Memorandum submitted by Dr Peter Tyler,
Department of Land Economy, University of Cambridge
REGIONAL PRODUCTIVITY
The background documentation to the enquiry
identifies the prime concern to be an examination of the effectiveness
of Government policy in closing the regional productivity gap.
However, there is also particular interest in assessing progress
in achieving the joint Treasury/DTI/ODPM Public Service Agreement
target in the 2002 Spending Review. This is to "make sustainable
improvements in the economic performance of all English Regions
and over the long term reduce the persistent gap in growth rates
between the regions, defining measures to improve performance
and reporting progress against these measures by 2006". I
am grateful for the opportunity to provide evidence to the Treasury
Committee. I have been involved for over 25 years in a number
of studies for Government designed to assess the causes of regional
differences in economic growth and the relative effectiveness
of Government urban and regional policies.
As the HM Treasury/DTI document "Productivity
in the UK: the regional dimension" indicates, there are significant
differences in GDP per capita across the regions of the United
Kingdom and this is a source of concern on grounds of both equity
and efficiency. In terms of economic efficiency, if GDP per capita
in the weakest regions could be lifted to that of the strongest,
then this would be a substantial boost to the overall level of
UK GDP. GDP in the least prosperous regions can be raised by increasing
the productivity of those currently in work but also by increasing
the employment rate, ie by getting more people actually into work
in the region. The extent to which the employment rate can be
increased depends on the number of people of working age in the
region and the scope for increasing their participation in the
labour market.
Research has suggested that in the United Kingdom
regional variations in productivity probably account for about
half of the existing regional variations in GDP per capita at
the present time. Relatively virtuous regions like the South East
have relatively high productivity, high participation and low
unemployment. The worst regions have the opposite on all three
counts. The evidence points to there being even larger differences
in productivity within standard regions than between them, and
these differences have been there for some considerable time (Rhodes
and Tyler 1986). Thus, for much of the post-war period some of
the large cities have been poor performers relative to the accessible
rural areas that surround them. There has also been a strong tendency
for areas and regions with relatively low productivity and employment
rates to remain that way one decade to the next—a phenomenon
that gives rise to the label of "fixed effects", or
simply that the relative pattern observed to day is much as it
was yesterday. This has tended to lead many commentators to suggest
that the forces that underpin the relative patterns observed are
quite strong.
The upshot of the above is that, if the persistent
gap in growth rates between regions is to be addressed (the Treasury/DTI/ODPM
PSA target in the 2002 Spending Review), then it is necessary
to increase the growth of productivity and the employment rate
in the slower growing regions. To increase the employment rate
requires that there are workers willing and able to participate
in the regional labour market and, crucially, enough new job opportunities
for them to find work. Recent work that I have undertaken with
colleagues in the University of Cambridge has examined the nature
of the challenge that exists and the scope for policy intervention.
With respect to geographical variations in productivity
I would like to refer to a recent paper by Professor Ron Martin,
Ben Gardiner and I (see references). As this paper discusses,
there are a number of conceptual and measurement problems associated
with producing indicators of productivity. In the paper we prefer
to adopt a Labour-Force-Survey-hours-worked productivity measure
and we have sought to compare and contrast regional differences
in labour productivity across the European Union. This allows
regional variations in the United Kingdom to be put in perspective.
Figure 1 below indicates the findings. Across the EU-15 productivity
is only 50% of the EU-15 average in some regions, particularly
in the Mediterranean countries. In other regions it is at least
50% above the average. This is the case in the Netherlands, Austria,
Denmark, much of Finland, parts of Ireland, some areas in Southern
Germany and the South East of England in the United Kingdom. Figure
2 drawn from the analysis indicates that every EU-15 nation has
regional disparities in productivity. However, there are two central
observations in relation to the United Kingdom. Many of the UK
regions are below the EU average and the UK compares unfavourably
in relation to France in this respect. Moreover, the relative
position has not improved significantly over time. It is of interest
that, in general, regional disparities in the existing EU-15 countries
are usually wider than the Accession states (where productivity
is pretty weak across the board and well below the existing EU-15
average).
