Written evidence submitted by Professor Ron Martin, University of Cambridge, Professor Peter Sunley, Southampton University, and Ben Gardiner

Director, Cambridge Econometrics (RDE0012)

1. Regional Economic Imbalance as Long-Standing and Entrenched Problem

Despite the political ‘discovery’ of spatial imbalance in the UK economy since 2010, as between London and the South East on the one hand, and the rest of the country on the other, uneven economic growth across the UK regions is nothing new. Rather, it is a long-standing problem. Major regional inequalities - and a broad ‘north-south divide’ - can be traced back to the beginning of the 20thC, if not earlier (see Table 1; Geary and Stark, 2015, 2016). Following a period of slight narrowing of regional disparities after the Second World War, inequalities in the economic performance of the regions have steadily increased since the early-1970s (Table 2).

Table 1: Regional Disparities in GDP per capita, 1901-1931 (GB=100)

Source: Geary and Stark (2015)

Perhaps more striking is the cumulative differential growth gaps between the regions over time.[1] Figures 1 and 2 shows these for a broad ‘north-south’ split of the regions, and with London shown separately. The gaps record the difference between the yearly growth rate (in employment or output) for any region and that for the national economy as a whole, cumulated year by year over the period 1971-2016.  This has meant significant costs in terms of lost potential output – for instance, had the Northern economy grown at the national rate between 1972-2010 it would have been £49 billion richer in output terms (Gardiner et al, 2013).  The Figures show first, the scale of the growth ‘catch-up’ problem faced by the northern regions compared to their southern counterparts; and, second, the dramatic ‘turnaround’ in London’s differential performance after the late-1980s.

Table 2: Regional Disparities in GVA per capita, 1971-2016

Source of data: Office for National Statistics

That the same broad north-south imbalance in the UK economy appears to be so entrenched, suggests that it is systemic in nature, and has become an ‘institutionalised’ feature of the nature and workings of the national political economy. Successive Governments have pursued some form of regional policy since the late-1920s, for almost a century. Yet, the fact that regional economic disparities are as large  - if not larger - now compared to what they were a century ago, likewise suggests that a much more radical - and systemic - policy response is needed.

Figure 1: Growing Apart: The Cumulative Growth Gap in GVA between the South and North of the UK, and the Dramatic Turnaround of London

Source of data: Cambridge Econometrics. See also Martin et al (2015). GVA in 2016 prices.

Figure 2: Growing Apart: The Cumulative Growth Gap in Employment between the South and North of the UK, and the Dramatic Turnaround of London

Source of data: Cambridge Econometrics.

2. The Local Dimension of the Economic Imbalance Problem

The problem is arguably even more challenging given that the broad regions inevitably mask considerable local variations in economic performance, for example as between different local authority districts (LADs). Figures 3 and 4 show the cumulative differential growth gaps, for employment and GVA, across the LADs over the period 1981-2017.

Figure 3: Cumulative Differential Growth Gaps (Percentage Points), Employment, LADs, 1981-2017

Source: Martin and Gardiner (2019)

Figure 4: Cumulative Differential Growth Gaps (Percentage Points), Gross Value Added, LADs, 1981-2017

Source: Martin and Gardiner (2019)

In both cases, a cumulative differential growth gap of more than 80 percentage points separates the more dynamic and the lagging local authority districts (see also Figures 5 and 6, which show the employment and output growth trajectories of the top 40 and bottom 40 LADs over the same period). What is only too apparent is that many local areas have not shared in the economic growth of the past four decades. There is a striking contrast between the prosperous and dynamic local areas around London, along the M11 to the Cambridge sub-region, along the M4 to Bristol, and up into the Oxford sub-region, on the one hand, and many old industrial areas in the North, South Wales, parts of the North East and North West, central

Figure 5: Divergent Employment Growth, 1981-2017: Top 40 and Bottom 40 LADs

Figure 6: Divergent Output (GVA) Growth, 1981-2017: Top 40 and Bottom 40 LADs

Scotland, and several coastal localities, including seaside towns around the country, including the South East.  The lack of employment growth in these areas over this period has produced widening inequities in economic opportunity and security, leading to negative cumulative outcomes through the outward migration of young, skilled and enterprising individuals. These ‘left-behind places’ are now attracting considerable political and policy attention. Many of them returned a majority for Brexit in the 2016 referendum, a result which was as much a popular disaffection in these places with what is seen as the remoteness and self-serving nature of the London economic, financial and political establishment, as it was with the EU itself.   A similar geography of populist discontent is evident in many of the old industrial areas in the USA, which have likewise been largely by-passed by the economic growth of recent decades (see for example, Hendrickson et al, 2018).

