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Strengthening Regional Economies

The Rt. Hon. Stephen Timms MP,  Former Minister of State for Competitiveness
Fabian City, Business and Politics Network Seminar, Fabian Society, London,  14 January 2008

“The North South divide”

The UK economy is doing well. We have had sixty one consecutive quarters of growth. Notwithstanding recent turbulence, Britain’s economy is stronger, fairer and more productive than it was ten years ago.

Every region has more new businesses. Investment is up. Employment rates are at record highs. Inflation and interest rates remain low and stable. As the Prime Minister remarked a week ago, Britain is “better placed than most” to withstand the global turbulence due to low inflation.

Longstanding regional disparities in rates of employment and of economic growth have narrowed with stronger employment growth in the North, benefiting from the vital combination of a stable macro-economic framework and public investment, combined with a confident and ambitious business community.

And I want to argue today that the Government’s regional policy has also been an important contributor to the success. We have seen, over the past decade, a new economic dynamism around the regions of the UK. The impact is very striking in the dramatic renewal under way in all the great city centres across the country – Birmingham, Manchester, Liverpool, Sheffield, Newcastle, Leeds. And part of the explanation for what’s happening has been the Government’s framework of regional policy, most notably in establishing the Regional Development Agencies, and their success in unleashing a wave of regional economic dynamism which the economy simply did not have the benefit of in the past.

Of course, differences remain between the regions. London stands out. On the one hand, London is the only English region with an employment rate below 70%. On the other, output per hour in London continues to be 25 to 30 % higher than in the Northern and West Midlands regions. I understand why some still talk of a north-south divide. But I want to argue today that that is nowhere near capturing the whole story. We need to move on from a sterile debate about the North-South divide to one that respects the real achievements in all our regions.

London has been an extraordinarily successful world city over the past decade – comparable always to New York, Tokyo, Singapore – but with an ever stronger claim today to pre-eminence among them, with more and more people arguing, as the Independent did the other week, that London is now the world’s capital city.

Before the introduction of the European single currency, so within the past decade, there was a serious debate about whether London, or Frankfurt, or Paris would be Europe’s financial services centre. That debate now feels faintly absurd. London has increasingly been recognised as the world’s financial services centre.

London is the most international and most liquid of the world’s financial centres. 34% of world currency exchanges are in London – with more foreign exchange transactions than in New York and Tokyo combined. Over 40% of the world’s foreign equities are traded in London. London has overtaken New York for over the counter derivatives, with 43% of the market, and in metals trading. 90% of the world’s trade in metals takes place in London, 25% of the world’s aviation and marine insurance, and almost 50% of all ship brokering. London is catching up now with New York in Hedge Funds and Private Equity – 21% of global hedge funds are traded out of London. In 2006, the London Stock Exchange listed more companies than the New York Stock Exchange, NASDAQ and Hong Kong combined.

London’s success accentuates the differences with the UK’s regional economies – but it provides a powerful driver for them too. London isn’t a rival, it’s an ally for regional growth. The success of London spills over to neighbouring regions, which benefit from easy access to a large market, from diffusion of knowledge and best practice.

It makes no sense to judge the success of the English regions simply by comparing them with London. We need other comparisons to give a rounded picture of how well the regions are performing. And what we find is that their relative performance has been strengthening. So, for example, from 1995 to 2004, growth in South Yorkshire was almost double that of Düsseldorf in Germany or Lorraine in France. That is the kind of comparison we need to draw, to understand properly the effectiveness of regional policy.

Resilience has been part of that success. There was comment last week about Yorkshire success in rebuilding businesses – and in some cases improving them – following last Summer’s floods. I know from my own visits that Yorkshire Forward’s role as a pro-active partner was key in identifying problems fast after the floods, and responding to them quickly and efficiently with grants and support.

In the mid 1990s, Gross Value Added per head outside the South East was more than 10 percentage points lower than the EU average. Now we are approaching parity with the EU 15. In 1997, only two English regions had GDP per head above the EU15 average. By 2004, over half of them did.

There has been a transformation in the fortunes of our regions – with rising prosperity and better life-chances everywhere. But the ‘north south divide’ narrative continues to exert a powerful hold on the popular imagination. We’ve been comparing our regions against a global financial city and finding them wanting. Any more rounded view shows there has been real and sustained progress.

London and the south east lead in knowledge-intensive employment and productivity, but a Work Foundation report last week highlights cities like Leeds and Manchester successfully growing their private sector knowledge-intensive economies.

So we will work with the regions to continue narrowing the growth rates. But we also need to move on from this sterile "North/South divide" debate, which simply fails to recognise the impressive achievements of the English regions.

Research Centre at LSE

Competition today can come from anywhere. Global challenges like climate change are having a profound impact. Technology is creating new industries and making others obsolete almost overnight. Every part of the country is inextricably linked to the global economy. An open, flexible economy like Britain’s stands to benefit.

But different areas will be affected in different ways. Regions and localities with high value-added businesses or which are early adopters of new environmental and other technologies may increase their comparative advantage. But places without such advantages will be in competition with low-cost production centres such as China and India. And pressure on the incomes of the low-skilled is likely to continue.

