The full paper can accessed here, with a summary article on VoxEU here. Below is an Opinion piece originally published in The Times Red Book on 6 March 2023.
By Ed Balls, Anna Stansbury, and Dan Turner
In this month’s Budget, Chancellor Jeremy Hunt will set out his long-term vision for UK growth and ‘levelling-up’ after his Autumn firefighting measures. Last week, Keir Starmer set out his five missions for the UK, including an ambition for the UK to have the highest growth rate in the G7.
Both will have their work cut out. Growth in 2023 is forecast to be the lowest in the G7 while the gap in incomes between the north and south of England is now larger than between east and west Germany or north and south Italy.
Labour and the Conservatives now agree we need a new approach to delivering stronger and more balanced growth. For decades, growth in London and the South-East has failed to “trickle down” to the rest of the country. Nor does anyone believe that Whitehall doling out centrally-managed and disparate pots of cash will make the difference. Both parties now champion devolution to more and stronger Mayors.
What are the levers that Ministers and Mayors should pull if they want to fire up the UK economy? In a new Harvard paper, published today, we chart the UK’s loss of industrial employment since the 1970s, which went further and faster than anywhere else in Western Europe. At the same time, we show that London and the South-East benefited from structural shifts in the global economy that, until recently, boosted finance and professional services.
But having lost the older economic ‘clusters’ based around manufacturing across the UK regions, we now face the much harder task of rebuilding new industries and services. Based on rigorous examination of the evidence, we argue that this can be done.
First, while there is no longer a shortage of graduates outside the South-East, businesses across the UK are being held back by a lack of scientific and engineering skills. We need to expand STEM learning in schools, apprenticeships, further education and our universities.
This demands a culture shift to rival the mass expansion of university education since the 1990s. If we can deliver these skills quickly, there is an economic win-win: higher wages for those entering the labour market, and faster growth for the UK’s export-orientated scientific firms.
Second, we need to redress underinvestment in transport infrastructure and services. For decades, the UK has spent less on transport than our peers in the G7 and biased that spending to London and the South East. Sister cities in Europe are more densely built and have better public transport. Cities in the US are far better connected by roads and are also less congested.
Compared to both, UK cities outside London are particularly poorly served by both public transport and road infrastructure. Our regional economies are, as a result, smaller and less dynamic than they should be given the skills of our people and the quality of our firms. Meanwhile, under-investment in housing in the South East makes it prohibitively expensive for anyone but highly paid, skilled workers to move to get better paid jobs which reinforces regional divides.
Third, we must invest in science and innovation in regions with lower productivity. Surprisingly, the UK private sector is more likely to spend on R&D outside the South East than the Government. Public money goes to those areas that already have thriving innovation economies: London, Scotland, and the arc spanning Bristol through Oxford to Cambridge.
In Germany, we show that the opposite happens: state funding is used to supercharge private spending on innovation in poorer regions. It is no coincidence that Germany is one of the only major countries to have narrowed the gap between its poorest and wealthiest regions over the past few decades.
Of course, fixing our governance will be as important as pulling the right levers. Our next paper will report our findings on what has gone wrong based on 85 interviews with former Prime Ministers, Chancellors, civil servants and local government leaders spanning five decades and all the major British political parties.
Right now, with productivity growth since the global financial crisis worse than in any period since the start of the Industrial Revolution, there is one thing on which everyone can agree: more of the same will not be enough.
Anna Stansbury is Assistant Professor at MIT Sloan School of Management, Dan Turner is a researcher at the Harvard Kennedy School and adviser to the Mayor of South Yorkshire, Ed Balls is Professor of Political Economy at King’s College London and Research Fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School
You can read the full working paper here: https://www.hks.harvard.edu/centers/mrcbg/publications/awp/awp198