How can you level up when you don’t know why regional disparities exist?
You’re reading Reaction. To get Iain Martin’s weekly newsletter, columnists including Tim Marshall, Maggie Pagano and Adam Boulton, full access to the site and invitations to member-exclusive events, become a member HERE.
Displaying its policy wonk origins, Michael Gove’s long-awaited white paper on levelling up the United Kingdom and one of the government’s flagship policies, is full of historical analogies and quotes.
The 322 page epic starts with a tour d’horizon going back 7,000 years, the middle part is a detailed analysis of productivity differentials between regions, somewhat bedevilled by being based on out of date statistical definitions, while the end is a sort of “greatest hits” where virtually every type of regional policy that has been tried since the 1980s is repackaged.
Its biggest weakness is that it has neither analysed in any depth why the current regional disparities exist nor why the UK’s most successful local growth initiative in recent years, East London’s Flat White Economy, emerged.
Without understanding either of these, the White Paper’s recommendations are likely to prove an expensive hotchpotch. One fears that much of the funding will be frittered away on various politicians’ pet schemes without doing much to solve the underlying problem.
The key analytical statement in the white paper is its analysis of the impact of globalisation:
“These dynamics of the global economy have benefited the UK overall, improving productivity, increasing wealth and driving up living standards through more innovation and competition. These dynamics, however, have not had the same positive economic and social impacts across the UK. While London and much of the South East have benefited economically, former industrial centres and many coastal communities have suffered. This has left deep and lasting scars in many of these places, damaging skills, jobs, innovation, pride in place, health and wellbeing.“
But this is extremely shallow. Most of the current disparities existed long before the recent bout of globalisation. The Jarrow marches were in the 1930s, the first regional disparities task force in the 1920s. And the global free trade of the 19th century was what lay behind the success of Manchester, Birmingham, Glasgow, Belfast and the other great cities throughout the UK.
Blaming everything on globalisation stands in the way of understanding how to make poorer areas richer.
A better approach than that in the White Paper would be to understand the nature of path dependency and see how areas that have become depressed then become unattractive to the skilled and talented and so their process of immiseration is continued. They get bogged down in despair. The physical infrastructure deteriorates. Breaking into this circle of causation is not easy but has to be undertaken before the depressed areas start to revive.
What is also essential is to move away from the 1960s style analysis that throwing money at the problem will solve it. This was tried and didn’t work. Which is not to say that government spending isn’t needed – but it has to be focussed on specific problems which are often different in different places.
Those who wrote the white paper see the problems of the depressed parts of the UK as a lack of capital of various different kinds to match the surplus labour that is available. But capital is in fact fairly easily available and government initiatives from the 1950s onwards have thrown infrastructure, investment grants and other finance at the problem. One of the side effects of this approach has been to create a class of well remunerated bureaucrats in the regions who often act as a barrier to solving the local problems.
Studying the Flat White Economy that emerged in the East End of London gives plenty of clues to how to solve the problem.
First, the extent of the previous deprivation in the East End needs to be understood. The 2000 planning white paper observed that “Many of the areas of East London identified by Charles Booth in the late 19th century still show up today as having the worst social deprivation. In three wards in Tower Hamlets, over 80% of children live in households that depend on means tested benefits.” In the tail end of the 20th century the level of deprivation meant that property was cheap and students and artists moved in. When Cebr moved to the border between Islington and Hackney in 2000 the area was reputed to have the greatest concentration of artists per square mile anywhere in the world.
The area’s strength in arts and film plus its cheap accommodation and its relatively central location with easy access to central London meant that as the web site design industry started to take off, East London became a natural location. Then the area became fashionable and success bred on success. As a result the cost of housing in Shoreditch rose by 858% between January 1995 and November 2021 compared with 388% for the country as a whole.
The East End of London benefitted from luck. But as Gary Player used to say, the harder I practice the luckier I get. The biggest stroke of luck was the UK’s very early take off in online retail, roughly twice as fast as the other main European economies. This meant an early take off in online marketing. As the UK for many years had been the European centre for advertising there was a natural match between the East End’s artistic and creative skills and the burgeoning demand for websites and digital marketing.
The second stoke of luck was immigration. Immigration from all round the world but particularly from the then depressed economies in Eastern Europe (newly joining the EU) and Southern Europe (where the Euro had caused mass youth unemployment). Most of the immigrants were young and technologically literate. This provided not only a labour force but also a source of creativity.
