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)
|
| London | 118 | 71
| 135 |
| South East | 105 | 80
| 120 |
| East | 100 | 80
| 109 |
| Scotland | 96 | 73
| 94 |
| East Midlands | 98 | 76
| 92 |
| West Midlands | 94 | 74
| 90 |
| North West | 97 | 73
| 90 |
| South West | 90 | 79
| 89 |
| Yorkshire and the Humber | 94
| 73 | 86 |
| Wales | 93 | 68
| 79 |
| Northern Ireland | 86 | 67
| 78 |
| North East | 95 | 68
| 76 |
| UK | 100 | 75
| 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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