Examination of Witnesses (Questions 140-159)
18 MAY 2004
PROFESSOR STEVE
FOTHERGILL, DR
PETER TYLER
AND MR
JOHN ADAMS
Q140 Mr Fallon: How coherent do you think
the Government's target is at the moment—and presumably,
looking at the PSA target, it would still be possible for the
south to grow as strongly as it is at the moment—and how
likely is it for the target be met?
Dr Tyler: It is a weak target.
It can be met, but it will not necessarily make the sorts of step
changes that we require if we are going to achieve all the objectives
and the things which your Committee is looking at and which are
so important to the UK.
Q141 Mr Fallon: In this coming Spending
Review, how would you like to see the target redefined?
Dr Tyler We have positively to
wish to narrow the gap between the existing levels of prosperity
in the north relative to the south. We can do things with growth
rates, but ultimately we need to see a step change in the rate
of growth of the more depressed regions relative to the prosperous
regions, otherwise convergence cannot occur. To bring about convergence
anyway, from my experience of looking across the whole of Europe,
is not an easy task. The countries that do use a whole series
of concerted actions, which at the moment we are not doing.
Q142 Mr Fallon: What part does this convergence
that you seek play in determining our international competitiveness?
Dr Tyler: My colleagues, in a
number of the papers that you have been looking at, have made
the point that the UK in its southern and eastern parts is now
really at full employment. We now have a situation which has been
a standard regional policy issue dating back for decades. We have
a situation where the south is overheating and the UK's rate of
economic growth is constrained by that. It seems to me almost
a matter of common sense that the more we can bring resources
underutilised in the north into the play of things, the more we
are going to grow more nationally as a country. I think we are
ultimately constrained by regional disposition.
Q143 Mr Fallon: Who should really be
directing the new target that you would like to see put in place?
At the moment, we seem to have this slight confusion between the
Treasury and Mr Prescott's department and the DTI. Who should
be driving the target of the kind that you have just redefined?
Dr Tyler: I find it difficult
to answer on "driving". I do believe that if we are
gong to make our regions the sorts of places where people want
to say and invest, then we require concerted action across all
the arms of government and we require co-ordinated action at the
regional level from all the major ministries. I cannot believe
that it should just be those that are principally economically
driven. It seems to me that the whole physical and economic and
social remit comes together to produce healthy and fast-growing
places. That is what our competitors and colleagues in Europe
do: they bring together all the arms of government to develop
and deliver a satisfying place.
Q144 Mr Fallon: Why is that not happening
here? We have had the Treasury talking about regional productivity;
we have had the DTI with its various schemes. Why are we so bad
at that kind of co-ordination here?
Dr Tyler: We tend to be driven
down particular tramlines and I do not believe we co-ordinate
very well. As a nation, I just do not believe we co-ordinate very
well, centrally or locally, and particularly at the regional level.
We do not have much of a history of that. I do believe that at
the regional level we need to co-ordinate a lot more between what
government does in the regions and what the RDAs are doing in
the regions. It seems to me that the whole agenda needs to grow
together. From my experience of looking at other countries, and
some of the examples you mentioned, they are just a lot more adept,
particularly in the States, at bringing those things together.
Coming back to your original question, I am not sure who should
lead but I am convinced that there needs to be a big party of
people at the table.
Q145 Mr Fallon: What is the role of the
Treasury in all this? Should it be stronger than it is?
Dr Tyler: Another issue which
I would like to talk about at some stage today is how we get resources
to bring about the sorts of changes required in some of our run-down
regions. As I remarked earlier, in a way, it has been remarkable
how much change has been brought about, particularly in many of
our large cities, which have suffered hugely compared to anywhere
else in Europe in the last 20 years. When you look at how much
change has been brought about, it is impressive, but we require
a lot more. The Treasury is always going to be involved with finance
and I think we need lots of new financing solutions to allow the
more rapid pace of change in our depressed regions. I think the
Treasury is still pretty formative.
Q146 Mr Fallon: The Treasury in its role
as disburser of public money: is that what you mean?
Dr Tyler: The Treasury in all
sorts of ways. It is the Treasury in terms of looking at the big
financing picture, but it is also, again from looking at some
of the models I have looked at across the world, about coming
up with new ways of financing infrastructure which we are so dreadfully
short of, particularly in our backward regions.
