anti-union legislation in the 1980s but also owed a
good deal to increased competition. Increased competition may have been the
more important factor in boosting British performance.




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