The results for the United Kingdom must be a
source of concern that there has not been much tendency for the
relative disparities to close over nearly 20 years. The United
Kingdom has not, infact, been alone in this respect since there
has tended to be slow convergence in productivity levels across
the regions of Europe and there is debate as to why increasing
integration across Europe has not been leading to significant
convergence. As always, there are two quite different schools
of thought as to what economic theory might predict! One school
has argued that there should be increasing convergence as the
low productivity regions "catch-up". The other school
argues that increased convergence is not to be expected because
there are powerful forces that are tending to lead to increasing
regional specialisation and concentration of economic activity
that concentrates productivity growth in the existing relatively
prosperous regions. What is also clear from the work we have been
able to undertake in Cambridge is that there have been very few
regions where there has been "virtuous" productivity
growth—in the sense that both productivity and employment
have grown at the same time. Such a favourable pattern of change
has only occurred in 19 regions out of 200 NUTS 2 regions studied
over the period 1975-98. The more common outcome is that there
are productivity gains in regions but usually alongside substantial
loss of employment as production has been rationalised.
There has been some interest in assessing whether
the differences between areas in productivity can be "explained"
by variations in industrial structure and a tendency for some
areas to be relatively specialised in the goods and services they
produce. In the main, although in some places structure can be
important, it is not felt to be the main contributor to the geographical
variations in productivity that exist. In a similar vein, there
is a strong belief that geographical clustering may convey productivity
gains. The precise role of geographical clusters remains unclear
in contributing to regional growth, although there is a body of
evidence that suggests that some clusters, particularly those
relating the knowledge-based sectors, seem to convey relatively
strong competitive advantages to the companies within them and
the "glue" holding the cluster together is quite strong
as a result (See Baxter and Tyler 2004).
In relation to the problem of low employment
rates in the traditionally slow growing regions, I remain firmly
convinced from my experience of evaluating regional policies that
if the rate of job creation can be increased in the slow growing
regions then more people will come forward to take the jobs on
offer. In other words, demand calls forth the supply from the
local stock of workers. In the most difficult labour market areas
like the inner cities there is also clearly a need for measures
to increase the ability of local workers to take the jobs created.
Recent work has sought to examine the patterns of employment change
across regions of the United Kingdom and compare these again with
what has been happening elsewhere in Europe.
Figure 3 presents evidence on the growth of
employment across the regions of the EU-16 over the period 1975-98
(using a spatial disaggregation that is broadly that of NUTS 2).
There have been significant differences in the pattern of regional
employment growth across the member states. In countries like
Italy, Spain, but also the United Kingdom, there has been differences
of more than 50% in the cumulative growth between the fast growing
and slowest growing regions. Figure 4 illustrates most vividly
the nature of the regional divide in job generation in the United
Kingdom by comparing and contrasting the performance of a fastest
growing region (East Anglia) with that of one of the slowest (the
North). The picture is one of sustained cumulative divergence
in employment growth rates and I believe that this is one of the
biggest challenges facing the United Kingdom in its drive to increase
the employment rate in its relatively slow growing regions. Simply
put, the rate of relative employment growth in these regions has
to increase if we are to encourage enhanced and sustained improvements
in labour force participation.
Figure 5 shows the pattern of employment growth
for each of the regions in the Netherlands and the United Kingdom
(at NUTS 2) relative to the EU average over the period. The United
Kingdom has seen a particularly divergent pattern with some regions,
especially in the South and East, having grown faster than the
EU average. Other regions, particularly in the Midlands and the
North, have grown a lot slower. In the Netherlands all of the
regions have been able to experience relative favourable employment
growth trajectories. The same cannot be said for the United Kingdom
and this remains a key challenge for policy.
Having flagged-up the nature of the problems
that are being tackled, the next obvious question is what can
be done about them? The committee will no doubt receive a considerable
amount of evidence on the relative importance of the main drivers
of productivity, namely skills, investment, innovation, enterprise
and innovation, and the degree to which specific policy interventions
are proving helpful. I would make a number of points.
There is considerable variation between regions
in the deficiencies that exist in relation to each driver, but
the slowest growing areas are exceptionally disadvantaged in relation
to virtually all of the key driver areas and it is not clear that
this is reflected in the amount of resources they have available
to them. Whilst it makes a lot of sense to have a regional policy
that considers the needs of all regions, there are obviously strong
arguments for recognising just how much the balance of relative
economic need and opportunity varies across the United Kingdom.
Existing resources through the RDAs recognise this to some degree
but its is not clear that other distribution mechanisms do to
the extent required if a real step change is going to be brought
about in firmly entrenched spatial disparities.