Mr Adams: May I make two very
quick points? The first is that the ODP is an England-only body
and the PSA target which we are discussing this afternoon applies
only to England, but of course Scotland, Wales and Northern Ireland
are part of the United Kingdom. Even post-devolution, central
government has an interest in the economy of the UK as a whole.
The second point I wanted to make is that the Treasury's role
is not just confined to financial issues. The PSA process, the
Spending Review process, does allocate money between different
government departments, but it also creates the headline targets,
which then feature in government policy, which is then the focus
of work by government departments over the next few years. So
the role of Treasury is, yes, as financial distributor, but also
it is very much about becoming a driving force in domestic policy
per se. I think the main reason why regional economic issues
on productivity have risen up the agenda is because of the interests
of the Treasury. For those of us who support regional economic
policy, that is only to be welcomed.
Professor Fothergill: Could I
come back on this notion that has been mentioned, that somehow
past regional policy has been a failure? I have seen that in ministerial
speeches; I have seen it in all sorts of documents. Frankly, it
is simply not true. If you look at the long history of regional
policy—and, like Peter Tyler, I have been engaged in this
game for many years—you can see that we had a number of
periods of very intensive and rather successful regional policy
in this country:in the immediate post-war years, and then there
was a long period, from about the beginning of the Sixties through
to about the end of the 1970s, when we spent a lot of money on
regional policy and we did actually create a lot of jobs in the
weaker regions, jobs that would not otherwise have been there.
It is quite wrong to talk about failing in the past just because
the problem areas are the same now as they were maybe 70 years
ago. The problem is that regional policy has always had to be
swimming against the tide. We have seen the complete erosion,
indeed destruction, of the economic base of some of Britain's
peripheral regions. Once upon a time, places like the North-East
were built on coal, steel, shipbuilding and heavy engineering.
Most of these industries have gone or been reduced to a shadow
of their former selves. It is hardly surprising that there are
still problems in these areas, even though regional policy has
actually worked and worked very effectively at certain times.
It has cost a lot of money but it has worked.
Dr Tyler: I would like to reiterate
one point. I can identify examples of areas which have turned
around. I would like to reinforce this point. I believe regional
policy, in its broadest sense, has been responsible for that.
I do not accept that in general regional policy has been a failure.
Q147 Mr Fallon: You seem to do a lot
more of it?
Dr Tyler: It is a question of
the former; I do not think there is really a choice. If you argue
that you wish to see a more even distribution of economic activity
in the UK because you believe, on the grounds of national efficiency,
that that is desirable, as well as regional equity, then you have
to have some form of regional policy. In my note you can see how
the Dutch and other countries in Europe have been very successful
at doing just that. Until we get into a mindset that thinks especially
about that, we are not going to achieve the sorts of national
growth we want. I ought to say that another problem has emerged.
We are now really short of regional identity in many places amongst
entrepreneurs and others. I am increasingly interested in what
I call regional entrepreneurs because I believe, going back to
our Victorian forefathers, there was a lot more desire then to
promote regions and make them grow for all sorts of reasons.
Q148 Mr Heathcoat-Amory: The Treasury's
paper on productivity estimates that about 60% of the regional
difference in GDP per capita is attributable to productivity
differentials. To be fair to the Treasury, it sees productivity
as being important but not absolutely dominant. In tacking the
productivity side of it, the Chancellor made a speech in January
in which he played quite heavily on the market-based solution.
He talked about better planning but also about encouraging local
and regional pay flexibility and the virtues of competition. He
also talked about the Treasury and the importance of remedying
market failures. I would like to get an idea from our witnesses
about the balance between where we could rely on better and more
flexible, lower factor costs, lower rents, bringing in more investment
and so on and the sort of market-based solution, which I think
the Chancellor was on about in January, and secondly this idea
about correcting market failures probably by direct intervention.
What is a priority and what do we mean by correcting market failures?
No-one has any idea what I am talking about?
Dr Tyler: Perhaps I could start.
