The Centre's two-year research programme on `Comparative Experience of Economic Growth in Postwar Europe' has brought together economists and economic historians to develop complementary approaches and apply new analytical tools to measure comparative economic performance and assess the roles of institutions and the political economy of supply-side factors. New insights in `endogenous growth' theory, which considers human and physical capital accumulation, catch-up and convergence and institutional `sclerosis', all called for a reappraisal of the `growth accounting' framework based on the Solow model. Applied research into Western Europe's post-war reconstruction also sheds light on the causes of its current high and persistent unemployment and the prospects for the transforming economies to the East. The major conference of this research programme, `The Economic Performance of Europe After the Second World War', took place in Oxford on 17/19 December. It was organized by Nick Crafts, Professor of Economic History at the University of Warwick, and Gianni Toniolo, Professor of Economics at the Università degli Studi di Venezia, both Research Fellows in the Centre's Human Resources programme. Financial support to the network from a SPES grant of the Commission of the European Communities and the hospitality of University College, Oxford, are gratefully acknowledged.

In `Post-war Growth: an Overview', Nick Crafts and Gianni Toniolo reviewed the recent theoretical and empirical literature on growth modelling and the stylized facts of Western Europe's post-war growth. Crafts reported estimates derived from a variety of `new growth' models, which all indicated very high residuals during 1950-73. This suggests either that this `Golden Age' was an extremely special period or that existing data on factors recently incorporated into growth theory are inadequate. Toniolo emphasized that this unusually high growth was above all a European phenomenon, which affected not only the market economies but also those of the Eastern bloc and the dictatorships of the Southern periphery. Europe's `catch-up' with the US was by no means automatic, however, and countries varied substantially in their exploitation of the available opportunities. Crafts suggested that future research should focus on the construction of human capital data to take account of quality (as well as the quantity) of schooling, as well as vocational training; it should also consider the effects of institutional factors on rates of return.

Angus Maddison (Universiteit Groningen) contrasted the favourable international policy framework created by Pax Americana with the chaos after World War I, and he suggested that the slowing of Europe's growth since 1973 may in part reflect the continuing role of the US as the lead country, whose productivity growth has now fallen to inter-war levels. Albrecht Ritschl (Universität München) stressed that increased factor mobility and specialization after World War II made national growth rates increasingly endogenous and dependent on Germany's performance as the European leader.

In `Convergence, Competitiveness and the Exchange Rate', Andrea Boltho (Magdalen College, Oxford) argued that a devaluation can have permanent positive effects on longer-term competitiveness if the resulting temporary high profits are used to open new markets, finance R&D, increase capacity or improve product quality, and Western Europe in 1950-73 is an ideal testing-ground for such effects. Germany and Italy's low exchange rates in the 1950s contributed to the increased competitiveness, investment, productivity growth and scale economies that underpinned the changes in their export structures, and these gains from moving `up market' persisted into the 1960s, despite substantial exchange rate appreciations. Boltho maintained that these effects were inextricably linked with those of intra-European trade liberalization, so similar strategies for export-led growth would not work today. Trade barriers are too low for GATT or the single market to offer gains comparable to those of the 1950s, while private sector investment would respond only weakly to exchange rate changes that were not expected to last.

Paul David (All Souls College, Oxford, and Stanford University) suggested investigating exporting firms' responses to devaluation by comparing their relative levels of investment in domestic production and overseas distribution. Wendy Carlin (University College, London) called for a more explicit consideration of changes in labour markets.

In `The Varieties of Eurosclerosis: The Rise and Decline of Nations since 1982', Mancur Olson (University of Maryland) argued that special interest groups' ability and incentives to appropriate resources increases over time, so rent-seeking is greatest in countries that have remained politically stable for long periods. If totalitarianism or foreign occupation destroys the institutions that engage in collective action, improved economic performance may follow, as in West Germany and Japan until the 1980s. `Encompassing interest' organizations restrain lobbyists' power since they take greater account of overall welfare. Economic union and jurisdictional integration such as the establishment of the European Communities in the 1950s also dilute the power of domestic cartels.

Olson described the different varieties of sclerosis that have characterized the English-speaking world, developing countries, and Eastern, Southern and Northern Europe, and he maintained that Europe has witnessed considerable institutional convergence over the 1980s. Northern Europe's encompassing interests have been gradually supplanted by their increasingly independent constituent parts; those of the autocracies in the East have collapsed; while the deep divisions that led to the formation of separate `ideological' labour unions in the South have now largely healed.