3. The City Dimension of the Imbalance Problem

In the case of the UK there has also been a distinct city dimension to the nature and scale of the geographically unbalanced nature of the UK economy. Most southern cities have pulled apart from their northern counterparts in terms of output and employment growth over the past half-century (Figure 7).

Figure 7: Output and Employment Growth across 85 British cities, 1971-2015

Source: Martin et al  (2019)

Note: Cities based on travel-to-work areas as defined in 2011. ‘Southern cities’ include those in  London, South East, East of England, South West and East Midlands regions; ‘Northern cities’ refer to those in West Midlands, Yorkshire-Humberside, North East, North West, Scotland and Wales. Data not available for cities in Northern Ireland. GVA per employed worker. GVA in 2016 prices.

These variations in output and employment growth across cities have a bearing on the ‘productivity puzzle’ that has attracted increasing concern and debate in recent years. Most attention has focussed on the ‘flat-lining’ of productivity since the financial crisis of 2008. In fact, the rate of productivity growth has been on a downward trend since the early-1990s. This problem, it should be noted, is not unique to the UK, but characterises most of the leading OECD countries. The possible causes of this slowdown have been much debated, ranging from the structural shift from manufacturing to a service economy (the claim being that many services have limited scope for fast productivity growth), to measurement issues (the difficulty of measuring productivity in many services), to diminishing returns to technological advance, to low rates of lack of skills, to inadequate rates of private sector investment, to a trend decline in infrastructure spending as a proportion of GDP, to name just some.

In terms of productivity levels, again most southern cities have enjoyed higher productivity since the beginning of the 1970s (Figure 8).

Figure 8: Labour Productivity Cross British Cities, 1971 and 2015

Source: Martin et al (2019).

When we turn to productivity growth, rather than levels, an interesting picture emerges. During the 1970s, and for part of the 1980s, northern cities tended to record higher rates of productivity growth than southern cities, reflecting the higher dependence of many northern cites on manufacturing (Figure 9).  That is, cities with initially lower than average productivity levels, tended to have above average rates of productivity growth, so that a degree of convergence in productivity levels was taking place. From the late-1980s onwards however, this convergence process stopped, and was even replaced by a slight divergence, with several southern cities tending to record slightly higher rates of productivity growth than northern cities (Figure 10). At the same time, however the rate of productivity growth across southern cities in this later period tended to be lower than the rate recorded by northern cities in the earlier period. In other words, there has been a geographical dimension to the productivity slowdown in the British economy (Figure 11).

Figure 9: Northern Cities lead Productivity Growth, 1971-1981

Source: Martin et al (2019). Data as in Figure 6.

The sources of this uneven geography of productivity performance lie in a combination of changes to industry structure and spatial differences in within-sector effects. In terms of industry composition, many northern and core cities have suffered a steep decline in export-intensive manufacturing and their tradable industries since the early 1970s. In most cases, they have failed to compensate by developing new higher productivity sectors

Figure 10:  Northern Cities have Lost their Lead amidst overall Productivity Growth Slowdown, 2011-2015

Source: Martin et al (2019). Data as in Figure 6.

Figure 11: The Shifting Geographical Imbalance of Productivity Growth, 1971-2015

Source: Martin et al (2019)

such as knowledge intensive business services or creative industries. Instead, the main sectors of employment expansion have been in lower productivity growth services. But changes to industry structure are not the primary cause of urban and regional variations in productivity growth. Instead, our analyses find that productivity growth differences across cities are primarily due to differences in within-sector productivity growth (Martin et al, 2018). The importance of within-sector effects suggests that firm entry and exit processes have variable dynamics, and that some cities and regions have a greater share of high productivity firms, irrespective of their industry structure. Specialisation by function and task and associated differences in skill and occupational structure appear to be increasing in importance and require investigation.

