Topic 8Privatization and Britain

By Alison Chiu

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United Kingdom : General Statistics

United Kingdom : General Statistics

Britain’s Political & Economic History in the 1900s

• World War 1 (1914-1918)• Great Depression (1929-1938)• World War 2 (1939-1945)

• Britain emerged from the 1939-1945 war triumphant, but economically exhausted

• Labour Government had an aggressive plan to

Labour Government’s Post War Consensus1. Commitment to maintain full employment by Keynesian

demand management2. Encouragement of the role of the trade unions. 3. Large role for state ownership of the utilities (such as

gas, electricity, coal, rail, etc) and intervention and planning in the economy.

4. The welfare state. National insurance system ,National Health Service

5. There was a belief that government could play a positive role in promoting greater equality through social engineering, for example, by progressive taxation, redistributive welfare spending, comprehensive schooling and regional policies.

Britain in the 1970s :

• However, figures on economic performance showed that Britain was losing out to other European countries. It was having problems with trade union strikes, productivity, inflation, economic growth and living standards.

• During the 1960s and 1970s, the main parties competed to reverse Britain’s relative economic decline.

• Nearly all European countries had so-called 'economic miracles‘ except Britain. Britain was often described as the 'sick man of Europe.

Britain in the 1970s : ‘Sick Man of Europe’

• The reason for Britain’s dismal performance was attributed to :

1) High and steep progressive tax rates reduced the incentive to work

2) Social safety net under the post war consensus on the welfare state also reduced the incentive to work

3) Conservative poor management vs unionized and militant workforce led to confrontational industrial relations

4) Wasteful public sector – investing in non-performing industries

5) Rise in global competition

Britain in 1979 : 'Winter of Discontent'

• Things escalated in 1979. In the 'Winter of Discontent' damaging trade union strikes in crucial public services against the Labour government’s income policies seemed to show that the country was ungovernable and that no government had an answer to inflation.

• It destroyed the government’s reputation for prudent economic management and its ability to gain the cooperation of the unions.

• The Labour government lost the following general election as a result and the Conservatives under Margaret Thatcher came into office

Britain in the 1970s

Winter of Discontent 1979– Rubbish in Londonhttp://www.youtube.com/watch?v=Je65Vw7ndro&feature=related

OrVideos – UK_Dustmen’s Dispute Feb 1979

What is Thatcherism

Economic policies characterized by :• decreased state intervention via the

free market economy• monetarist economic policy• privatization of state-owned industries• lower direct taxation and higher indirect taxation• opposition to trade unions, and• reduction of the size of the Welfare State.

Refers to the political and economic policies of Margaret Thatcher when she was Britain’s Prime Minister

What is ThatcherismIn short, Thatcher’s policies aimed at transforming the British economy to a more market oriented economy and emphasized the need for less government intervention

She stressed the importance of enterprise culture, the culture of taking risks, investing, and wealth maximizing.

She claimed to have been influenced by the works of Austrian economist Federich von Hayek which advocates free markets and less government intervention

Thatcher and the Miner’s Strike 1984-1985

• The Miner' Strike was a major industrial action affecting the British coal industry. • It was a defining moment in British industrial relations, and its defeat significantly weakened the British trades union movement. • It was also seen as a major political and ideological victory for Margaret Thatcher and the Conservative Party.

Commanding HeightsEpisode 1Ch 15, Ch 17, Ch 18

Privatization : 4 main dimensions

• Transfer of ownershipFrom public sector to private sector through issue of shares or sale of the corporation to employees

• Process of deregulationThe removal of government controls from an industry or sector, to allow for a free and efficient marketplace.

• FranchisingGovernment grants the franchise of a public company to private companies. Private companies have to compete for franchise, this encourages competition

• Replacement of public production by private productionMany of the goods e.g. utilities previously provided by the government is now provided by the private sector

How Thatcherism reversed the post war consensus

1. Eg. requirement for pre-strike ballots; the end of the 'closed shop' (union membership as a precondition of employment in a specific industry); and making unions liable for damages incurred in illegal strikes. Hardly consulted by the government, influence waned because of the abandonment of income policies and rising unemployment.

2. Gas, electricity, telephony, British Airways and later British Rail were all privatised.

How Thatcherism reversed the post war consensus

3. The government abandoned its commitment to full employment, stating this was the responsibility of employers and employees, and accorded priority instead to keeping inflation low.

