Remaking the case for levelling up
The new government has a weird lack of interest in policy to improve economic performance in poorer areas
One thing that has surprised me about the new Labour government is the lack of interest in policy to improve the economic performance of poorer areas. This kind of policy has gone by many names over time in Britain: regional policy, inner-city policy, the Northern Powerhouse - and most recently “Levelling Up” under Boris Johnson.
The new government has got rid of the concept of “Levelling Up” and changed the name of the department responsible. The surprising bit is that they have not put their own version in its place.
I think this is super weird. Whatever your politics, there is a strong case for policy action in this area.
So low-status is the issue under the current government, that on being ousted from being the PM’s Chief of Staff, Sue Gray has been appointed “envoy for regions and nations”. Being sent to work on the issue is clearly regarded as the equivalent of exile to Siberia, or at best, the Stewardship of the Chiltern Hundreds.
I feel like compared to where we were in 2022 we need to start over again making the case for this sort of policy. So this is the first of a series of posts about boosting growth in poorer places.
My back pages
First, a quick declaration of interests: those who know me will know I have been working on this sort of thing for some time. You can find some of the papers I have authored / initiated / coauthored here:
Making a Comeback (2021)
Network Effects (2021)
Levelling Up White Paper (2022)
I was also previously involved in regional policy when I was at the Treasury, helping to develop George Osborne’s Northern Powerhouse agenda and negotiate devolution deals. Later on, I was Minister for Levelling up in 2021-2022, helping to design and negotiate things like the Shared Prosperity Fund.
Just like starting over
Obviously, most of economic policy is not regional policy. Often the thing that will help poorer places most are things that improve the overall functioning of the economy.
It’s perfectly reasonable to say government needs to get the basics right first. There’s no shortage of things to improve about the British economy. Our disastrous energy policy; our difficulty building things; the erosion of a flexible labour market; low productivity growth in the public sector; upward pressure on tax from bad demographics; a migration mix which is not selective enough; dysfunction in capital markets and difficulty channelling finance to productive investments; no equivalent of the amazing innovation-to-market ecosystems of the US or China… I could go on.
But on top of all those other things, policy to strengthen the performance of weaker areas is an important part of creating a strong economy.
I often meet people on the right, or in the civil service who are nervous about regional growth policies, because they think:
They may spill over into policies that damage faster-growing regions.
That the real answer is to go with the grain, and boost successful regions so that people can move to opportunity.
That the whole thing is based on a false premise - that poor areas are poor because of the low-skilled composition of the people who live there, and so we should just think in terms of people not places.
These policies won’t work and will be wasteful - that everything has been tried, and nothing works.
That this is inevitably a social democratic sort of concept, trying to buck the market when actually Britain needs more free-market policies.
I understand why people say all these things, but I don’t agree.
It’s true that in the past policy makers did things which deliberately held back faster-growing areas in the forlorn hope this would help poorer ones, most notably Certificates of Industrial Development in the postwar years. These policies were destructive and a mistake.
It is true that part of the answer is about creating new opportunities elsewhere. This accelerationist perspective is one I particularly associate with Tim Leunig, who is a brilliant guy. But although it is true that there are trade-offs when it comes to spending, much of what we need to do to help places like Oxford or Cambridge grow is about planning and reforming innovation policy. We can get them growing faster with zero impact on our ability to do things for poorer places.
It is also partly true that poorer places are poor because of the skill level of the people in them.
But only partly true. Differences are really not just compositional. The chart below shows the employment rate of people in different parliamentary constituencies all of whom have no qualifications, and the differences are massive: below 46% in the bottom 10% and above 64% in the top 10% of seats.
These massive variations don’t go away if you control for ethnicity. Even if we just look at white people with no qualifications we see the same massive variation. Similar patterns are visible if we look at other variables like earnings, and the pattern is there for higher skill levels too: although the curve gets flatter by the time you work your way up to graduates, even then it doesn’t disappear.
We can also debunk the idea that this is just about skill levels by looking at places over time. Here is what happened to GDP per capita compared to the national average (=100) in areas affected by deindustrialisation. These dramatic declines did not occur because the people living in them tore up their GCSE certificates, or became less able, but because the productivity-enhancing heavy industries these places previously hosted collapsed. There is a lot about economic performance that skill and qualification levels don’t explain.
There is a paper by Gibbons et al (2010) which is sometimes abused to argue that everything is about skill levels. It is a particular HMT favourite. But in this paper the authors are controlling for everything about individuals, including their occupation and industry, not just skill level.
Of course this makes nearly all differences disappear - it’s a reduction to absurdity. For example, if Britain’s post-industrial areas had more people with the occupation “Senior Manager” in the sector “Investment Banking” then yes, they would be richer.
But this is just controlling away the issue - the question about what jobs and industries are where is exactly what we are interested in understanding. The monumental economic changes seen in the table above would be completely invisible viewed through this tinted lens.
The idea that “everything has been tried” is just not plausible either. Tom Forth has written about this at length. Ron Martin and others calculated that between 1960 and 2020, if we include EU spending, then we spent on average around 0.27% of GDP on regional aid. That’s not nothing. It’s about one fifth of the budget of BEIS, the old business department.
