Official figures suggest that the normal rate of economic growth in the UK is bumbling along at around 1.7% per year, which is a full percent lower than was previously the norm. Many argue that this tepid growth is underpinned by the low productivity that sees Britain consistently below France, Germany, and the United States. This decline was especially pronounced after the financial crisis, with productivity growth the second slowest in the G7, after Italy.
Research from LSE highlights the regional disparities in productivity, with places like London producing over twice the gross value added per job as places like Torbay and Powys. What’s more, whereas national productivity growth has slowed in recent years, London’s performance has actually increased, whereas the low-performing regions have declined.
Slow progress
Despite concerted effort to “level up” the country, the results suggest that most parts of the UK have stagnated in terms of productivity, with growth only seen in a few high-performing areas.
The researchers explain that productivity gaps within countries are quite common, but the UK’s concentration of productivity is perhaps partly explained by the services-based economy, which benefits particularly from agglomeration.
The study highlights how some areas, such as York and Southampton, managed to transition from manufacturing to service-based economies, while other areas, such as Lancaster and East Kent didn’t. These difficulties have fed into the various political implications of “left behind” communities in recent years.
Area-level productivity
The researchers believe that area-level productivity differences are the consequence of four main factors:
- The size of the local economy
- Levels of physical capital
- Levels of intangible capital
- Levels of human capital
Between them, they argue that these four factors account for around 55% of the spatial variation seen in productivity. The importance of intangible capital, such as R&D and ICT equipment has become crucial as the focus on high-value tradable services has grown.
The authors believe that any approach to tackle this will need to make trade-offs between boosting national productivity and reducing regional disparities. With resource constraints inevitable, it will probably mean focusing investments on certain places over others, and then investing aggressively in them.
This investment is sorely needed, however, as the researchers highlight how French workers currently use around 40% more capital than their British peers, which contributes almost entirely to their higher productivity.
A problem comes with the ability, or otherwise, of the government to pick projects that will deliver the biggest return on their investment. This is especially so if money is diverted from London and other high productivity areas to elsewhere in the country where returns might be lower.
The researchers are at pains to point out that even if investment is diverted away from London, the agglomeration effect is likely to mean that it will be diverted to other cities in the hope that similar spillovers can be seen in those regions as are seen in the Southeast. If the government choose to invest in smaller towns then the returns will inevitably be limited by the scale of the local economy.
They argue that the government’s Levelling Up white paper has unrealistic expectations of creating “global cities”, especially given the meager sums committed to the endeavor. It’s also unlikely to fix the very real problems faced by “left behind” communities, which are typically outside of the kind of regional cities that would offer the best potential for investment.
In essence, the future path will involve clear and difficult trade offs. The question remains whether a government that has so often shied away from such trade offs will be willing to make them or whether inevitable fudges will be the end result.
