The answer to regional inequality isn’t public money, it’s productivity
Andy Burnham’s ambitions for Number 10 North are nothing new, but successive governments have failed to focus on the key reason for differing regional outcomes, says Paul Ormerod
The creation of Number 10 North symbolises a key aspect of Andy Burnham’s policies. Namely, to revive the economies of the more deprived parts of the UK.
The previous Conservative government came up with the slogan “Levelling Up” to describe such an aspiration. It may now be taboo in government circles. But the new phrase “prosperity in every postcode” expresses the same intention.
Harold Wilson had a similar optimistic view in the run up to the general election of 1964, shortly after being elected Leader of the Labour Party.
The great 19th century Conservative Prime Minister Benjamin Disraeli had coined the concept of ‘two nations’ within Britain, one rich the other poor. Wilson turned it against the Tories 100 years later, arguing there was still “an over-congested south-east and the starved north”.
We see Disraeli worrying about regional inequalities in the 1860s, and Wilson doing the same in the 1960s, followed by Sunak in the early 2020s and now Burnham in the mid-2020s.
We can readily deduce from this that it is not an easy problem to solve.
In the six decades following Wilson’s speech there has been a proliferation of regional initiatives. Billions of pounds have been spent. But the inequality persists.
A key reason for this is that much of the activity has failed to focus on the key reasons for differences in regional outcomes.
The main reason why many areas in the regions are poor is because the average firm has relatively low productivity and can therefore only pay relatively low wages and salaries.
Building new transport links, refurbishing shopping centres, providing training courses, all these have only an indirect outcome on regional differences in incomes.
Raising productivity
The key aim must be to raise the productivity levels of firms. There are two aspects to this.
First, the industrial structure of the economically weaker areas is weighted towards industrial sectors which themselves have inherently low productivity. A report by the OECD in 2020 gave this as the main reason why the UK’s regional cities lag behind both London and the South East and their counterparts in Western Europe.
The second is that there is a very wide difference between the most and the least productive firms in any given industry, even when the industry is defined very narrowly. The poorer areas of the UK have too many firms in the mid/low end of the productivity distribution and too few at the high end.
In short, the regions need to increase the importance to their economies of high productivity sectors and to help those firms already based there who want to boost their productivity levels.
Policy should be focused directly on achieving these aims.
Useful evidence of the effectiveness of targeting the productivity issue directly comes from a new paper from the Productivity Institute (PI) at the University of Manchester (note: the PI is separate from the Business School to which I am attached).
UK Research and Innovation (UKRI) funds projects designed to promote collaborations in research and innovation between both companies themselves and companies and universities.
The PI applied sophisticated and powerful analytical techniques to a database of 25,122 projects funded by UKRI over the 2004-2021period involving 44,406 participating firms and institutions across the UK. They examine a wide range of different collaborative structures, for example whether they are within or across regions, whether they are university-industry or private-public.
They find strong evidence that public support for R&D and knowledge collaborations has an unequivocally positive effect on regional economic development.
The lesson is clear. Blanket spending on the regions does very little to narrow the economic gap between them, as the last 60 years demonstrates. Smart, targeted spending can make a distinct difference.
Paul Ormerod is an Honorary Professor at the Alliance Business School at the University of Manchester. You can follow him on Instagram @profpaulormerod