Select Committee on Treasury Written Evidence


Memorandum submitted by ippr north

SUMMARY

  To understand the reasons for regional productivity differentials is it imperative that we set out a clear conceptual framework for thinking about regional economic disparities. Productivity cannot be discussed in isolation. Much of the Government's focus in regional policy stems from its concern with the UK's productivity gap with a number of other countries. However, this is a fundamentally limiting approach in terms of both the analysis of the regional problem and the range of policies necessary to address that problem. Most importantly, it downgrades the importance of disparities in employment across the UK's regions.

  While there is a broad "North-South" divide in prosperity in the UK, the relative importance of differences in employment and productivity in explaining these differences in GVA per head differs from region to region. The low GDP per head of regions such as Wales and the North East is explained in large part by low levels of employment; their productivity levels are similar to many regions with higher GVA per head.

  This submission considers the effectiveness of current policy in three key areas: the regional skills, education and training agenda; science, innovation and the regions; and in enterprise policy.

  1.  ippr north is based in Newcastle-upon-Tyne. It is part of the Institute for Public Policy Research (ippr)—the UK's leading think-tank. We are the most influential research organisation promoting social justice and enhancing political debate.

THE REASONS FOR PRODUCTIVITY DIFFERENTIALS BETWEEN REGIONS

  2.  To understand the reasons for regional productivity differentials is it imperative that we set out a clear conceptual framework for thinking about regional economic disparities. Productivity cannot be discussed in isolation. Much of the Government's focus in regional policy stems from its concern with the UK's productivity gap with a number of other countries, in particular France, Germany and the USA. However, this is a fundamentally limiting approach in terms of both the analysis of the regional problem and the range of policies necessary to address that problem. Most importantly, it downgrades the importance of disparities in employment across the UK's regions.


  3.  HM Treasury and the DTI do acknowledge in their Productivity 3 report[53]that at the most basic level differences in GVA per capita will primarily be a function of regional variations in productivity and employment (paragraph 1.10). They state that "policies should tackle both productivity and labour market weaknesses if they are successfully to affect regional GDP per capita gaps" (paragraph 1.13). However, it is clear that their major concern is to close the UK's productivity gap, and can best be described, to paraphrase former US President Kennedy, as "ask not what your country can do for your region, but what your region can do for your country". It is not at all clear that this reflects the concerns of some in the lagging regions, indeed in their economic agenda the Welsh Assembly Government have prioritised employment over productivity.

  4.  One of the weaknesses of the Government's approach is that it also misses out some of the most important drivers of prosperity at a regional and local level, specifically the efficiency with which the labour and housing markets operate. We should aim to have a conceptual framework that allows these two critical issues to be addressed and which give employment issues their due weight. Our suggested framework is set out in Figure 1, and is taken from a recent ippr report[54]. We think this represents a much fuller picture for thinking about the causes of and potential solutions to regional economic disparities, and discusses productivity in a more balanced manner.

  5.  Table 1 details levels of prosperity, productivity and employment in the UK's 12 nations and regions. We differ from the Government in the indices we use to measure some of these factors. We prefer as a measurement of productivity output per hour worked, rather than output per person employed. The latter does not take into account any differences in working hours between different regions and countries and the former is a better measure of the efficiency with which labour is being used. We also prefer to use a straight measure of the employment rate rather than the Government's combination of working-age population share, labour market participation rates, and unemployment rates. This is particularly because the unemployment rate is no longer as reliable a guide to the health of the labour market as it may have been because of the growth in economic inactivity.

Table 1

LEVELS OF REGIONAL PROSPERITY, PRODUCTIVITY AND EMPLOYMENT
Productivity

(GVA per hour

worked 2001)
Employment Rates

(as a percentage

of all people

of working age,

Spring 2001)
Output

(GVA per head 2001)
London11871 135
South East10580 120
East10080 109
Scotland9673 94
East Midlands9876 92
West Midlands9474 90
North West9773 90
South West9079 89
Yorkshire and the Humber94 7386
Wales9368 79
Northern Ireland8667 78
North East9568 76
UK10075 100

Source: National Statistics[55]; Regional Trends[56]

  6.  The figures for regional income or GVA per head (based on where people reside) will come as little surprise, detailing a broad "North-South" divide with a "winner's circle" in the "Greater South East" of the UK (consisting of London, the East of England and the South East regions). These regional disparities emerged during the 1920s and there has been remarkably little change since then.

  7.  The relative importance of differences in employment and productivity in explaining these differences in GVA per head differs from region to region. The low GVA per head of regions such as Wales and the North East is explained in large part by low levels of employment; their productivity levels are similar to many regions with higher GVA per head. On the other hand, the South West has above average levels of employment, but relatively poor productivity (and a low working age population share). London's relative prosperity is due to its high levels of productivity, though it has mediocre rates of employment (but a high working age population share).

THE OPERATION AND EFFECTIVENESS OF THE VARIOUS PROGRAMMES TO ADDRESS THE PRODUCTIVITY GAP AT A REGIONAL LEVEL

The regional skills, education and training agenda

  8.  A focus on productivity might lead to an emphasis on very different skills and particular policy instruments than a focus on employment. For example, a focus on employment might lead to an emphasis on improving adult basic skills, whereas a focus on productivity might lead to an emphasis on higher education. In any case there is a fairly clear "North-South" gap across the English regions in terms of both types of qualifications—London and the South East have significantly higher proportions of the working age population with higher education qualifications and lower proportions of the population with no qualifications.