Paul David questioned whether the Thatcher government's attack on trade unions, professional groups and civic institutions in the 1980s had cured the brand of sclerosis long known as the `British disease'. Martin Weale (University of Cambridge) asked whether Olsonian sclerosis contributed to unemployment, which could account for low overall growth without any reduction in underlying productivity growth.

In `Why the 1950s and not the 1920s? Some Notes on Post-war Decades of German Economic History', Karl-Heinz Paqué (Institut für Weltwirtschaft, Kiel) contrasted the differing experiences of reconstruction and growth of the Bonn and Weimar Republics. He maintained that Olsonian accounts of the Wirtschaftswunder exaggerated the destructive effects of war and occupation on Weimar's institutions and proposed a simple monopoly union model to capture the main `corporatist' features of German labour markets in both periods, in which collective bargaining institutions amplify good and bad shocks alike through `passive rigidity'.

In the 1950s, reintegration into the world economy at a time of high demand for traditional German exports induced a `reindustrialization' that raised employment and labour productivity and led to unanticipated improvements in the terms of trade of exports versus imports and investment versus consumption goods. Moderate wage settlements allowed firms to retain these gains as profits for investment which underpinned the economy's subsequent growth. In the late 1920s, in contrast, although labour productivity growth was respectable by international standards and exports regained their pre-1914 shares in some markets, downward wage rigidity (which government policy supported) led to large-scale unemployment which only a series of positive shocks from international trade could have reduced. Such an `export miracle' was probably not feasible for the Weimar Republic, however, even without the protectionism abroad and Nazi autarky at home that arose from the Great Depression. European incomes were simply too low to justify the widespread adoption of US-style assembly line techniques to service middle-class mass markets: Germany and France did not attain US 1929 levels of car ownership until the early 1960s.

Charles Bean (LSE and CEPR) noted that an enormous empirical literature on unionization had found no evidence that unions' or indeed firms' exercise of monopoly power had contributed significantly to unemployment. Robin Matthews (Clare College, Cambridge) noted that UK unemployment remains high, despite restrictions on union powers that would never have been thought possible fifteen years ago.

In `Convergence: What the Historical Record Shows', Steve Broadberry (University of Warwick and CEPR) reviewed evidence on the convergence of labour productivity among the advanced industrialized economies since 1870. Empirical findings based on Maddison's (1991) national income data that associate low income in 1870 with subsequent strong productivity growth depend critically on the inherent bias of the sample: including other countries that were rich at the start of the period (such as Argentina) and excluding Japan (which was extremely poor) destroys the relationship. Long-run productivity data for manufacturing indicate local rather than global convergence, as persistent differentials among the `convergence clubs' (North America, Northern and Southern Europe and Asia) reflect their different endowments and demand conditions. Williamson's (1991) data on urban unskilled real wages also indicate a process of local convergence.

Angus Maddison suggested investigating the contribution of policy to productivity changes, which might explain, for example, why Japan's labour productivity has reached 80% of the US level in manufacturing but only 8% in agriculture. John Kendrick (George Washington University) reported that his own productivity comparisons confirmed strong convergence within the OECD but not elsewhere: on the Asian periphery, the poor are getting poorer and the rich richer.

Charles Bean and Nicholas Crafts then presented `British Economic Growth since 1945: Relative Economic Decline... and Renaissance?'. They noted that empirical work in the `new growth' framework has confirmed the UK's poor performance in exploiting its relatively limited opportunities for catch-up. The 1945-51 Labour government emphasized export growth, the development of the welfare state and macroeconomic stabilization, but it did little to reform the structure of industrial relations, promote competition in product markets or improve management quality. Throughout the Golden Age, the concentration of limited R&D spending in high-tech and defence industries, poor training of the labour force and unreformed industrial relations continued to hamper growth. The Thatcher government's policies of privatization and trade union reform certainly delivered a one-shot improvement in the productivity level, at the cost of increased poverty and inequality. It is too soon to assess their effects on its growth. These policies also entailed significant costs of deindustrialization and did little to raise investment in human or physical capital.
Robin Matthews noted that labour force growth had been lower than elsewhere, especially after immigration from the West Indies stopped, which was for social rather than economic reasons. Alec Cairncross (St Antony's College, Oxford) stressed that the Attlee government's whole policy had been dictated by the need to reduce the foreign debt; it could not have done more to promote production and investment.

