Number theory: Britain’s economic decline in five charts
Here are five charts which explain how the British economy has been losing its importance over the long arc of history
On April 10, The Times (in the UK) reported that India halted the free trade agreement (FTA) negotiations to protest against the British government’s handling of pro-Khalistan protests in London. While both the UK and Indian government have denied these reports, it is a fact that the negotiations have been stuck for a long time.And it is clear that India is not in any haste to close the deal. This, in many ways, is also a reflection of the shrinking weight of the British economy in the world. Here are five charts which explain how the British economy has been losing its importance over the long arc of history.
UK’s slide in terms of overall GDPThe World Bank’s World Development Indicators database goes back to 1960. In current dollar terms, the UK’s GDP was the second largest in the world in 1960. This has gradually come down to sixth by 2021, the latest period for which World Bank (WB) data is available. Using WB data to calculate the UK’s share in global GDP also shows a fall, with the number coming down from 5.3% in 1960 to just 3.2% in 2021.
See Chart 1: UK’s share in global GDP
To be sure, UK started losing its economic edge much earlier
This is where the University of Groningen’s Maddison Project Database is useful. The Maddison database ranks countries by GDP in 2011 purchasing power parity (PPP) dollars – PPP method adjusts for price differences across countries – from 1820 onwards. The UK was the third largest economy in the world in 1820 (China and India were ranked first and second). While China and India lost their economic importance, thanks to colonial subjugation, the UK was replaced by the US in the latter half of the 19th century. The UK became the second largest economy in PPP terms in 1950 but has been losing its position since then. It was ranked 8th in 2018, the latest period for which we have GDP statistics in the Maddison database.
The fall in its GDP share in the world has also been accompanied with a fall in the premium which the UK enjoyed vis-a-vis per capita incomes in the world, which is the best measure of living standards. As the front-runner in the Industrial Revolution, the UK enjoyed almost four times higher income levels than the world in 1870. After the First World War (1913 to 1918), the UK’s income levels were three times higher in 1920, before slightly improving to 3.3 times in 1940. The long-term effects from the Great Depression of the 1930s and the Second World War (1939 to 1945) worsened the ratio further for the next 30 years. While Margaret Thatcher’s neoliberal reforms pushed this ratio up temporarily, the number has fallen further in the aftermath of the Global Financial Crisis reaching 2.5 by 2018.
See Chart 2: UK’s per capita GDP as a multiple of global average
British footprint in global trade has been shrinking
Data from the Federico-Tena World Trade historical database, developed by two European economists (Giovanni Federico, Antonio Tena Junguito), provides comparable trade statistics dating back to 1800. Nearly half the global trade emanated from the UK at the beginning of the nineteenth century. This share had fallen to one-fifth by 1852 and remained more or less the same for the next 50 years. However, the Great Depression took this number down to just 14.1% in 1938, the latest period for which we have trade statistics in the Federico-Tena database.
See Chart 3A: UK’s share in global trade pre WW-II
Since statistical agencies stopped publishing trade figures between 1939 and 1947, there are no comparable trade statistics for this period. The earliest post-World War II year in the United Nations Conference on Trade and Development (UNCTAD) database shows the UK’s share in global trade to have dropped to 10.9% by 1948. Over the next 30 years, this share fell continuously to reach 5% by 1980, and slid to just 2.1% in 2022.
See Chart 3B: UK’s share in global trade post WW-II
Britain has the lowest rate of investment in the G7
Britain’s economic problems are far from over. A November 2021 study by researchers at the London School of Economics and the Resolution Foundation think tank said that “low business investment, weak management and too few commercial patents are factors behind Britain’s large productivity shortfall”. Data from the Organisation for Economic Co-operation and Development (OECD) also shows that the UK’s Gross Fixed Capital Formation (GFCF), an indicator of investment spending, has fallen to 17.3% in 2021, from 23.6% in 1970. The latest figure is also the lowest among the G7 economies, with Japan being the highest (25.6%) and the rest above 20%. While the UK attempted to fix this by slashing corporate tax rate from (30% in 2007 to 19% in 2017), the policy did not deliver, and this is perhaps why they made a U-turn and raised the tax rate to 25% from April.
See Chart 4: Investment as share of GDP in UK vs G7 nations