Britain is a developing country

We aren't leading the world: we're trying to catch up

Since the 1970s, economic growth in the world’s most advanced economies – and indeed science itself – appears to have slowed down. These “frontier” economies are the canary in the coalmine, because they have, in theory, maxxed out how much they can grow by using existing inputs (like labour, land and capital) better. For them, unlike developing countries, all that’s left is to improve the inputs they’ve got via innovation. And that rate of improvement seems to have slowed down. 

This “Great Stagnation”, as Tyler Cowen dubbed it in his 2011 book, has been the focus of much interest and concern. I have even made and presented a BBC radio documentary looking into it. (For what it’s worth, I think one problem is that we’ve made science more bureaucratic and deferential to authority.)

Last week, I spoke at Civic Future’s conference on the topic, focusing on how it related to the UK. When it came to the UK, I said I thought it was the wrong question.

A slowdown in “frontier growth” and technological progress matters a lot for the United States. But it matters less to Poland or Bangladesh – countries that are still trying to get to the frontier. While technological advances do still benefit them, most of their growth comes from using their existing inputs, like land and labour, in more efficient ways that are not technologically novel, or adding more capital that, again, is not technologically novel – some agrarian developing economies can grow simply by adding more tractors; no developed economy can. 

For these developing countries, the challenge is to catch up with the world’s advanced economies, and they can still have rapid improvements in their living standards without the need for global technological progress at all.

My claim is that the UK is now a lot more like Poland than it is like the United States in terms of the kinds of growth it needs to do – driven by improved use of existing technology and inputs, and accumulation of capital, rather than driven primarily by technological advancement. With the exception of a few sectors like AI, we are so far behind the frontier in terms of economic development that worrying about technological progress doesn’t make much sense, and at worst is a serious distraction. 

Here are some statistics that might put it into perspective how far behind the frontier the UK is.

• By GDP per capita, adjusted for purchasing power, the US ($76,399) is 39% richer than the UK ($54,603). GDP growth since 2010 has been 47% faster – nine percentage points – in the United States (28% growth) than the UK (19% growth), despite being from a much higher level.

• By productivity, or how much we produce per hour worked, the US was 38% more productive than the UK (UK $54.3/hour, USA $73.7/hour) in 2019. France / Germany were much closer to the US than to the UK at $69/hour.

• Between 2010 and 2019, productivity growth was twice as fast in the US (8% growth) as the UK (4% growth).

• Americans could stop working each year on September 22nd and they’d still be richer than Britons working for the whole year.

• Or, as Mike Bird pointed out, a car wash manager at an Alabama Buc-ees, a chain of gas stations and grocery stores, earns more ($125k/year) than THREE median UK salaries.

• The average starting salary for a newly-qualified nurse in the US is over £42,000, compared to only £27,000 in most of England, and the gap only widens as their careers progress.

• UK real disposable incomes are not forecast to return to 2021 levels until 2027.

And many input costs are higher in Britain than America.

• A median square foot of housing in the US is about half the price of the median square foot of housing in the UK (about $225 or £173 in the US, versus £331 in Britain).

• The median industrial price of energy even before the Ukraine war was 7 cents per kWh in the US and 19 cents per kWh in the UK.

• The industrial price of energy tripled in the UK between 2004 and 2021, or doubled relative to other prices.

• Annual energy use per person in the US is 77,000 kWh; in the UK it’s 30,000 kWh. 

• Annual electricity generation per person is 12,700 kWh; in the UK it’s 4,800 kWh.

UK GDP per capita is about to be overtaken by South Korea and Slovenia. If the UK continues with the same rate of growth it has enjoyed over the last decade, then Poland will be richer than Britain in about 12 years’ time.

As exciting as AI and other frontier technologies are, pinning the country’s hopes on them misunderstands how far behind the US we are across the board.¹ The US isn’t rich just because it has a big tech sector: every single US state is richer per person than the UK, even places like Mississippi and West Virginia without big tech or advanced manufacturing sectors.

The UK is thinking like a frontier economy when it should be thinking like a developing country. We’re well off by global standards, but poor by the standards of the frontier. And how rich we get mostly won’t be determined by the Great Stagnation, but by more mundane factors like the cost of energy, the supply of housing and infrastructure, and returns on capital investment.

In a way this is optimistic: the UK has a policy problem, not a fundamental scientific one. 