In `Convergence and Divergence of Productivity Levels in Europe', Bart van Ark (Universiteit Groningen) presented indices of manufacturing productivity over 1950-90 for eight European countries. While these exhibited substantial catch-up with the US, there was little or no convergence among or within European countries. The productivity improvement of the `West European 4' France, the Netherlands, West Germany and the UK is even greater if the data are adjusted to reflect value added per hour worked rather than per person employed; indeed, by this measure they still outperform Japan. He also compared these measures to those for productivity in agriculture and the economy as a whole as well as relative per capita income levels. Van Ark concluded that a full analysis of catch-up and convergence must incorporate these sectoral estimates, changes in sectoral composition and differences in working hours and labour force participation rates.

Gianni Toniolo noted that these data confirmed Europeans' relative preference for leisure and asked whether the reduction in hours worked had in fact raised productivity, as the introduction of the 40-hour week had done in the early part of the century. Robin Matthews remarked that measuring hours worked was much more difficult for the whole economy than for manufacturing.

In `Real Income Growth in the OECD, 1966-1990', Martin Weale deflated real GDP for 23 OECD countries by consumption price indices to estimate national output in terms of the consumption it affords. He developed an optimizing model of intertemporal consumption as an alternative framework for `growth accounting', which he used to attribute growth of income per person employed to the terms of trade, investment and a residual. His income data were only weakly correlated with those derived from conventional estimates, especially during the 1980s; in particular, the `economic miracle' country was Greece, not Japan, and the UK performed much better than the general consensus suggests. For ten countries, the residuals were not significant, which casts some doubt on the empirical relevance of the effects of human capital accumulation and externalities identified by `new growth' models, while catch-up contributed less to total factor productivity growth in the 1980s than earlier.

Roberto Cellini (Università degli Studi di Bologna) suggested that the residuals might be capturing the effects of market imperfections or scale economies. Charles Bean suggested that incorporating population growth might affect the results. Paul David stressed that the `measurable economic welfare' approach as pioneered by Beckerman and developed here takes no account of leisure.

In `France, 1945-1992', Pierre Sicsic (Banque de France) and Charles Wyplosz (INSEAD and CEPR) reported that France displayed come catch-up during its immediate post-war reconstruction, which saw the establishment of active planning and the alliance with West Germany but was plagued by political instability. France's Golden Age from the establishment of the European Economic Community in 1958 to the first oil shock in 1973 saw faster growth and marked rises in employment in both manufacturing and services. Growth in public sector employment since then has been insufficient to offset massive rises in unemployment. Wyplosz noted that GDP growth has been curiously smooth in France, although data on its industrial production suggest that has been subject to the same disturbances as the rest of Europe.

Sicsic noted that concern over the fall in the stock of equipment capital throughout 1930-45 had prompted governments in the 1950s to spur growth by directing available investment funds towards the major nationalized enterprises in energy, transport and telecommunications. This included an element of rent-seeking, but increased openness and the redirection of trade away from the colonies and towards Europe promoted competition and increased incentives to innovate. Since 1974, France has performed as the average European country in terms of unemployment and inflation, and in particular in its responses to the oil shocks of the 1970s.

Alan Milward (LSE) questioned whether removing the final 10% in ad valorem tariffs entailed in this trade liberalization could have had the effects the authors claimed; the effect of abolishing quotas in 1950-52 must have been greater. Jaime Brown Reis (Universidade Nova de Lisboa) suggested that government subsidies to nationalized industries may have subsidized industry in general through the low prices charged for transport and energy.

In `West German Growth and Institutions, 1945-90', Wendy Carlin argued that the post-war rationalization of West Germany's union structure and the establishment of `co-determination' and the abolition of government involvement in collective bargaining and monetary policy marked a clear institutional break with the Weimar Republic that underpinned the Federal Republic's subsequent strong growth performance. The creation of an independent central bank with a commitment to low inflation solved the `coordination problem' arising from workers' uncertainty about whether their willingness to forgo consumption will in fact induce growth-promoting investment by capitalists. US-style antitrust policy also ended official support for cartels while preserving the advantages of Germany's traditional long-term relationships between banks and industry.

