Thatcherism, by Kim, Changhyun, Oct 2005

Results of Thatcherism

1) Economic Growth
1979 to 1983 was the period of recession. In 1980-1, manufacturing production fell by 14 percent, and gross national product fell by 3.2 percent. Unemployment nearly doubled. In fact, unemployment rose more rapidly in 1980 than in any single year since 1930, when the world absorbed the Wall Street Crash of 1929.
From 1983, the United Kingdom entered a period of economic expansion. From 1983 to 1986, the GDP grew by 8 percent, productivity per worker by 13 percent, and exports by 21 percent. The boom of the mid-1980s more than compensated for the recession in the earlier part of the decade. In terms of growth, the 1980s outperformed the 1970s. Real earnings in the 1980s grew by an average of 2.8 percent a year. During the 1970s, real earnings grew only 0.5 percent a year. Even during the post-war boom of the 1940s, real earnings had grown by only 2.1 percent a year. Economic expansion was accompanied by easy credit, and it is possible that the average living standards grew faster under Margaret Thatcher than under any previous Prime Minister. In 1978, 62 percent of the households owned a telephone and 54 percent had central heating. In 1988, 85 percent owned a telephone and 77 percent had central heating.
The 1980s saw a dramatic improvement in Britain's relative performance in terms of labor productivity. During the 1970s, the United Kingdom had the lowest rate of productivity growth (0.6%) among the seven largest industrialized countries (G7). In the 1980s, Britain had the third highest productivity growth among the G7, behind only Japan and France. The rate of productivity growth had increased 3 times.
Thatcher, however, still failed to reverse the trend of relative decline. In 1979-1988, the average annual growth rate was 1.9%. Though considerably higher than that achieved from 1973 to 1979, it was still lower than the growth rate in Germany, Japan, and the United States.
One negative side of Thatcherism was high unemployment. The economy entered a period of expansion in 1983, but the unemployment rate continued to rise until 1986. In 1986, the number of unemployed persons was 3.3 million, 11.8% of the workforce. The average unemployment rate of 1979-1989 was 9.1%. This is considerably higher than the average unemployment rate of 1973-1979, which was 3.4%. During the largely boom period of 1960-1973, it was 1.9%.
High unemployment was the result of the end of government's commitment to full employment. Thatcher did not subsidize or nationalized troubled companies to prevent unemployment; instead, she cut staff from nationalized industries and sold them. Much of the unemployment came from the manufacturing sector, which was especially dependent on subsidies and state ownership.

2) Industrial Structure
Under Thatcher, manufacturing declined while services, especially financial services, boomed. Her policy of reducing government intervention in the economy was great for the financial sector, but drove many manufacturing firms out of business. Many British manufacturers had been dependent on government subsidy. Furthermore, Asian countries, especially Japan, sold manufactured goods of superior quality at lower prices. British people bought Japanese goods with the extra money they made during the boom of the 1980s. British manufacturing could not compete with that of Japan.
The decline of manufacturing and the rise of services was evident from the onset of Thatcherism. Britain lost approximately 25% of its manufacturing production capacity in 1979-1981, while the service sector was comparatively unaffected. During the Thatcher years, Britain disappeared as a major manufacturing economy.
Much of the people who were unemployed in the 1980s were those who had lost their jobs in the manufacturing sector. This loss of jobs was only partly offset by the increase in the number of jobs in the service sector, most of which were low paying. Unemployment eventually dropped to 5.8% by 1990 from a peak of 11.8% in 1986, but unemployment was high for most of the 1980s.
The boom period of the mid 1980s was due in part to the loss of many inefficient manufacturing firms during the recession of 1979-1981. The improvement in economic performance depended on massive investment in the service sector, especially the finances. Shifting resources away from manufacturing, where low productivity was endemic, propelled British growth. It is estimated that 50% of the increase in national wealth during the 1980s came from financial services.
Thatcher's policy of deregulation contributed to the growth of the financial sector. In 1983, Thatcher eliminated foreign exchange controls that had been in place since the World War II. British investors could seek best possible returns anywhere on the planet. Many foreign investors were eager to invest in Britain as well. London became an important financial hub of the world.
During her second term in office (1983-1987), banks were permitted to lend on mortgages, and building societies (savings and loan associations in the U.S) were allowed to act more like banks. When realestate prices began to rise, many people took out mortgages to buy houses. Deregulation of hire purchase (installment buying) encouraged consumer spending and debt.
Thatcher further expanded London's role as a world financial hub by opening the stock market to foreign and domestic traders in 1986. This event is often called the "Big Bang." Trade restrictions were removed, allowing the merger and takeover boom in the United States to spread to Britain. Much of the activity was financed with borrowed money. The stock market crashed in October 1987, bringing the boom to an end. Nevertheless, the stock exchange was forever changed from a tradition bound institution to an institution full of profit pursuing mentality.
Financial institutions generally preferred making short term loans to finance stock or realestate investments over making long term commitment to developing new industries. Money from these institutions often went to making the financial sector an even more important part of the economy. Very little went to investing in manufacturing.