There is a whole raft of market failures. The question of what
is exactly a market failure is an interesting one. For many years
since the 1930s, policy has played heavily to try to overcome
market failures in property markets and land markets. I believe
the UK should rightly be proud over 70 years of the sorts of initiatives
that it has had to overcome dereliction, contamination and all
sorts of land adjustment problems, which I believe have impeded
the regeneration of our big cities, particularly in the northern
areas. Certainly I would support fairly extensively the approach,
taking land and property as an example, that that has been very
useful in overcoming what are obvious market failures which impede
economic growth. I feel as you move across the other drivers,
then you start to see other examples of that.
Q149 Mr Heathcoat-Amory: Surely, when
a firm goes out of business or an industry dies, that releases
a lot of cheap land which is attractive, given the enormous rental
prices in the south-east? That is a market driver which makes
the north or bits of other regions of Britain more attractive.
That is a market solution. I am trying to get a feel for how the
market would be seen to operate and what we mean by market failure,
which seems to be just a posh term for grant intervention, which
we have had a lot of in the past. What is new about correcting
market failure? What do we mean by this rather attractive phrase?
What are we talking about there?
Professor Fothergill: Let me try
to give an example, picking up on the property issue. You say
that when a firm may close in the north, a large stock of cheap
land becomes available for development and why does that not attract
firms from the south. The fact is that the property market in
large parts of the north still works so that even once you have
redeveloped that land, the cost of redeveloping it actually exceeds
the value of the completed development. There is a gap. That is
simply because property values and rental levels are not sufficiently
high in large parts of the north to justify the market undertaking
normal, private property sector development activity. Traditionally,
the way the government has overcome that problem, that market
failure if you like, is by providing gap funding for property
development, or, if you go back far enough in time, it was by
direct development by the government itself in the pre-1980 days.
That is one example of how the market fails where the economics
simply do not stack and, without intervention, nothing at all
will happen. Having said that, to characterise the failure of
the economy of the north as being one simply of market failure
is a little bit too glib. You have to look at different components
of the overall economy. In the labour market, in many respects,
the market works remarkably well in shifting skilled workers in
short supply from the north down to the south. That ends up denuding
the north of many of the people who might be needed to supply
inward investors with a labour force. It is not simply that it
is all market failure in one direction.
Q150 Mr Heathcoat-Amory: Could I ask
about the quality of the decision-making? If we are going to remedy
market failures in the Treasury's terms, presumably this means
that people, officials, regional development agencies, are going
to be taking quite difficult decisions. Do our witnesses have
confidence that their decision is going to be better than the
long stream of picking winners for support of failing industries,
modernisations, which we have had in the past? That has a very
long history and, despite what Professor Fothergill said, I think
certainly, at least in some cases, those are acknowledged failures.
A lot of money was spent in a fruitless attempt to intervene in
a way that did not bring the benefits we expected. Why do we think
that modern market failure intervention is likely to be any more
intelligent?
Dr Tyler: Increasingly policy,
certainly the policy we see these days, is concerned really to
provide resources that local decision takers are supposed to put
together to bring about effective solutions. In the last
15 years, particularly through major regeneration initiatives
like the Single Regeneration Budget, we have been seeing locally-based
partnerships representing people from the private sector, the
public sector, and other stakeholders coming together to decide
how to spend this money. It is not a matter any more of some centralised
states deciding who should spend the money. The money is increasingly
being spent by those who know best what needs to be done with
it. We do not need to confuse the matter with successive statements
about what regional policy has done in whole different decades
to where we currently are. We are now about developing regions
that are quality places, and local people need the resources to
do that. If one believes that the whole of the market can do it,
I can show you plenty of statistics that will show you that once
the market is just running without a regional policy of any sort,
then the market concentrates again on existing areas of wellbeing.
That is the reality. We need mechanisms to tackle that. I cannot
but agree with you that we do not want people making the decisions
that you might feel are less able to do so compared to the local
industry. That policy is long gone.
Professor Fothergill: May I ask
almost a rhetorical question? What is the alternative to bringing
administrative discretion into the process? If the alternative
is to rely on the private sector and the market to do it all for
itself, then, frankly, the private sector will not do it, for
example, in the property market in certain areas. The other alterative
might be to remove the discretion of civil servants and simply
give automatic financial assistance to firms. The trouble with
that is that you often end up giving a lot of money where it is
not actually needed in what economists call "deadweight".
I cannot really see any alternative to going down the route of
introducing an element of administrative discretion into financial
support in the regions, if on the one hand you want something
to happen and, on the other hand, you do not want to make it inordinately
expensive by spreading the money across just about everything.