The currency and economic reforms of 1948 restored market incentives and allowed West Germany to join the `convergence club', while the 1949 stabilization and the Korean War boom were critical steps in the transition from recovery to self-sustained growth, supported by inflows of highly qualified workers from the East. The construction of the Berlin Wall in 1961 led to a slow-down (mitigated in part by immigration) and raised union bargaining power, while the Bundesbank's non-accommodating policy towards the oil shocks inflicted a short-term fall in profit levels in order to preserve investment and profitability in the longer term. Carlin considered whether the structure of industrial relations and emphasis on welfare provision had impeded Germany's adaptation to structural change in the 1980s: while rigid employment protection legislation, highly structured wage setting and compulsory consultation certainly restricted the scope for simple cost-cutting, they also made possible other forms of innovation that depend on the long-term stability of relationships among firms, employees and financial institutions.

Klaus F Zimmermann (Universität München and CEPR) noted that concerns about labour shortages dated from before the Berlin Wall; many firms were actively recruiting from Southern Europe in the 1950s. Charles Wyplosz noted that every item on Carlin's list of `growth-promoting' institutions had been absent in France, which nevertheless displayed very similar growth performance.

In `Economic Growth and the Swedish Model', joint with Magnus Henrekson and Lars Jonung, Joakim Stymne (Prime Minister's Office, Sweden) investigated the causes of Sweden's poor relative growth performance since 1970. The political dominance of the labour movement and the Social Democrats since 1932 and active Keynesian intervention both fostered and depended on the growth of the public sector. The establishment of the national pension system in 1959 naturally reduced private saving for retirement, and precautionary incentives for saving reduced further with the introduction of other welfare state provisions in the 1960s and 1970s, while credit rationing and direct political control directed the limited available funds inefficiently towards larger companies and infrastructure. Sweden has also become an increasingly protected economy, as the share of tradables in GDP has fallen substantially while governments have done little to reduce centralization and monopoly power in the non-tradable sector. Incentives for human capital accumulation and returns to education have also fallen, while a flat age-wage profile provides little incentive for on-the-job training. Finally, while Sweden's high level of business investment in R&D has produced an impressive number of US patents, this has not fed through to growth since Swedish companies have tended to license out the implementation of their innovations.
Mancur Olson stressed that the Swedish model based on `encompassing organizations' performed well until the 1970s, given the limited opportunities for catch-up; he suggested that this very success had induced overconfidence among policy-makers who came to expect more than the system could deliver. John Kendrick wondered why there was no discussion of profit rates and factor shares as in Carlin's paper; he assumed that initially lower profits had been squeezed by strong wage growth.

In `Institutions and Economic Growth: Europe After World War II', Barry Eichengreen (University of California, Berkeley, and CEPR) noted that catch-up accounted for only part of Europe's exceptionally high growth in the quarter-century after 1945, which was driven by an extraordinarily high level of investment, despite qualifications about its measurement. Post-war Europe's institutions underpinned reconstruction and growth by ensuring that wage restraint stimulated this investment and that export growth directed it towards its most productive uses. By enforcing the terms of the domestic and international post-war settlement, they overcame the commitment and coordination problems that had led to financial chaos, massive unemployment and widespread protectionism in the 1930s, by persuading workers that wage restraint would lead to increased investment and encouraging firms to invest on the basis of comparative advantage in international rather than domestic markets.

Eichengreen then considered various accounts of why the Golden Age ended in the 1970s. Olsonian sclerosis is hard to test and does not obviously account for the slow-down's timing; by worsening the intertemporal trade-off of consumption versus investment, the oil shocks may have reduced incentives for wage restraint; and the breakdown of Bretton Woods may also have reduced the scope for stabilization policy. Finally, increased capital mobility undermined the institutional basis of the post-war settlement, as providing management with an `exit' option of investing abroad further reduced domestic workers' incentives for wage restraint.

The conference closed with a panel discussion, led by Paul David, which focused on the scope for further empirical research into the varieties of convergence identified in the theoretical literature, the importance of moving beyond national comparisons to consider the processes driving growth at the regional level, and the implications of changes in governments' policy priorities over the long term.


CEPR has published selected papers from this conference and others from this research programme in two volumes. The first focuses on cross-country comparisons of productivity growth while the second will comprise a series of country studies:

Quantitive Aspects of Post-war European Economic Growth edited by Bart van Ark and Nicholas Crafts
ISBN (Hardback) 0 521 49628 4

Economic Growth in Europe Since 1945 edited by Nicholas Crafts and Gianni Toniolo
ISBN (Hardback 0 521 49627 6
ISBN (Paperback) 0 521 49964 X