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The "levelling-up" challenge

Written by: Diane Coyle, Bennett Professor of Public Policy, University of Cambridge

If it were easy to “level up” towns or regions where economic outcomes such as productivity and living standards lag behind the UK’s average, it would have happened long ago. But the evidence collated on the Industrial Strategy Council’s website confirms what experience travelling around the country suggests: the gaps between different places within the UK are large by international standards and as wide as they have ever been.

The geographic pattern is complicated. Successful places lie next to struggling ones, and this is true at different geographic scales, and comparing rural to urban regions. Understanding these different experiences will be key to developing policies that have a chance of succeeding.

In work with my Bennett Institute colleague Penny Mealy, we looked at the ‘complexity’ of different local authorities’ economies. This is a way of ordering places according to the industrial sectors in which they specialise, like a classification system for books in the library. The point of the exercise is that certain activities, labelled as having high complexity, are strongly related to high productivity and earnings. Can low complexity areas move into more complex activities?

The analysis give some insights into what is feasible, because given what is available in any place – such as workforce skills, supply chain specialisms, connectivity, market demand – some higher-value activities are nearby in the complexity ranking. So, as an example, Wigan has existing strengths in basic manufacturing, and could realistically move into higher value manufacturing, distribution of manufactured products, and repair.

Understanding the differences between different places is a vital first step to figuring out policies that might make a difference in future. After all, given where we are, it is clear that previous policies have not succeeded. However, the complexity approach does not uncover the causes for different outcomes – only what is incrementally feasible given the current economic landscape. We are far from understanding the causes of whether different places succeed, or not.

One contributory factor is infrastructure, particularly transport and communications, as these connect workers to jobs and firms to markets for their products and services. In another study, with Marianne Sensier from the University of Manchester, we highlighted the way investment in major transport projects has favoured London in particular. This is partly a matter of political choices in the past, but also reflects the fact that standard cost-benefit analysis fails to take account of the potential effects of the way behaviour can change as a result of a big enough investment.

Politicians and others across the North of England firmly believe major investment to enable more reliable and faster commuting and freight across the region is essential to enable the ‘thick’ labour markets and supply chains enjoyed by the South East. In effect, they are saying additional investment would substantially change the future path of economic growth.

There is research supporting their conclusion. For example, one study of the Beeching cuts to the UK rail network had made a significant difference to the subsequent fortunes of places cut off from rail connections; although some of the lines were uneconomic on any calculation, others could have been left in place if the importance of the network as a whole had been taken into account. A more recent paper looking at the US rail network found that the expansion of rail in the 19th century had very large aggregate effects on productivity because it led to a more efficient allocation of labour and capital geographically.

These are exactly the kinds of questions the Chancellor will be grappling with in his first budget on 11 March. He will clearly have to decide how much scope there is for additional spending, and there are many competing demands including those due to the coronavirus threat to global economic growth. The UK’s investment level – private and public – has been too low for too long so there is no way to catch up in one step. Setting priorities for projects and places will therefore depend on a more detailed analysis of what is feasible, and where significant investments might make a big difference.

The “levelling up” challenge is a long term one, which will affect many Budgets and spending reviews to come. It is a challenge to economists too, to take advantage of new data sets and techniques develop the detailed geographic data and the analytical tools that will help inform policy decisions.

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