Devolution is the shakeup Britain needs
In France, Germany and Italy, productivity levels in second cities are 20 to 30 per cent higher than they are in the UK. Devolution could change that, writes Paul Ormerod
Much has already been written about Andy Burnham’s speech on Monday setting out his 10 year agenda. A key part of his platform is devolution to the regions of the UK away from London.
The time scale over which success of this initiative can be judged is long. In his book with the Mayor of Liverpool, Steve Rotherham, the second of their 10 essential policy points was called a “basic law”. This is a reference to a version of a law passed by Germany after West Germany and East Germany were reunified, saying all states in the country should have “equivalent living standards”.
In Germany, a great deal of progress has indeed been made. But even now, some 35 years on from reunification, the states which comprise the old Communist East Germany still lag the more prosperous parts of the West.
The Germans recognised the need for truly radical policies to enable the East to catch up. It was massively behind the income and productivity levels of the Federal Republic in the West.
The good news is that the gap in prosperity between the UK regions and London and the South East is nowhere near as large as it was between East and West Germany. The former operated under the failed system of socialist planning. At least the British regions operate in a market oriented economy.
But the gap is still substantial. And it shows few signs of narrowing. Indeed, the take off in the Golden Triangle of London/Cambridge/Oxford may be widening the difference.
The potential for increasing productivity levels in the regions is certainly there. In 2020, the OECD published a major report entitled “Enhancing Productivity in UK core cities” These were 11 cities which in turn form the core centres of economic activity in their own areas, such as Liverpool, Manchester, Leeds, Newcastle, Cardiff and Glasgow.
The OECD describes them as “second tier” cities; second tier, that is, to the main city namely London. There is no inherent reason why such cities should underperform economically. The report shows that in countries, such as France, Germany and Italy, productivity levels in second-tier cities are 20 to 30 per cent higher than they are in the UK.
Britain’s regions are underperforming
We might reasonably wonder why market forces have not solved this problem. Rents and labour, at least in the private sector, are cheaper in the second-tier cities than they are in London. So companies have an incentive to relocate to these areas.
Market forces do indeed operate, but in this context they are weak in comparison to factors identified by the OECD such as relatively low skill levels and a weighting towards low productivity industries in our regional cities.
The measures advocated by the OECD are very similar to those of the Prime Minister-in-waiting: devolution of power, expanded vocational and technical training, housing, improved public transport and the like.
The focus on the concept of place in Burnham’s agenda has attracted support from the 2019 economics Nobel Laureates, Abhijit Banerjee and Esther Duflo, in their book Good Economics for Hard Times. They write “Economists have traditionally been unwilling to embrace place-based projects… This analysis seems to give too little weight to the facts on the ground”.
The plain fact is that both North and South lose out from the underperformance of the regions. Equally plainly, decades of regional policies driven from Whitehall have made little difference to the gap.
There is no point in carrying on with more of the same. A radical approach is needed. Burnham’s policies have attracted a lot of criticism. But they are innovative and different and have a chance of succeeding.
Paul Ormerod is an honorary professor at the Alliance Business School at the University of Manchester