3) Income Distribution
Thatcher intended to provide "incentives" for the wealth creators to make Britain prosper. Her tax policy of cutting the income tax and raising indirect taxes and the National Insurance contributions were designed to make the income distribution of the United Kingdom more unequal, and she succeeded. The top income tax rate dropped from 83% to 40%, but the VAT rose from 7% to 17.5% while Thatcher was in office. The tax burden on the richest tenth fell from 52% in 1979 to 36% in 1989.
In addition to the tax policy, the shift of the economy from manufacturing to services polarized the income distribution. Many workers who had jobs in factories became unemployed, while educated professionals in the financial sector enjoyed prosperity. Yuppies (Young UPwardly mobile Professionals) became more common. Some of those who had lost their jobs in the manufacturing sector found new jobs in the service sector, but most of these jobs were low paying and often part-time.
Women were one of the beneficiaries of Thatcherism. The service sector was more friendly to women than the manufacturing sector, where manual labor was important. By 1990, 48% of all employees were women. The proportion of families with both adults working rose substantially during the 1980s.
However, the proportion of families with no member in full-time employment also rose during the Thatcher years, from 29% to 37%. The increase in the number of elderly persons can only partly account for the increase - much of it was due to the loss of manufacturing jobs.
The average real income of British families rose 37% from 1979 to 1992. The income of the richest tenth rose by 61%, but the income of the poorest tenth decreased by 18%. In 1979, the richest tenth's share of the national income was 20.6%, and that of the poorest tenth was 4.3%. In 1991, the richest tenth's share was 26.1% and that of the poorest tenth was 2.9%.
Although Britain as a whole became more affluent, it is doubtful that the poorest fifth experienced any gain from Thatcherism. The number of people in families earning less than half of the average income was 5 million in 1979, but was 14.1 million in 1992. Almost 20% of the children qualified for school meals by 1987. Thatcher is often blamed for creating a large underclass unseen since Victorian times.

4) North-South Rift
Thatcherism affected northern and southern United Kingdom differently. The decline of manufacturing hit traditional manufacturing areas of the north harshly, while the south benefited from creation of new white collar jobs.
Unemployment was concentrated in northern England, Scotland, and Northern Ireland, where new industries rarely located. South England, especially the greater London area, was booming with new service industries, although slums of London had some of the worst poverty in the United Kingdom. Income disparity between northern United Kingdom and southern United Kingdom was a consequence of the change in industrial structure of the United Kingdom.
It is no coincidence that Margaret Thatcher was disliked in the north and loved in the south. In the 1987 elections, the Conservative Party won 226 of 260 seats (87%) in the south and Midlands, but won only 149 seats from all other areas combined. In south England, Labour won only 5 seats outside London. The elections of 1979 and 1983 had also showed a geographical divide, but not as pronounced as that in the 1987 elections.

Kim, Changhyun
October 2005

Winter of Discontent, from Wikipedia
Thatcherism, from Wikipedia
National Enterprise Board, from Wikipedia
Margaret Thatcher, from Wikipedia
United Kingdom General Election 1979, from Wikipedia
Thatcherism 1979-91, from BBC England Timeline
Thatcherism 1979-90, from BBC British Timeline
The "British Disease", from BBC British Timeline
Thatcherism, from Economy Professor
Margaret Thatcher, from PBS
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