Economic Growth
The Golden Age

Europe's high post-war growth rates will never be repeated, but the 'Golden Age' does offer important lessons for today's policy-makers, provided they use the right analytical tools. This was the message of Nicholas Crafts and Gianni Toniolo at a Brussels lunchtime meeting at ECARE, Universite Libre de Bruxelles on 30 May. Toniolo is Professor of Economics at the Università di Venezia, a Research Fellow in CEPR's Human Resources programme, and co-leader (with Crafts) of CEPR's research programme, 'Comparative Experiences of Economic Growth in Post-war Europe'. Their presentation was based on a number of papers and publications (see box?), including their Discussion Paper No. 1095, 'Post-war Growth: An Overview'.

Crafts and Toniolo stated that if policy-makers wish to understand the implications of the Golden Age, they need to look at it using an appropriate model of economic growth and to place it firmly in its long-run historical context. As the previous article explains, there are a variety of endogenous growth models, some of which are attractive to economic theorists, but are very poor guides to policy. The broad capital model, for example, stresses the importance of rapid accumulation of physical and human capital. But the post-war European experience shows that heavy investment is not enough to ensure rapid growth: towards the end of the Golden Age, high levels of routine investment encountered diminishing returns. This was not the route to permanently faster growth, Crafts and Toniolo warned.

Endogenous innovation models which instead emphasize the importance of innovation and the diffusion of new technology are much better guides to the rise and fall of the Golden Age, according to Crafts and Toniolo. Catch-up in the post-war period was not automatic but depended on institutions and policies which provided strong incentives to innovate, that is, they enhanced social capability. Trade liberalization and social contracts between capital and labour mattered much more for growth than did the Marshall Plan's investment subsidies. An interpretation of catch-up in the early post-war period based on the endogenous innovation approach offers important policy insights. For example, the experience of the Golden Age suggests that the single European market will have important dynamic effects on growth, but that this 'growth dividend' will not be automatic. Similarly, future catch-up by peripheral European regions will not be achieved through massive subsidies of physical investment, but instead by strengthening these regions' capacity to innovate. What matters is not the object gap but the ideas gap.

Looking at Europe's growth record in a long-run context, the 3.8 per cent growth rate for GDP per person between 1950-73 is clearly exceptional, as is the very strong inverse correlation between 1950 income levels and subsequent growth (apparent at both national and regional levels) and the TFP growth of this period. The growth achieved was far more than simply reconstruction and a return to a previous long-run trend. Some countries, however, had disappointing growth (Ireland and the UK), while productivity gaps between Northern and Southern Italy, and between Britain and Northern Ireland remained stubbornly wide, despite very high rates of physical investment. The end of the Golden Age came as opportunities for catch-up weakened, returns to investment diminished and wage pressures squeezed profits. As catch-up possibilities were exhausted, TFP growth fell. In the last twenty years, evidence of 'conditional' convergence in the OECD has been, at best, very weak. This is not surprising if long-run growth depends on endogenous innovation, since underlying capabilities for TFP growth will differ across countries.

Closer examination of the Golden Age highlights several key aspects of the growth process which tend to be overlooked by standard cross-country regression analyses of growth since 1960, Crafts and Toniolo argued. First, technology transfer was much more vigorous than before the war and was accompanied both by an 'invasion' of American direct investment in manufacturing plants and a surge in European R&D which promoted catch-up. Second, convergence of income levels within Europe was particularly rapid following episodes of European integration such as the formation of EFTA and the EC. Third, TFP growth in Europe was aided by the contraction of the agricultural labour force. Lastly, both investment and innovation were promoted by 'the post-war settlement' which produced better wage bargaining and commitment technologies to ensure 'good behaviour' by both sides of industry. Domestic and international institutional reforms, and social contracts and rapid catch-up should both be seen as mutually reinforcing.

Crafts and Toniolo suggested several insights from the Golden Age experience in a new growth theory perspective. First, the single European market will probably enhance long-run growth, but by how much depends on the extent to which its detailed implementation raises incentives to innovation, technology transfer and foreign direct investment. Second, emulation of Western Europe's Golden Age in Eastern Europe requires an appropriate post-Cold War 'settlement' based on multilateral trade liberalization rather than aid, avoidance of inappropriate social contracts, and a reallocation of talent from the bureaucracy to innovative rather than criminal activities. Third, the convergence of income levels within the EU's regions will not occur automatically, and requires more than just support for physical and human capital formation. The main long-run disadvantages of peripherality may often stem from 'softer' factors which lower the capability to exploit and develop new technologies.