4. as the government introduced quasi-markets into education and health services

5. Government insisted that it could no longer be a universal provider. More should be left to the market, the voluntary sector and self-help.

Thatcherism’s Impact on the British economy in the 1980s

• Economic growth – UK performance in the 80s improved in terms of GDP growth, labour productivity, unemployment fell. On the downside, income inequality also increased

• Improved industrial relations – less strikes• Improved incentive to work – government

abandoned full-employment, employees forced to look for jobs and keep themselves employed,

• Improved incentive for firms to be profitable - employers forced to manage efficiently

1970-1979

1980-1984

1985-89

1989-1993

1997-2001

2002-2006

UK 570 480 180 70 14 28US Na 160 90 200 54 15France 210 90 60 90 20 naGermany 40 50 Na 30 1 6Italy 1310 950 300 360 67 111

Days Lost per 1,000 Employees Selected Industrial Nations 1970-1993

Source : Table 8.6. Kennet, Comparative Economic Systems, ILO

UK Income Tax Rates (%) on Earned Income 1979-20101979 1980 1985 1990 1995 2000 2005 2008 2010

Lower rate

25 25 - - 20 10 10 0 0

Basic rate

33 30 30 25 25 22 22 20 20

Top Rate

83 60 60 40 40 40 40 40 40

Source : Kennett, Table 8.5 and http://www.ifs.org.uk

Lessons from Britain’s privatization

1. Managerial culture, rather than ownership determines productivity – this may be achieved with or without privatization

2. Laws that curb trade union power results in a more flexible labour market. This leads to lower unemployment but increased income inequality

3. Regulation is required when privatized industries become natural monopolies in order to protect public interest

4. Substantial short term gain to public revenues

End of Thatcherism

• Towards the end of the 1980s Margaret Thatcher, became increasingly vocal in its opposition towards Britain becoming part of the European Union and this alarmed her own Conservative Party who voted for her removal

• She was succeeded by John Major another Conservative

• In the 1990s, the Labour Party under Tony Blair won the election

Britain in the 1990s : John Major (Conservative Party)

• Between 1990-1993, Britain entered into a recession. Reasons were that Thatcher government had allowed the economy to expand too rapidly causing inflation. Britain joined the European Exchange Rate Mechanism which targeted at fixing the British pound to the ERM.

• Saw the end of the Conservative Party rule and Tony Blair under the Labour Party was elected Prime Minister

Britain in the 1990s : Tony Blair (Labour Party)

• Tony Blair’s economic policy includes :- Maintaining market-based reforms

Privatization continued. Under the Labour government, state owned enterprises continued to be privatized

- He made the Bank of England independent- Introduced substantial market-based reforms in the

education and health; introduced student tuition fees; sought to reduce certain categories of welfare payments

- At the same time, introduced supportive social policies on health, education and income distribution

1997-2007

Britain today

• The UK, 3rd largest economy in Europe after Germany and France.

• Past two decades, the government greatly reduced public ownership and controlled social welfare programs.

• Agriculture is intensive, highly mechanized, producing about 60% of food needs

• Services, particularly banking, insurance, and business services, account by far for the largest proportion of GDP while industry continues to decline in importance.

• From 1992-2007, Britain's economic growth outdid Western Europe

Britain today

• But by 2008, Britain’s economy was hard hit by the global financial crisis due to the importance of its financial sector. Economy went into recession late 2008

• BROWN government implemented measures like nationalizing parts of the banking system, cutting taxes, suspending public sector borrowing rules, and moving forward public spending on capital projects.

• Gordon Brown lost in UK’s 2010 elections to a coalition party of Conservative and Liberal Democrats

Gordon Brown Labour

2007-2010

Britain today

• Facing burgeoning public deficits and debt levels, the CAMERON government in 2010 initiated a five-year austerity program, which aims to lower London's budget deficit from over 10% of GDP in 2010 to nearly 1% by 2015.

David Cameron Prime MinisterConservative

Nick CleggDeputy Prime MinisterLiberal Democrats

Conservative – Liberal Democrats coalition

ReferencesBooks• Kennett, D. (2001) “A New View of

Comparative Economic Systems” (2ed) Harcourt Publishers

• Rosser, J.B. and Rosser, M.V. (1996), Comparative Economics in a Transforming World Economy

Websites• http://www.bbc.co.uk/history/british/modern