Sunday, April 17, 2005
North-South divide set to widen with a vengeance
Posted by David Smith at 11:00 AM
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There’s not long left, so now is the time to launch my short series: Things they are not telling you during the election campaign.

Let me start with one important issue, the prospect of deep regional disparities reasserting themselves in the coming years. The north-south divide is on the way back, and this time with a vengeance.

Figures last week gave a hint of the shape of things to come. Unemployment rates on the claimant-count measure rose last month in just three regions of Britain — northeast England, Yorkshire & Humberside and the East Midlands.

The government’s panic over MG Rover, and the questionable use of £6.5m of public funds during a pre-election period to stave off redundancies, unsuccessfully, shows that ministers are not at all confident about the job-generating ability of regions that depend on manufacturing.

Why haven’t regional disparities been at the fore in recent years? One reason is that London and the southeast suffered from the three-year bear market in shares and the downturn in the global economy. According to Experian Business Strategies, London suffered a recession in 2002, its gross domestic product falling by 1%, and managed only 0.4% growth in 2003, before returning to normal (over 3%) last year.

A second reason is that Gordon Brown’s public-sector recruitment drive has been of particular benefit to regions outside London and southeast England. In the north, state jobs account for a much higher proportion of employment, and that proportion is rising. Brown’s deliberate policy of shifting public-sector jobs away from the southeast is reinforcing this effect.

Other policies pursued by Brown have had a significant regional impact. His strategy of redistribution from better-off to poorer households is well known. What is less often noted is that these policies, such as tax credits and the national minimum wage, do not take account of the higher cost of living in the southeast. They therefore have a much bigger impact in the regions.

A third reason is that regional differences look less troubling when the economy is doing well. The northeast’s unemployment rate, 3.9%, is nearly 2½ times the southeast’s 1.6%. But that doesn’t look as bad as it would if the figures were, say, 10% and 4% respectively.

So the government has succeeded in keeping a lid on the north-south divide. All that, however, is going to change. Public-sector employment growth will ease back and normal service will be resumed. Ove Arup and Partners and Oxford Economic Forecasting set out some of this in an excellent recent report for the government, Regional Futures: England’s Regions in 2030.

The north (defined here as northeast and northwest England and Yorkshire) has an abject job- creation record. In the period 1971-2004, just 10,100 net jobs were created, and that includes the recent burst of public-sector jobs. In the Midlands over the same period there were 619,000 net new jobs, while in the south there were 2.73m.

“These trends are unlikely to be reversed in the next 25 years,” the report says. “Graduate employment, R&D, new business formation and other competitiveness indicators are all much higher in London, the southeast and the east of England.”

Closely related to the dynamics of employment growth are those of population. London accounts for 63% of the natural increase in the (English) population and 60% of net inward migration from other countries. Official projections have the regions and counties furthest away from London experiencing population decline or only modest growth over the next quarter of a century, while the population of the south rises by 15%-16%.

The Arup report characterises London as a mega-city, its hinterland taking in a population of 18m, nearly a third of the UK total. There are prospering cities in the north, notably Leeds and Manchester, and in Scotland, notably Edinburgh, but they are dwarfed by London’s scale, influence and reach.

Nick Banks, one of the authors of the report, sees much of the north as still being rooted too much in the industrial society of the past, while the south has adapted to the new reality of a 21st-century, post-industrial society.

The outlook, according to regional forecasters, is for growth in the south to exceed significantly that in the north. The top four regions for growth and employment over the period 2004-12 will be the southeast, the east of England, London and the southwest, according to Experian Business Strategies.

If that looks like a smug, comfortable outlook for the south, it is far from that. The “mega city” that is London suffers from its own success. The southeast’s infrastructure is creaking under the strain and increased congestion means that quality of life is suffering.

The government, sensibly, has rejected the old-style regional policy approach of trying to limit growth in the southeast in the mistaken belief that this will help the north. Unfortunately, it has failed to follow through with the alternative, that of removing enough barriers to growth in the southeast so that the region effortlessly pulls the rest of the country along with it.

Thus, projected new housebuilding is running well behind the growth of households (next time you look at advertisements for new houses check how many of them are outside the southeast).

One big post-election political battle will be over the government’s ability to force through a much bigger increase in housebuilding within striking distance of London.

Meanwhile, investment in transport is running well behind demand. London’s Crossrail project, first proposed in 1989 and endorsed in Labour’s manifesto last week, will not be operating until at least 2013-14.

Can anything be done to achieve a better regional balance in Britain? For as long as I have been writing about this subject people have suggested that technology — distance working — would come to the regions’ rescue. That is not happening, and looks unlikely to do so. Neither manufacturing nor the public sector offers solutions. Economically, the north has to adapt so that it becomes more like the south. And that is a lot easier said than done.

PS: The markets have decided that the election result is a foregone conclusion, hence the lack of any pre- polling day volatility. Investors and traders see Labour returned but with a reduced majority and in some cases, via spread betting, are putting their money where their mouths are.

There is still scope for a little excitement. One would be if the opinion polls turned in the Tories’ favour. Another could arise from the combination of two elections, Britain’s on May 5 and the French constitutional referendum on May 29, on which the polls are pointing to a “non” vote.

According to David Bloom, HSBC’s director of currency strategy, the combination of a comfortable Labour victory and a French non would push the pound higher, not necessarily an enticing prospect for struggling manufacturing exporters. The argument is that the French vote would both undermine the euro and take the political pressure off a re-elected Blair government on Europe.

A narrow Labour victory and a French “oui”, on the other hand, would not be great news for sterling. It would put pressure on the government to get a yes vote in Britain’s own referendum, planned for next year, and reopen old Labour wounds over Europe. All eyes, it seems, will soon be on Paris.

From The Sunday Times, April 17 2005

Comments

A great issue to bring back to the fore.

The inherent weaknesses of several regional economies have remained despite window dressing to try and suggest otherwise. The North East has continued to be the worst performing region on almost every measure for two decades for example.

Words like industrial and post industrial are not helpful either - they are polemnic fuzzy concepts, of which many, such as knowledge economy, clusters, remote working etc which are so often the emperors new clothes of economic development.

About half of regional economic development policy and expenditure is window dressing and tinkering at the edges. What's often forgotten is that regions such as the NE often lack sufficiently developed domestic demand side economies - bluntly, not enough decent sized, decently performing businesses; an over-reliance on large externally owned employers, small domestic demand to fuel indigenous enterprise growth. The NE has few inherent competitive strengths in comparison to the SE of England.

There's a wealth of research, evidence, analyis on regional and local economic development now. We understand the problems and opportunities well. What I would like to see is policies and actions at the local level that more realistically address these. Some progress has been made.

The point about remote or even home working - there is little evidence to suggest that this has happened to any remarkable extent. It is, I am afraid, a theory and concept often converted into facts via a journalist's or politician's notebook!

So what to do - let's start thinking about how we build competitive locations for doing business in the North rather than dogmatically pursuing vague and unproven dreams and visions of 'knowledge economy' or 'biotech clusters' in Gateshead etc. Fundamentally we need private businesses to set up or locate in the North to employ people and generate wealth. We need to give them reasons to do so. We cannot afford to be so fussy about what businesses set up or expand.

I think, the main challenge facing regional economic policy in the North is that in some areas, its tough to creat substantial economic growth from a very low (and worsening) base position.

I don't have any answers, but I am in a fortunate professional position to be working on them. A lifetime's work!

Posted by: Glenn at April 18, 2005 01:07 PM
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