But there is one problem. There is virtually no recognition of how bad things are among British elites. Stefan Dercon, author of Gambling on Development, has a theory about what allows developing countries to experience sustained economic growth: they need their elites to come to an agreement to pursue it. The reforms needed to grow are painful and unpopular in the short-run. Regimes that do them without an “elite bargain” behind them are opening themselves up to being removed. Similarly, when one party in the UK proposes planning liberalisation, almost inevitably the others swing heavily Nimbyish.

In the UK, the preoccupations of the “elite” – by which I mean the people, left and right, in politics, government and media whose views shape those of the country – are with things like Net Zero (above all), inequality, obesity, delivering Brexit, regulating Big Tech, data ethics and privacy, cutting immigration, gender and racial pay gaps, and other priorities that are either unrelated to, or diametrically opposed to, making the country richer. If growth gets mentioned at all it is usually to support some unfunded and poorly targeted tax cut. On the flip side, every proposed tax or spending cut is assessed in terms of its distributional impact, not its effect on growth.

There is no recognition of the UK’s poverty and low growth relative to the frontier, and a lack of seriousness about how important this is.² Even degrowth is a fashionable idea in some circles.

When we talk about building more housing, which is probably the biggest single fix for the UK economy, elites rightly attack Nimbies a lot. But they also repeat obstructionist memes like embodied carbon, nutrient neutrality, condemnation of “luxury housing” and foreign owners, biodiversity net gain, and even the completely silly idea that housing costs aren’t really high at all, and high prices are a product of low interest rates alone. Oh, and mandatory bee bricks.

These are not serious ideas because Britain’s elites are not serious about anything other than managing public opinion. It is encouraging that Keir Starmer has prioritised housing recently, but I worry that when the rubber hits the road, he will run into the same pettifoggery and opportunism that proposals for new housing usually face.

Energy is no better. Most elites have an uncritical assumption that we will somehow work out the problems with wind and solar before they are such a large share of supply that their intermittency problems – ie, the fact that the wind doesn’t always blow and sun doesn’t always shine when we need it to – really bite.

Few realise that “levelized cost of energy” estimates flatter wind and solar by ignoring most of the costs of intermittency, and that without a deus ex machina of storage that is orders of magnitude cheaper than our current options, more wind turbines mean continued reliance on gas as a back-up, all year-round, or rolling blackouts. I almost wonder if people assume that these problems are so obvious that someone important must have realised and solved them. But they haven’t, and the path we are on is likely to be even more expensive, and less reliable, energy than we have today.

Even marginal improvements we could make to speed up development are off the table. To give one small example, there is zero discussion of, say, the Aarhus Convention, which caps unsuccessful plaintiffs’ legal damages at £10k for failed challenges to huge infrastructure projects, no matter how costly the uncertainty and delays they cause are.³ Indeed, Theresa May’s government expanded this protection to more kinds of legal challenges, and barely anyone noticed or cared. 

So if you buy my two theses – that the UK should focus on catch-up growth, and that elites here aren’t remotely prepared to support what’s needed to achieve that – then those of us who want the UK to be more prosperous have two choices.

Either we try to win over elites, or try to do things that are unambiguously win/win that drive growth and don’t need widespread elite support.  

Lately, I have leaned towards the second approach. I am fond of the idea of street votes, and think we could use this principle of “Coasean democracy” in other areas to bypass opposition and get stuff built, by sharing the benefits with the local veto holders who would otherwise block things. 

Maybe an elite bargain is possible. Labour’s pro-housing stance is encouraging, and even the current government has quietly done a few things to improve things recently. Maybe I’m overestimating the importance of elites and, as Britain Remade believes, maybe you can convince voters directly, who might be more interested in the cost of energy and rent. Or maybe we can “prime the pump” with growth that comes for other reasons, like fixing housing via some of the methods above, and that environment makes it easier to do the other reforms that we need. In any case, the sooner Britain realises that it is a lot poorer than it ought to be, the sooner we can start to change that.

1. This assumes that AI does not turn out to be a steam engine- or electricity-level invention. If it is, then it probably trumps everything else. I think it is worth betting a lot on AI, but not assuming away our other problems.

2. By which I mean the ability to think in terms of trade-offs and scale when considering various problems and solutions.

3. This can be raised to £25,000 in certain cases, which is still vastly lower than the actual costs these lawsuits can create.