  9.  This gap is partly a consequence of differences in educational attainment at 16 and staying on rates post-16, but are also a consequence of out-migration of the better qualified to more prosperous regions, where a higher proportion of better jobs is on offer.

  10.  Recent moves to regionalise the local Learning and Skills budgets are a red herring—it is impossible for the public sector to match the skills of the workforce to the demands of employers. Individuals should make their own decisions over further education and training. RDAs should focus on increasing the demand for skills from employers, in itself a very difficult agenda.

  11.  One recent issue flagged up by the Chancellor is whether the UK has sufficient regional and local variation in pay. Although national pay setting is the norm in both the private and the public sector, in practice there is much local discretion to reflect local circumstances. In general the labour market does not seem to be failing in a profound way to allocate labour efficiently across the regions, although there are specific problems, including parts of the public sector. Successful congested regions should bear the costs of higher pay for public sector workers.

Science, innovation and the regions

  12.  Innovation—the invention and application of new technologies, products and production processes—is generally assumed to be a key driver of productivity and employment growth. Policy in recent years has been driven by vague concepts, such as the creation of a "knowledge-based economy" and by a small number of individuals who have become skilled at promoting their ideas—Michael Porter and "cluster theory"; Richard Florida and the "creative class" and the Boho index, the Work Foundation and "Ideopolis".

  13.  One of the reasons for this is a paucity of good evidence from rigorous evaluation. A large element of innovation policy should be focused on dissemination and on what must seem rather mundane initiatives, such as human resource management or modest improvements in management practice. At present we do not even have a methodology by which to measure such things.

  14.  The most common proxy for innovation is spending on Research and Development (R&D. Business dominates R&D expenditure: 67% of the total in 2000. Of the remaining 33% which is public expenditure, 21% is by higher education institutes and 12% by government itself. There are clear regional differences in business, HE and directly government funded R&D, and it is within government spending that the sharpest divides are to be found: £1 per head in the North East and £78 per head in the South East. A different picture emerges from the UK Innovation Survey, which concluded that there were few substantial differences between regions. This survey is still in its infancy but its results should not be dismissed as too counter-intuitive. It may be that firms in the "North" are not less innovative but that there are less of them.

  15.  While it is important to remember that science policy is not innovation policy, there are very clear regional divides in science spending, and although the science base in all regions needs to be strengthened a key question is whether the science base should be "regionalised"—with spending more evenly spread across the UK? This is not an easy issue and difficult trade-offs need to be managed—funding science in the "Greater South East" might exacerbate regional economic differentials; regionalising the science base could harm the standing of UK science. There will not always be a "win-win" situation. A centre-left government should prioritise regional policy and full-employment.

  16.  Some science institutions should be relocated from the "Greater South East" to "lagging" regions. This may lead to a culture change that would address the South East-centric bias in the distribution of science spending. Suggested institutions include the seven research councils and the Higher Education Funding Council for England. New investment in science could also be "top-sliced" to create a regional science fund.

Enterprise policy

  17.  In the UK, debates about enterprise are too focused on small and medium sized enterprises (SMEs). In truth, enterprise policy is as relevant to large firms as to small firms. While SMEs create a large number of new jobs, they are also subject to large-scale job losses. Notably, a higher proportion of the workforce is employed in SMEs in "lagging" Northern Ireland and Wales than in "prosperous" London. There seems little correlation between employment by firm size and regional prosperity.

  18.  Nearly £8 billion is spent on public sector support for SMEs: £3 billion by DEFRA on agricultural support, £2.6 billion by the Treasury on revenue foregone through tax measures, and £2.2 billion on other initiatives. This £2.2 billion is spent on a complicated and inefficient array of initiatives, particularly external business advice. A pilot scheme is currently in operation where four RDAs are leading the co-ordination and management of Business Links. It may be too early to judge their success, but the case for RDAs assuming responsibility is strong.

  19.  A great deal of research has tried to establish the characteristics of the more successful entrepreneur. One conclusion is that age is an important determinant, and the easiest way to promote enterprise is to focus on 30- or 40-something individuals who are well educated and who have experience of working in a particular sector. Social enterprise has moved up the political and policy agenda in recent years, but it is not clear how useful it is in improving economic activity, achieving higher levels of productivity or creating jobs.

  20.  Enterprise Areas are also a recent creation. Their boundaries are drawn at the ward level (postcode level in Scotland). However, these deprived areas are unlikely to have a high proportion of the managers and professionals likely to make successful entrepreneurs. A focus on broader Travel-To-Work Areas would be more likely to ensure that Enterprise Areas cover potential entrepreneurs. Those in "hard-to-reach" communities may start a business but, crucially, they would also be within travelling distance should other entrepreneurs create job opportunities.

January 2004





53   HM Treasury and DTI (2001) Productivity in the UK: 3-The Regional Dimension London: HMT. Back

54   Adams J, Robinson P and Vigor A (2003) A New Regional Policy for the UK London: ippr. Back

55   www.statistics.gov.uk/pdfdir/prodr1203.pdf Back

56   http://www.statistics.gov.uk/downloads/theme_compendia/Regional_Trends_37/Regional_Trends_37_contents_revised.pdf Back


 
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