Regional inequality is a local problem now on the national agenda. Levelling Up the UK economy has been a government priority since the general election last December when the victorious Conservative Party won a swathe of seats in northern England from Labour in traditionally working-class areas.
But to address regional inequality we need to get straight about its causes.
Geographical disparities in income are not unique to the UK: the US East and West coasts are richer than the states in the middle; the North of Italy outperforms the South; and output per worker is still significantly greater in the former West Germany than the former East.
Yet, two things do stand out about regional inequality in the UK. First, the disparity between the South East and the rest of the country is greater than that seen in almost any other developed economy. The ratio between GDP per head in the richest 10% of regions and the poorest 10% is 4.3- the highest in any OECD country[1]. Secondly, excluding London, UK towns and cities have lower productivity than their counterparts in similarly rich countries.
Figure 1 – % of GVA attributable to FDI in UK regional economies. Source: ONS
Numerous explanations have been posited for the extent of regional inequality in the UK, but not all stand up to scrutiny. The complaint that governments systematically prioritise spending on the already affluent South East does not tally with the reality that the Treasury’s cost benefit analysis methodology favours less prosperous regions by assuming a uniform average income across the country.
London does attract the lion’s share of foreign direct investment, but it is not wildly out of proportion to the size of its economy (see fig 1). As Guy Currey, Director of Invest North East England, notes in the OCO Global Broadcast , in relation to their population size, the North East and Northern Ireland attracted the most FDI projects in 2019.
Educational outcomes are better in the capital than elsewhere in the country but, until recently, the reverse was true, and it did not obviously hold London back.
However, two factors do stand out as compelling explanations for the UK’s exceptional regional inequality. The first is the low productivity of larger towns and cities in the UK, aside from London. Intriguing research by the Centre for Cities and the Open Data Institute suggests that this is in large part due to the absence of effective public transport – not the much-vaunted high-speed links to London but local services which enable efficient commuting.
The research demonstrates that in most countries a relationship exists between productivity per worker and size of city – the larger the city, the higher the productivity. However, this relationship does not hold in the UK.
Figure 2 – Size should matter: relationship between population and productivity per worker… in France and UK
One reason why larger towns and cities tend to be more productive is down to what economists call ‘agglomeration effects’ – really two separate phenomena, often conflated: the benefits that accrue from localised specialties or ‘clusters’ and the more general advantages that come from urbanisation
– where everything a company needs is within easy reach. But these latter benefits accrue not in relation to geographical proximity but rather to journey times. If it takes an hour to travel 5 miles across a city, many of these agglomeration benefits are surrendered. And the public transport networks of the UK’s second tier cities are poor (see fig 3).
Figure 3 – fixed line public transport in Lyon and Birmingham. Source: Citymetric
Once you replace population size with the number of workers within effective commutable distance, the link between size and productivity is re-established for UK towns and cities.
A second major factor is the centralisation of power in the UK. Successive governments since the 1980s have wrested powers from regional authorities, consolidating them in Westminster. This has coincided with the de-industrialisation of the North of the country, so it is difficult to isolate the impact of each. However, the counterfactual does exist: Scotland. It, too, suffered declines in traditional manufacturing, but unlike the North of England, it has had considerable power to shape its own destiny since devolution in 1999. Control over planning, economic policy and elements of taxation have enabled Scotland to carve out its own niche. The 2020 EY Attractiveness Survey confirmed that for the seventh year in a row, Scotland retained its position as the most attractive UK location for FDI outside London, with a 7.4% increase in FDI projects. In general terms, countries with more devolved systems of government tend to be more equal.
Aside from the government’s explicit levelling up agenda, the economic ‘elephant in the room’ is COVID-19. The Coronavirus lockdown has hit all regions of the UK economy hard, and the initial impact may have been greatest in the most deprived areas. While large sections of the London services economy have been able to continue with employees working from home, less affluent regions depend more on retail, hospitality, and manufacturing, all of which require physical presence in shared workspaces.
However, the medium-term prognosis for areas outside of London and the South East may be more positive. In a future with more home working, and potentially restricted hospitality, employees may question the value of living in one of the most expensive cities in the world. As Steve Harper, Executive Director of Invest Northern Ireland points out in the OCO Global Broadcast, “Levelling Up the UK, the key to regional economic development”, regions like Northern Ireland are well placed to offer a high standard of living, better work life balance and good connectivity. From an investor’s point of view, the draw may be access to UK talent or the UK market, at a discount to the cost of investing in the capital.
A second strand to post-COVID regional economic development strategy may be to exploit the trend towards onshoring and reshoring, i.e. the policy of multinational firms reducing the fragility of their operation by sourcing parts closer to home and diversifying their supply chains. The argument goes: the North of England or Wales may be expensive compared to China, but they are cheap compared to the South East of England. So, if there is an imperative to source manufactured goods from within the UK, it is those regions that stand to benefit. It will be interesting to see data emerge over the coming months quantifying the extent to which boardroom conversations are translating into concrete investments.
Ultimately, though, regional inequality is a symptom of a wider phenomenon. Globalisation has enriched the world in aggregate, but the benefits and costs have fallen unequally.[1] Western manufacturing – and therefore regions that have depended on it – have lost out to lower wage economies in the East while those who trade in intellectual property have been enriched by access to a global marketplace. For those who have long argued for a more interventionist industrial policy, UK regional economic development cannot come too soon. For those who champion laissez-faire economics the question arises: how do you advocate free trade to regional electorates that have not felt its benefits? As the Brexit referendum reminded us, this is not a rhetorical question.
At OCO Global we work with regional development organisations, investment promotion agencies and governments to facilitate market access for exporters and to help attract foreign direct investment. If you would like to know more about how we can support your organisation, please get in touch with nick.watson@wordpress-448088-2081753.cloudwaysapps.com.
[2] See forthcoming blog from my colleague, Julia Bach
[1] The Economist, Leaders, 30 July 2020