4. Explaining Geographical Economic Imbalances: Is Bigger always Better?

Numerous theories and explanations of geographically unbalanced growth have been advanced in recent years, and the range of causal variables invoked is an extensive one, including for example, economic structure and specialisation, investment, technology, innovation, clusters, skills, infrastructure, institutions and governance. One factor that has tended to dominate discussion, especially with the field of spatial economics, is that of agglomeration.  The geographical concentration of economic activity is argued to boost local growth via various externalities and ‘increasing returns’ effects, for example to do with the availability of a large pool of (skilled) labour, access to a myriad of suppliers and intermediaries, dense networks of information exchange and transfers, and the like. It is further argued that these agglomeration effects tend to increase the productivity of the firms in the agglomeration. Perhaps not surprisingly this claim has  found its way into policy discourse, to become almost a conventional wisdom that ‘bigger cities are better’, since they have higher productivity, and faster growth.  This has in turn fuelled the idea that a policy ‘trade-off’ exists, between higher national growth or greater regional equality (less geographical concentration): that policies intended to achieve a more even geographical spread of economic activity and growth may well results in lower national growth overall. The following quote from a Treasury paper typifies this view:

Theory and evidence suggests that allowing regional concentration of economic activity will increase national growth. As long as economies of scale, knowledge spillovers and a local pool of skilled labour result in productivity gains that outweigh congestion costs, the economy will benefit from agglomeration. … policies that aim to spread growth amongst regions are running counter to the natural growth process and are difficult to justify on efficiency grounds (HM Treasury, 2007).

The evidence for such a ‘trade-off’ is not as unequivocal as this sort of claim suggests (Martin, 2008; Martin et al, 2010). Much of the evidence is based on the USA case. The UK is quite different in its territorial structure and organisation (especially given the dominance of London). Further, the evidence for the scale of the ‘productivity lift’ of agglomeration suggest that it is in fact modest. Most such studies find that a doubling of a city’s size lead to an increase of around 5-6 percent in the level of productivity.  This is hardly a major effect, and it is moreover, a one-off effect. Clearly one cannot continue doubling a city’s size indefinitely. Also, such estimates rarely take full (or indeed any) account of the diseconomies (congestion costs, pollution, the need to invest in ever larger expenditures on infrastructure, and the like) that also rise with city size.  Finally, the evidence for the UK indicates that, it has been smaller cities that have led productivity and high-skill job growth over recent decades (see Figures 8 and 9).

Of course, there are advantages from agglomeration – otherwise cities would not exist: but it is by no means an iron law of the spatial economy that more agglomeration is better, that bigger is better. It is not necessarily size that matters, but what regions, cities and localities do, and how well they do what they do that is crucial; and in this respect the creation, attraction and retention of an educated workforce, an enabling and supportive entrepreneurial environment,  high quality infrastructure, good connectivity with other places, especially those within commuting distance, good quality and range of housing and amenities, and purposeful and strategic local economic governance, are all more important than size per se. It is time that the obsession with ‘agglomeration’ played a less prominent role in policy discourse.

5. Decentralising an Over-Centralised National Political Economy

While recent moves to devolve some economic authority and decision-making to LEPs and City-Deals are welcome, the scale of the resources and range of powers involved look patchy and insufficient given the current challenge presented by spatial imbalance.   The national institutional framework in the UK remains highly centralised and leads to high levels of government expenditure in London and the South East.  Many policy and infrastructural decisions that are ostensibly ‘non-spatial’ actually have a geographical impact that supports and reinforces growth in these ‘core’ regions, acting as what Lord Heseltine once termed ‘a counter-regional policy’. Recent steps to improve planning, infrastructure and innovation in less prosperous cities and areas are a necessary response, but have lacked resource and made highly uneven progress, often due to local disputes and rivalries. Intermittent discretionary funding and programmes subject to perpetual reorganization and churn will, in all probability, continue to prove inadequate.

There is a need for a much more radical – and systemic - policy response. We have argued that this should involve several reforms to the institutional framework with the goal of a devolution of economic governance (see Martin et al, 2016).  The priority is to establish a nation-wide (rather than partial and fragmented) system of functional city-regional authorities that have genuine control over local economic local public revenue and spending, so that they are better resourced, and incentivised to create high quality economic environments. Without this it is hard to see how house-building, planning, skill upgrading and local industrial strategies can be effectively co-ordinated and enacted, so as to grow and embed high productivity enterprises. This needs to be accompanied by a degree of fiscal devolution so that these local government units are better resourced and have powers to retain and spend local taxes and receipts. The risk that further devolution accentuates the differences between resources of these city-region authorities is clearly significant and needs to be managed through appropriate redistribution. A national planning authority and plan would be able to better co-ordinate spatial decision-making across government, and warn of unnecessary and unintended counter-regional effects. Finally, measures to decentralise the banking and financial system in order to support SME emergence and development across the regions are overdue.  A regionally-focused development bank that raised the demand for and supply of patient small firm finance is a necessary corrective to the limited focus and preoccupations of conventional finance (see, for example, Klagge et al, 2017).

