Dorset Economy Blog 49: Unproductive Areas & Autumn Report

BU’s Emeritus Professor Nigel Jump writes the next in his series of blogs on the Dorset economy.

The Chancellor of the Exchequer delivered his Autumn Statement on 22 November. He has insisted on avoiding recession and falling inflation in the last 6 months, but the latest projections from the Office for Budget Responsibility (OBR) show a stagnant economy over the next 3 years.

The report focuses on key economic issues: the need to boost productivity through supply-side reforms; The report announced measures to help all drivers of productivity: skills, investment, innovation, entrepreneurship and competitiveness. These plans include various targeted spending packages, tax and benefit changes, and regulatory reforms aimed at encouraging business investment and workforce engagement. In the coming days, the media and others, individually and collectively, will no doubt be looking for details to assess potential impact. Some industries, employers, places and public bodies will welcome changes in incentives for R&D, planning, foreign direct investment and free trade zones. However, here I want to focus on broader regional questions.

Low productivity is often not identified in the report as a key driver of the UK economy’s weakness both nationally and regionally. It illustrates aspects of how productivity, wealth and well-being are unevenly distributed across our various geographies.

“The UK has the highest regional disparities of any developed country. Today, these are larger than those between East and West Germany and North and South Italy. New technologies, global competition, the loss of old industries — and the failure to support new ones — are all driving that divide. This quote comes from a recent report by the Harvard Kennedy School of Business and Government (HKBG), “Why UK regional policy is not working?” which analyzes the failures and lessons of UK regional policy.

Basic evidence in the form of GVA per head measure of productivity reveals wide inequalities across Great Britain and Northern Ireland (see snapshot in table below). The data show a clear north-west/south-east divide. SW England (including Dorset) is in the middle of twelve UK regions and devolved administrations. On this measure, SW England is below the UK average (-13.2%) while SE England is above (+7.4%). Importantly, the regions in this league have not moved in terms of relative performance or rankings for at least three decades. Regional differences are wide and consistent. Strong economic activity is concentrated in large, well-connected, urban centers in the greater Southeast.

Within SW England, the equivalent indices for Dorset County and Bournemouth, Christchurch and Poole in 2021 are 71.4 and 90.3 respectively: -28.6% and -9.7% above the UK average. Of course, the UK average is significantly higher than London, reflecting how centralized and concentrated our economy is in a 'hub and spokes’ pattern. (It is important to note that GVA/head is a measure of the output of a place divided by the number of residents. Therefore, the amount of travel in or out of an area can increase the number, but not the class. It is a measure of regional income/head, which has regional differences. (Similar, but narrower. Most urban areas, including Dorset, move their relative GVA/head positively by the way the figures are compiled.)

UK Regional GVA 2021 (UK Average = 100)

N East
70.6
Yorks & Lost
80.5
East
89.3

Wales
74.1
W Mids
81.2
Scotland
90.5

N Ireland
79.4
S West
86.8
S East
107.4

E Mids
80.3
N West
87.4
London
183.4

Source ONS

The HKBG report provides six Explanations for UK regional weaknesses:

1. Broader regional divisions are broader and more stable, … difficult to narrow them down;
2. Past regional policies have been spatially biased… and insufficiently ambitious;
3. Centralized approaches promoted disparities in regional development;
4. Policy instability led to unsustainable outcomes due to short-term policy;
5. Stable political leadership, empowering local government, overcoming regional differences; And
6. Cross-party support for local governments working together within city-regions could improve matters.

It suggests Regional policy should consider:

1. Best levers for growth in English regions?
2. The right place for decision-making in local productivity?
3. A way to fund regional revitalization in infrastructure and efficiency?
4. A reconciliation of local fiscal autonomy and accountability, redistributing resources from wealthier regions to expatriates?

Regional disparities in productivity and wealth reflect a number of historical economic forces, notably industrialisation, the rise of London as a global financial center and the failure to keep up with long-term, sub-national policies. The lack of regional progress reflects a combination of over-centralisation, policy inconsistency and globalisation. There is often an optimistic belief that market forces will fix things without the need for government intervention.

There are fundamental and pervasive weaknesses in the UK’s economy, governance and politics. Post-Brexit, policymakers have been less aggressive than expected in pursuing sub-national improvements. As a result, for example, Foreign direct investment In the UK (historically a major source of productivity growth) (FDI) has struggled. Uncertainties about EU market access, smaller scale economies and relatively large policy initiatives in Europe and the US have pushed the UK below France in the FDI league and FDI has fallen from around 10% of GDP in 2016 to under 3% in 2021. The latter was a 'funny’ year, and some of the fall may be recovered as the economy recovers from recent shocks, but some growth potential has been lost, perhaps forever.

Sub-national increases in productivity are key political, institutional and economic challenges for the 2020s and beyond. Regional policy should be part of any UK growth strategy. Spreading wealth by attracting broader and deeper local investment can improve the performance of the entire country.

According to the HKBG report, our local and regional businesses are often optimistic but not efficient. They may be slow to take good advice and act on it. Structural weaknesses are enhanced by capabilities and innovation weaknesses. Many of our international competitors show better regional patterns that reflect the social compactness of the workday, more homogenous workforces, consensus-driven leadership, flatter organizations and better communications. Any progress for the UK would mean more technology and investment and more pay and respect, along the lines of many northern European countries, where work is shorter and with better outcomes. We are far from such a model. „Leveling up” has entered the regional policy lexicon and the Autumn Report presents some of its actions under this label. But, to date, progress in vision, design and „positioning” has been outstanding.

The UK’s diverse, but unproductive, areas need real improvements in productivity that do not restrict successful areas but spread best practice to underperforming ones. Learning lessons from around the world – countries and industries, technologies and skills, and infrastructure and investment – ​​can drive entrepreneurial competitiveness forward. To this end, Collaboration between local businesses, the workforce, and education and other organizations is essential to compete. The Autumn Report makes some of these points, but a radical, positive and comprehensive change in regional policy remains elusive.