We need a better understanding of these changes, so we can know how to frame a policy that works better for every part of Britain. So I am announcing today that my department, with the Economic and Social Research Council and other Government funders, is investing up to £2.5m in a new research centre, the Spacial Economics Research Centre, headed by Dr Henry Overman at the London School of Economics. The aim of the Centre is to put the UK at the forefront of research into economic location; so we can get a real grip on where value is generated, and how we can make sure that our policies can enable every place to reach its potential.

The Centre is also a genuine UK collaboration, with researchers from around the country, from Newcastle and Glasgow, joining in. It is an example of how links between London and the rest of the country can benefit all the regions.

Developing new policy frameworks

One way the Government will help the transition of existing businesses to newer higher-value businesses is through the renewal of our manufacturing strategy. Working with RDAs over the coming months, we will identify and grasp new opportunities and new markets for UK manufacturers throughout our regions and nations.

And following consultation meetings with over 500 entrepreneurs, we are also developing a new Enterprise Framework to build upon the achievements of the past decade – that we have more businesses in Britain than ever before, and an increasingly entrepreneurial economy.

Sub-National Review

In 2002, we set for the first time a specific and measurable target to reduce regional growth gaps – to reverse trends apparent since the 1920s. It remains a top priority following the recent Comprehensive Spending Review – one of three cross-Government priorities led by my Department.

The recognition behind creation of the Regional Development Agencies was that local or regional challenges are best dealt with locally. One size, fixed in Whitehall, does not fit all. So the Sub-National Economic Development and Regeneration review, published in July, set out further reforms needed in the light of increasing globalisation and faster change. The challenge for us is to create the conditions for business success in every region and every locality.

A recurring theme in our enterprise conversations with businesses has been recognition of wider economic stability supporting their success. That’s why we continue to prioritise economic stability, making tough decisions for the long term, to ensure that businesses can flourish.

Given that basis, regions and localities need a focused, flexible and supportive environment, adapted for their own circumstances. They need to encourage entrepreneurship and the creation of new businesses. They need to support firms to adapt to and create new technologies and opportunities. They need to build on their assets to attract and retain a more highly skilled workforce. We need to make sure that there are incentives and powers in place so that even the most disadvantaged areas benefit from growth. And regional economies need to adapt to the challenge of a low carbon economy and plan for a changing climate.

To achieve all this, we want to transform the way in which national government, regions and local areas work together to create the conditions for dynamic economies.

International evidence suggests economic growth is strongest where administrative boundaries coincide closely with economic boundaries. But many English local authorities are too small to effectively tackle the challenges of ‘real’ markets. For instance Manchester City Council covers little more than Manchester city centre, but Manchester’s economy includes ten or fifteen neighbouring authorities like Salford, Oldham, Bury and Stockport. This mismatch can reduce the incentive for local authorities to grow their local economies, as the benefits of their investments are often enjoyed by residents of neighbouring places. We want to explore new ways of co-operative working to recognise this.

We want to strengthen the role of local authorities in economic development. We will consult on creating a duty on all upper tier authorities to carry out an assessment of the economic conditions and challenges in their area, and give further incentives to local authorities to promote growth.

We want to develop collaborative working at the sub-regional level. We will strengthen sub-regional transport management through the Local Transport Bill, and allow groups of local authorities to agree collective targets on economic development.

But there will be a continued important role for regions and national agencies in setting policy frameworks and standards. And economies of scale or scope mean that some functions such as business support are best delivered at higher levels.

We want to streamline with a single, integrated regional strategy setting out economic, social and environmental objectives for each region. Business-led Regional Development Agencies will become more strategic. We will expect them to delegate more spending to lower levels, along with support to build economic development capacity.

We will drive improvements in RDA performance, and simplify RDA objectives. We will improve scrutiny of the RDAs from both the local and national levels. And we will ensure that the work of other agencies – the Highways Agency, Learning & Skills Council, Job Centre Plus – that their work contributes to agreed regional priorities. The prize will be better decision-making and more effective delivery.

We will be consulting on the detail of these reforms in the next few weeks. Some of these changes will require legislation, and we need the transition to be as smooth as possible. But we are taking action now where we can.

Last October, we published indicators that will support the new performance framework for local authorities. The indicator set has a clear focus on economic development.

In November, Hazel Blears announced that thirteen sub-regions will be working more closely together from next June. Each area is producing plans to tackle its key issues. South Yorkshire, for example, is prioritising improving housing; Bournemouth, Dorset and Poole will boost skills, and capitalise on the 2012 Olympics sailing competitions. Almost all proposals have tackling worklessness as a key priority.

Conclusion

I’ve outlined much that Government is doing. But we can’t do this alone. We need to work in partnership. There are big challenges in all this: striking the right balance between local devolution and national targets; achieving growth alongside social equity and environmental goals; addressing economic issues best tackled at regional or sub-regional level without compromising democratic legitimacy.

I look forward to hearing your views. Thank you.