6. Trade and Capital Flows: Two Major Data Gaps 

It has long been argued, and economic history supports the contention, that regional and city economic growth and prosperity depend on a strong and competitive local export base. Indeed, as mentioned above, the lagging economic performance of much of northern Britain since the 1970s can be attributed, in part, to the loss of their former vibrant manufacturing export industries and a slowness in replacing these with new export-intensive activities (see Rowthorn,  2010; Martin and Gardiner, 2018). However, such analyses have been based on proxies for trade, since no detailed, consistent time series data on local trade (both exports and imports, both internal to the UK and external to overseas markets) exist. Some official data have just begun to be produced and made available, but these are as yet relatively aggregate in nature, and relate to external (outside UK) trade. There are still no readily available data on internal trade, on how local areas within the UK trade with one another.  Thus, we have but a rudimentary idea about the economic connections between the different parts of the UK, such as supply chains and production networks.

Likewise, the data on capital and related financial flows between the different parts of the UK are also sparse.  Capital movement, and the supply of finance for business, are of crucial importance for understanding the interdependencies, and dependencies, between regions, cities and localities. The geographies of capital flows are no less important than movements of workers in generating spatial imbalances in economic growth. Given the overwhelming concentration of the major financial institutions and related activities in London, the latter attracts capital, savings and investments from all over UK, but little is known about the scale of these flows, and even less about the flows back out of London to the rest of the country. What information we do have – for example on bank lending to SMEs, and on venture capital investment – suggest that London itself and the surrounding South East region are the main beneficiaries.  There has long been a debate over whether and to what extent ‘funding’ and ‘equity’ gaps exist in the regions. There is however a real need for much more data on finance and capital flows if such key issues are to be better mapped and understood.

7. The Need for a Radical Policy Turn

The main implications of the above selected points can be summarised as follows:

• The UK’s regional (spatial) economic imbalance problem is of long standing, going back at least a century. The detailed specific geographies of this imbalance may have changed, and the scale of economic inequalities have waxed and waned, but the main regional patterns – and especially the division between London and the South East on the one hand, and the rest of the UK on the other, have been a consistent and worrying feature.
• A key aspect of this persistence has been the ability of London and the South East to repeatedly ‘reinvent’ their economies around new industries: first, in the inter-war years, when these two areas attracted over 70 percent of all the new mass consumer manufacturing firms of that period (see Scott, 2007); second since the mid-1980s, with the increasing importance of new high-technology, financial, and knowledge intensive business services; and arguably again once more with the rise artificial intelligence, clean technologies, genetic engineering and the like. By comparison, the older industrial regions have lagged well behind in re-orientating their economies in these historic shifts.
• The persistence of the regional imbalance problem over at least a century or more suggests its causes are deep-seated and systemic in nature: Why do London and the greater South East manage to lead each new phase of industrial-technological development? The reasons are many, but the concentration of economic, financial and political power in London and its immediate environs, and the concentration of public spending there,  has undoubtedly played a major role .  The fact that the UK is one of the most centralised economies in the OECD bloc cannot be merely incidental in relation to the scale and persistence of its regional economic imbalance problem.
• The fact that the UK has pursued some form of regional (and urban) policy since the 1920s, seemingly with no real substantial impact on securing a more spatially balanced economy, surely suggests that past policies have never been up to the scale of the challenge, have never been sufficiently strategic, and have always been considered marginal to – rather than as central to - national macro-economic management and Treasury policy. The implication is that a radical rethink of regional policy is now urgently called for, not just for the contribution it could make to national economic growth, productivity and competitiveness, but also to the reduction of the serious and potentially damaging economic, social and political polarisation and division that has come to characterise the UK.
• The various policy initiative that have been introduced in the past few years – from LEPS, to City Deals, to the Industrial Strategy, to devolved Combined Authorities, to local growth funds, strength in places funds, left behind towns funds and so on, are all in a way welcome, not least because they indicate a growing political realisation of the need to spatially rebalance the economy.  But what now exists is a complex, even chaotic, plethora of schemes, many partial in spatial coverage, and often not coordinated or integrated.  This seems to be a typical British policy response: of trying out yet another scheme or intervention in reaction to the latest political credo.  Add to this the churn in the local institutions charged with implementing these multifarious schemes, and the result is almost certain to be limited, even disappointing.
• What, arguably, is needed and is long overdue, is a spatial rebalancing ‘Marshall Plan’, on a scale, and with sufficient strategic vision and intent, spatial coherence, and resource commitment, to promote and harness the economic potential that exists across all parts of the UK - in short, a new national political economy: spatial inclusiveness need not be at the expense of overall national growth and efficiency, but can contribute substantially to it.

