Implications of a Modernization Strategy for the United Kingdom

Summary

The economic consequences of modernizing the UK’s tradeables sector are analyzed by computer simulations using Cambridge University’s Multisectoral Dynamic Model. These simulations assume that a combination of economy-wide and industry-specific policy measures gradually improve the competitiveness and quality of British goods and that productivity growth is brought into line with that of the major West European competitors such that the UK’s share of total OECD exports no longer declines. Attention is focused on whether expansionary fiscal policies can reduce the level of unemployment while, for a number of reasons, the pressures on the balance of payments get released only very slowly. Success in reducing unemployment levels then crucially hinges upon whether the benefits from increased productivity growth can be diverted from real earnings increases toward job creation (almost entirely in the services sector). A detailed breakdown of employment generation possibilities in the non-manufacturing sector is presented and analyzed as to the policy measures required to sustain productivity growth.