Q151 Mr Heathcoat-Amory: You have not
answered my question. Professor Fothergill talked about local
people being given resources. This sounds wonderful. We all want
resources and businessmen locally in my constituency love being
given resources, but who, and at what level, and how, and why,
is going to work next time?
Mr Adams: One of the instances
which I have concerns about is where the state is intervening
in the market in cluster policy. There are lots of criticisms
of cluster policy but it seems to me that the main one is that
it is, in effect, picking winners; it is picking sectors that
it is hoped will succeed. That is intervention in the market and
it is a risk that might pay off but, as you say, the state's role
in picking winners in the past has not been hugely successful,
but we wait and see. The main driver for cluster policy has been
the DTI. The DTI has pressured RDAs to go down the role of having
many, many clusters. The idea that the centre is better at determining
the role between the market and the state than regional institutions
is not borne out by all the evidence.
Dr Tyler: I would probably like
to stay away from cluster policy and just focus on the nitty-gritty
of actually getting land and people back into use in our old industrial
areas. As Professor Fothergill has mentioned, if you look at most
of the land and property markets in relatively depressed regions,
they do get into a sort of vicious circle whereby the market will
not redevelop land speculatively because there is not an adequate
rate of economic return. What happens therefore is absolutely
nothing for many, many decades. The role of government, and it
must surely be a role in this modern age—and all of our
fellow competitors and colleagues across Europe do this—is
actually to get that market working again. That is what our very
successful land and property markets policies have done. It is
not just a question of giving people at the local level the resources;
it is a question really of devising the best solutions to regenerate
local areas. That is not to say that Whitehall should not find
some resources to allow that process to happen. I cannot see otherwise
how local regeneration will come about, given the deadweight costs
of the industrial legacy. By the way, I would also like to point
out that many of our competitors and colleagues in Europe, like
the Republic of Ireland, have adopted these sorts of approaches
with massive success. I do not think it is a question of just
giving people money at the local level and then in some sense
wasting it. The regeneration of our big cities which is now underway
is a tribute to 20 years or more of local decision-makers using
money from government to enact change; without that resource,
they could not do it.
Professor Fothergill: Land and
property can only be one part.
Q152 Mr Heathcoat-Amory: I have one more
question. I come from the county of Somerset, which is a victim
of this system. The grants that South Wales gets draws firms and
jobs across the Bristol Channel to South Wales. There are many
documented examples from my own constituency. In a way, to correct
a market failure in Wales, they are creating a market failure
in Somerset. Are our witnesses at all worried that we are introducing
a new distortion whereby a firm that wants to locate in my own
constituency is, against its market judgment, drawn across to
somewhere else? Is this an unintended consequence?
Professor Fothergill: May I say
that I do not think that is a fair view of regional policy in
the present context. In the context that we had, let us say, in
the 1980s when there was mass unemployment just about everywhere,
then fair enough, I think you could certainly argue that if you
were encouraging firms to go to South Wales instead of Somerset,
or more likely somewhere along the M4 corridor nearer London,
then it was a bit of a zero sum game, but in the fully employed
parts of Britain, which is quite a large part of the south now,
there is probably not the capacity to accommodate a great deal
more of additional economic activity and a great deal of employment.
If you can get jobs into the South Wales areas of this world and
into the North-East areas of England, this will be a net addition
to economic activity in the economy as a whole. I would now say
that it also the principal way of working towards overall national
full employment. If you pull the big levers of macro-economic
policy, you tend to overheat the economy in the fully employed
parts of the south and generate inflationary pressures. No, I
do not think it is fair to say that this is a zero sum game. There
are real net benefits to expenditure on regional policy to the
national economy and to the taxpayer.
Dr Tyler: May I add that a balanced
settlement pattern where we have not got run-down inner cities
and where we have more prosperous activity everywhere is in the
interests of every area in the UK. I really cannot see that the
argument is very strong these days for not doing something about
the sorts of areas we are talking about. I admit you have to be
aware, of course, of displacement effects, but we have become
very good at being aware of those. We probably invented regional
policies, so we ought to know what to do about those sorts of
things.
Q153 John Mann: Mr Adams, are cities
the new clusters?