But it is not on remotely the same scale as, say, the programme to boost East Germany after reunification. Between 1991 and 2002 spending on the east accounted for 6.3% of West German GDP on average.
It worked: average wages in the East rose from 51% of the Western average in 1991 to 83% by 2019, and life expectancy also caught up, from being about an eighth shorter1.
And the growth happened even as the eastern population fell and people moved west: showing that you can support people moving to opportunity and the creation of new opportunities locally.
You can get it if you really want
Some people will still feel like regional policy is something for left-wing governments. There are certainly more left-wing approaches on regional policy, but I strongly disagree.
Quite a lot of the things you want to do to boost the growth of poorer regions are just… good economic policy. They aren’t always about the government spending money, but about sorting out local governance, and unblocking obstacles to things happening. One of the main tasks of UDCs in the 1980s was to sort out hopelessly fragmented land ownership. Sometimes they are about the government spending on things that unlock growth, like the roads and light railway that allowed London’s Docklands to be regenerated. Sometimes it is the leadership and knocking-heads-together stuff that people like Ben Houchen do.
For the right, policies to spread opportunity are part of a strategic political alternative to left wing policies. All governments of the right in all countries get criticised by the left for not doing enough for poorer people. All of them end up making arguments along the lines that their overall policies will benefit poorer people more in the long run than left wing policies. This argument is stronger if governments on the right can show they are actively spreading opportunity to poorer areas. For the right this is part of our argument about “Hand-ups, not hand-outs”, and spreading opportunity rather than redistribution and so on.
I agree that a lot of left-wing approaches to regional policy are bad, with wasteful spending on doomed arts projects, job-creation boondoggles and excessive focus on the public sector. But there’s a distinctly centre-right set of policies to help poorer places grow faster. Their focus is about attracting private investment, (particularly with lower tax) supporting innovation, sorting out dysfunctional local government and catalysing and breaking down obstacles to private sector activity. I will come back to the centre right approach in the next post.
These policies have more heritage on the right than people recall, with plenty of examples in the Thatcher/Heseltine period: from tax breaks to attract Japanese carmakers to creation of development corporations to drive the revitalisation of London and Liverpool docklands - amongst many others.
With a little help from my friends
There are good reasons to think that efforts to get growth going in poorer parts of the country can enable stronger growth overall - both empirical and theoretical reasons.
On a wide range of measures the UK is one of the most geographically unbalanced economies2. It is very striking that all the developed countries that have higher productivity than the UK also have more balanced economies.
In terms of recent growth rates, rather than levels, the evidence also suggests more balanced economies have certainly not suffered lower growth, and if anything have seen slightly higher growth.
One possible reason for this correlation between balance and overall strength is that more balanced economies may be allocating resources more efficiently. In an unbalanced economy land and other assets might be underutilised in some areas, while others experience congestion costs of various kinds (with high housing costs, rail and roads choked, and social infrastructure overloaded).
Another reason may be that imbalances cause problems with matching in the labour market. All over the world, lower-skilled people are less likely to move to find work, in part because they rely more on family and community networks. This means that greater imbalances and longer travel times to reach “good jobs” make it harder to match people to higher wage jobs they are capable of doing.
There is also evidence of negative graduate earnings premiums in some places for the highly skilled too (which I will come back to in a later post). There are places that can’t offer high skilled people who don’t move the opportunities to get ahead, and there will always be people who don’t move for one reason or another.
More balanced growth might also have quality of life benefits that aren’t fully captured in higher GDP per capita. The UK’s monocentric growth leaves lots of people trying to cram into small spaces where their quality of life is lower - Londoners are the least happy people in Britain, despite higher incomes.
I have been struck by the quality of growth in Western Germany in particular. It lacks a city on the scale of London or Paris, but has lot of thriving small cities and towns where people can enjoy big houses, open spaces and pleasant towns. You don’t have to move to the capital to get ahead in life.
Conclusions
There are good policy and political reasons for people on the right to support efforts to get poorer places growing faster.
It is not true that “we have done everything and nothing works”.
There is an opportunity to get better growth overall and higher quality of life.
Many mistakes have been made in regional policy, but there are a set of distinctively centre right approaches to this question which can do better.
My next post will look at a couple of things that I think are overemphasised in the UK debate about local growth.
This happened despite a disastrous locking for political reasons of the exchange rate to the old Ostmark to the DM at the absurd rate of 1:1 - 500-1000% overvaluation of the Ostmark. They basically drank poison then invented an antidote.
For example, see Philip McCann’s exhaustive analysis of this.
"A leg-up, not a hand-out"
I agree with the vast bulk of the article. I think alongside much improved regional economic policy there is some virtue to accepting a small number of places just don't have a purpose anymore and the people should be helped/supported/incentivesed to move.
Thanks
This should be a core part of the Conservative platform. To add to the argument you’ve made, successive governments have actually prioritised infrastructure investment in the south east, it’s no surprise that growth followed. The practice of the last 40 years almost shows the opposite to those who argue against a levelling up agenda. We need cheap, bountiful energy and good quality infrastructure across the UK.