Most studies that analyse the source of artistic creativity shows that migrants who leave the comfort zone of their own countries show greater creativity. The analysis in my book about the East End’s renaissance The Flat White Economy showed that not only did these immigrants boost their own creativity but also that of the native population with whom they worked. As creativity is the raw material of the new knowledge economy, much as coal and iron were for the industrial age, this is critical in the creation of the knowledge economy.
The third stroke of luck cannot be replicated elsewhere which is the proximity of the East End of London to the City. Which meant that the UK’s booming fintech sector was almost bound to move there. Fintech is now the strongest driving force of the Flat White sector.
So what lessons can be learned?
First, the ‘I’ word cannot be ignored. The White Paper mentions immigration 6 times. In each case explaining how Brexit has permitted immigration to be controlled. Yet there is no way in which regions with histories of low entrepreneurship and excessive dependence on the public sector can possibly revive without the entrepreneurial push from immigration. People with no history of starting businesses do not become entrepreneurs overnight. Reviving regions will need to attract striving people to kick start their businesses. It’s not just in the UK that migration is the key – for example the bulk of Silicon valley startups were started by migrants. Until Brits become more innately entrepreneurial, we will have to rely on our migrants for much of our entrepreneurialism as well as to boost our creativity.
Second, ignoring London is a mistake. One of the UK’s greatest national strengths is London and its cosmopolitan and exciting life. People from everywhere want to visit London – on the border between China and Mongolia 3 years ago an immigration official told me when I explained where I lived – “to visit London would be my dream”.
Far from stopping the ‘brain drain’ from the regions to London as is proposed in the White Paper, the regions need to build a circular brain drain where people go to London, make the connections that you can in a cosmopolitan capital, and then return to their own region to use their new found skills and connections to build up new businesses. Regions need to be connected with London, not to ignore it.
Third, regional cities will have to become aspirational to attract young people. This partly means building up local universities teaching on site, partly ensuring development of the clubs, bars and music venues that make places attractive to young people. One of the US’s most thriving tech hubs is Nashville, based on its historic music roots. Young people, particularly those who spend most of their lives behind screens, need to socialise. The places that look most attractive for socialising are often those that attract most skills.
Fourth is the realisation that most digital jobs aren’t actually digital. I’ve been explaining this to disbelieving techie people since I was Chief Economist at IBM UK in the 1980s. It’s still true today. Most of what becomes enabled by tech is not tech itself but something that uses tech. Website design is an example, creating mainly jobs for designers, not tech experts. Though investment in digital skills is important, helping people with other skills use tech is the real prize.
Finally, this vision of the knowledge economy is largely city based. That is largely because cities, with their opportunities for socialising, tend to attract the pools of labour that are essential for a knowledge economy. There seems to be a particular desire to socialise for knowledge workers who are stuck in front of screens all day. Generating the sorts of venues that encourage this is pretty well impossible except in towns and cities.
What about devolution? The early experience is mixed. The danger is that devolution is used to funds the development of relatively authoritarian local one party states in regions which often discourage the development of alternative sources of power and influence. But devolution at its best can allow for different experiments in generating local growth that can be compared. Each successful experiment should lead to imitation.
Going back to the White Paper, other than the need to encourage immigration, which is crucial, many of the ideas that might make development of the knowledge economies in the regions of the UK are actually contained in it. But so are a whole host of other policies which could sidetrack both resources and energy.
The key message is that any successful regional development initiative has to start from entrepreneurial businesses, not from government officials who are more likely to obstruct development than promote it. Tees Valley Mayor Ben Houchen wants the power to cut taxes to attract businesses. Margaret Thatcher’s enterprise zones provided tax holidays. Even Harold Wilson’s Selective Employment Tax and Regional Employment Premium tried to cut the cost of labour in regional areas through tax rebates.
The scope to cut local taxes would almost certainly do more than a whole host of government spending initiatives to help start to bridge the regional divide. But any policy that doesn’t attract creative and entrepreneurial immigrants is unlikely to do much to solve so entrenched a problem.
Douglas McWilliams is Deputy Chairman of Cebr the economics consultancy. His book, The Flat White Economy, chronicles the emergence of London’s tech sector. He has also been Chief Economist for IBM UK.