Mr Adams: They certainly are very
fashionable at the moment. If you look at the evidence, I think
it is true to say that cities and possibly city regions have had
faster economic growth than areas outwith cities. It would be
wrong to focus on cities at the expense of other areas in our
regions.
Q154 John Mann: Why does government intervention,
for example DTI intervention, focus so heavily on cities? For
example, if we take the Small Business Service for Nottinghamshire,
35% of their activities are in the City of Nottingham?
Mr Adams: I do not know why you
could say that. It is true to say that those industries which
do not operate in cities have not had the profile which they deserve.
If you look at the area in which I live in the North-East, at
Washington in Sunderland, which has the most efficient car plant
in Europe, and if you look at the chemical industry on Teesside,
it is one of the biggest, most impressive and productive plants
in all of Europe, but Sunderland and Teesside are areas which
do receive central government money. I do not think the government
solely focuses on cities, but those are more fashionable at the
moment. I would like to see a broader regional economic approach
rather that the focus on cities and city regions, which we do
see at the moment, that is true.
Dr Tyler: I think the answer to
that question is relatively straightforward. The greatest need
is still in these areas, particularly Nottingham, which is an
area that is slow to turn round.
Q155 John Mann: What do you mean by "the
greater need"?
Dr Tyler: In terms of the inner
city problems, the need to stimulate new businesses, the need
to get activity going again.
Q156 John Mann: Do you mean economic
or social indicators?
Dr Tyler: The two inter-play.
If you look at our big cities, many years ago they were generators
of people who started businesses; they therefore used to produce
lots of jobs for the local population. They have found it difficult
to replace the activities they have lost. Therefore, it is wholly
appropriate that, since we see cities as economically efficient
ways of concentrating production and bringing work to people and
quality of life, it makes sense to try to enable those places
again. I also would emphasise that I believe the relative improvement
in our cities, the big cities, is a relatively recent thing and
is still in many ways quite fragile. In terms of the different
groups in society we are taking about, equally it is still not
delivering those benefits to the individuals who may be experiencing
local problems. I can quite see why in a place like Nottingham
you would want disproportionately to concentrate the assistance.
Mr Adams: I think I might disagree
slightly with my colleague sitting to my left. To say that all
need is based in cities is slightly over-egging the pudding, especially
when you look at some of the coalfield communities and the seaside
towns which exist in and around the United Kingdom.
Q157 John Mann: Let me ask Professor
Fothergill. Let me anticipate his question. I have a copy of Real
Level of Unemployment, 2004. In that you state that real unemployment
in my constituency is 14.2%. How do you calculate that 14.2%?
Professor Fothergill: It is quite
a sophisticated exercise. I think the general point you need to
bear in mind about the current claimant unemployment figures is
that in Britain we have become very good at, one, diverting people
from unemployment benefits on to other benefits and, two, diverting
people right out of the benefits system altogether. What we did
in that particular exercise was to try to estimate the size.
Q158 John Mann: Can you give an indication
because 14.2% is a high figure? What does that 14.2% come from?
Professor Fothergill: The biggest
single distortion to the unemployment figures is that we divert
large numbers of people who would like work and who are able to
work on to incapacity benefit. You need to bear in mind that at
the moment we have 900,000 people claiming to be unemployed and
2.7 million people of working age on sickness-related benefits,
principally incapacity benefit. I am not saying all of those would
be in work in a fully employed economy, but we have expended hundreds
of thousands of pounds of public money trying to get a handle
on what the scale of hidden unemployment is amongst that 2.7 million.
Q159 John Mann: If we take those on incapacity
benefit in my constituency, that figure is just over 4,000, so
nothing vaguely like 14.2%?
Professor Fothergill: Your constituency,
Bassetlaw, will have a working age population of 30,000 to 35,000.
The total population is probably round about double that. 4% of
the working age population of, say, 35,000—I am guessing
at the orders of magnitude—that certainly puts you at round
about the 10 percentage point mark. We are not saying all of those
are hidden unemployed. Some of them are and they need to be added
to the claimant unemployed. In Britain we divert large numbers
of women in particular right out of the benefits system, not on
to IB. For example, if a woman has a partner in work and she does
not have sufficient National Insurance credits but wants to work
and is looking for work, she will not be counted in the unemployment
figures.
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