Tuesday, April 9, 2013

Before and After Thatcher

A lot of the commentary (at least in the US) on Margaret Thatcher's death seems to agree that she "turned around" the British economy.  The idea is that her basic policies have been followed by all succeeding governments, and that economic performance has been consistently better ever since she took power.   The first point seems pretty plausible, at least as far as a reduction in the economic and political power of labor unions.  How about the second?  I compared the rate of per-capita GDP (data from the Maddison Project) in the pre-Thatcher and post-Thatcher years.  I take 1980 as the dividing line, although she took office in 1979, on the grounds that it takes a while for any government to make a difference.

In 1950-1980 per-capita GDP in Britain grew by 86%; in 1980-2010 it grew by 84%.   However, in relative terms, post-Thatcher performance in the second period was a lot better:  its 1950-80 growth ranked 19th out of 20 countries in Maddison's Western Europe or "European Offshoots" (US, Canada, Australia, and New Zealand), while its 1980-2010 growth was third out of 20.

Further examination of country differences showed a general pattern:  the rate of growth in 1980-2010 can be predicted pretty well from per-capita GDP in 1950 and growth 1950-80.  Countries that were poorer at the start of the period tended to grow faster--that is, they tended to catch up.  That's to be expected.  The surprising thing is that (controlling for GDP in 1950) there is a strong negative relationship between growth in 1950-80 and 1980-2010; countries that grew rapidly in the first period tended to grow slowly in the second one (e. g., Italy), and countries that grew slowly in the first period tended to grow rapidly in the second one (e. g. Ireland).  You could say that "turning it around," for better or worse, was normal.  I don't know why this would be the case, but the pattern is too strong to be plausibly dismissed as a coincidence.

British economic growth in 1980-2010 is almost exactly what would be predicted from those two factors.  Four countries stood out as doing better than expected--Ireland, Norway, Austria, and the United States--while four did substantially worse--Denmark, France, Portugal, and New Zealand.

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