Selected References

Blanchard, O.J. and Katz, L.E.  (1992) Regional Evolutions, Brookings Papers in Economic Activity, 1, Washington DC.

Deutsche Bank (2013) London and the UK Economy: In for a Penny in for a Pound? Special Report, Deutsche Bank Markets Research.

Gardiner, B., Martin, R.L., Sunley, P. and Tyler, P. (2013) Spatially Unbalanced Growth in the British Economy, Journal of Economic Geography 13, pp. 889-928.

Geary, F. and Stark, T. (2015) Regional GDP in the UK, 1861-1911; New Estimates, Economic History Review, 68, pp. 123-144.

Geary, F. and Stark, T. (2016) What Happened to Regional Inequality in Britain in the Twentieth Century?  Economic History Review, 69, pp. 216-228.

Hendrickson, C., Muro, M. and Galston, W. (2018) Countering the Geography of Discontent: Strategies for Left-Behind Places, Brookings Institution, Washington.

Klagge, B., Martin, R.L. and Sunley, P. (2017) The Spatial Structure of the Financial System and the Funding of Regional Business: A Comparison of Britain and Germany,  pp. 125-153 in R.L. Martin and J.Pollard (Eds) Handbook on the Geography of Money and Finance, Elgar.

Martin, R.L. (2008) National Growth Versus Regional Equality? A Cautionary Note on the New Trade-Off Thinking in Regional policy discourse, Regional Science, Policy and Practice, 1, pp. 3-13.

Martin, R.L. (2015)  Rebalancing the Spatial Economy: The Challenge for Regional Theory Territory, Politics Governance, 3, pp. 235-272.

Martin, R.L., Pike, A., Tyler, P. and Gardiner, B. (2016) Spatial Rebalancing in the UK Economy: Towards a New Policy Model,  Regional Studies 50, pp. 342-357.

Martin, R.L. (2019) The Disunited Economy: The Left-Behind Places, Why They Matter, and What can be Done About Them, presentation to the Chief Economic Development Officers Workshop on Inclusive Growth, London, 8 July.

Martin, R.L., Gardiner and Tyler, P. (2010) Does Spatial Agglomeration Increase National Growth?  Some evidence from Europe, Journal of Economic Geography, 11, pp. 979-1006.

Martin, R.L. and Gardiner, B. (2018) Reviving the Northern Powerhouse and Spatially Rebalancing the British Economy: The Scale of the Challenge, Ch. 2 in Berry, C. and Giovannini, A. (Eds) Developing England’s North: The Political Economy of the Northern Powerhouse, pp.23-58.

Martin, R.L., Sunley, P., Gardiner, B., Pike, A., Tyler.P., and Evenhuis, E. (2018) The City Dimension of the Productivity Puzzle: The Relative Role of Structural Change and Within-Sector Slowdown, Journal of Economic Geography, 18, pp. 539-570.

Martin, R.L., Gardiner, B., Sunley, P., Pike, A., Tyler.P., Bailey, D. and Evenhuis, E. (2019) The Economic Performance of Britain’s Cities: Patterns, Processes and Policy Implications, 55 pp. (www.cityevolutions.org.uk)

Martin, R.L. and Gardiner, B. (2019) The Resilience of Cities to Economic Shocks: A Tale of Four Recessions (and the Challenge of Brexit), Papers in Regional Science, DOI: 101111/pirs.12430, 32pp. https://rsaiconnect.onlinelibrary.wiley.com/doi/epdf/10.1111/pirs.12430

Rowthorn, R.E. (2010) Combined and Uneven Development: Reflections on the North-South Divide, Spatial Economic Analysis, 5, pp. 363-388.

Scott, P. (2007) The Triumph of the South: A Regional Economic History of Early Twentieth Century Britain, Farnham: Ashgate.

July 2019