Disparities in the location of economic activity
are being further reinforced by European integration and associated
developments like the roll-out of High Speed Rail Links across
Europe (See Figure 6 below). The recent Lyon's Report was a welcome
step in the direction of considering how Government service activity
might be further decentralised from the South of England, but
there is much that needs to be done in considering how Government
expenditure—particularly in relation to transport infrastructure—can
be used to increase the relative advantage, competitiveness and
thus the economic growth of the United Kingdom's relative slow
growing regions. Parts of the North are particularly disadvantaged
and have not benefited from specific redistribution formula like
that of Barnet.
The key elements of the Government's strategy
to increase productivity and the employment rate has played to
macroeconomic stability (which must surely be correct) and the
correction of "market failures" across the five main
drivers of economic growth. It is hard to disagree with the need
for policy initiatives in each of these areas, although the precise
success of specific policy initiatives has varied significantly.
There is evidence of some relative success in
relation to specific initiatives like SMART. The Regional Venture
Capital Funds are currently being evaluated and there are encouraging
signs that these measures add real value. Regional Selective Assistance
has also been of significant importance in improving the competitiveness
of indigenous industry in the slower growing regions, although
there have been concerns over its relative cost effectiveness
as reflected in recent attempts to increase its net additionality.
It is hard to over-estimate the importance of
innovation and, although evidence is thin, geographical variation
in the incidence of innovation is a major driver of spatial differences
in productivity, competitiveness and thus growth. Innovation powers
the product and service differentiation and value added that is
of such importance in modern day competition. And it is certainly
right that in more recent times considerable emphasis should be
given to securing enterprising and competitive responses from
the indigenous sector in regions. The possibility of continued
high levels of inward investment into the United Kingdom regions
as has occurred in the past looks considerably less likely given
competition for such investment from the Far East, Central and
Eastern Europe.
The evidence base as to how actions in relation
to individual drivers add together to enhance the overall picture
appears to be weak and is not systematically organised at the
present time. In general, the fast growing locations across the
United Kingdom, and for that matter the European Union, are those
that have the economic, physical and institutional characteristics
that enable what we might term enterprising behaviour to occur.
And, crucially, the environment of successful, fast growing areas
is such that they attract a high proportion of decision takers/
entrepreneurs who are likely to be good at demonstrating enterprising
behaviour wherever they chose to locate. It is for these reasons
that the South of England is able to continue to reinvent itself
as industrial change takes place.
Certainly in relation to the institutional infrastructure
needed to produce coordinated solutions it is necessary to have
a relatively bottom-up approach, and there have been significant
improvements in this respect in recent years. The scope for "one
size fits all" implementation of policies from Whitehall
has tended to give way to a more locally need customised basis
through the RDAs and other organisations and this is to be welcomed.
The Regional Development Agencies are a key element in this but
other institutional issues need to be addressed as well.
Creating what might be termed enterprising fast
growing regions requires concerted actions by both the market
and the state and a strategic approach to bringing about change.
It requires what we have termed in recent work as Regional Entrepreneurs
(Baxter and Tyler, 2004) who are prepared to coordinate
actions between all of the key stakeholders to overcome leadership
gaps, provoke cross-sectoral relationships and tackle infrastructure
shortfalls. A successful solution requires expertise that spans
the fields of entrepreneurship, land use and strategic sub-regional
planning and finance (including a range of local government financing
issues). In the United Kingdom it has proved very difficult to
coordinate action, and this must compound the problems of relatively
slow adjustment from old to new structures that seem to lie at
the heart of the United Kingdom's inability to share economic
growth across its regions.
REFERENCES
Baxter C and Tyler P (2004) "Creating enterprising
places: what makes for competitive high-technology locations?"
Entrepreneurship in the Regions Conference, Cambridge MIT Institute,
7 May 2004, Cambridge (copies available pt23@cam.ac.uk).
Tyler P and Rhodes J (1986) "The Census of production
as an Indicator of regional differences in productivity and profitability
in the United Kingdom". Regional Studies, Vol 20,
No 4, pp 331-39.
Martin R and Tyler P (2000) "Regional employment
evolutions in the European Union: a preliminary analysis".
Regional Studies, Vol 34, No 7, pp 601-16.
Gardiner B, Martin R and Tyler P (Forthcoming late
2004) "Competitiveness, productivity and economic growth
across the European Regions". Regional Studies.
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