Does lower productivity outside London and the South East affect UK-wide performance?

Professor Bart van Ark was recently a guest on an Institute for Government panel “What policies can level up economic performance?” discussing the Levelling Up agenda. This is a condensed version of his remarks.

The Levelling Up agenda is not just an issue for places and areas outside London and the South East – it’s a national problem. Professor Bart van Ark, Managing Director of The Productivity Institute, says the rest of the UK needs to perform better – alongside London and the South East of England continuing to enjoy high productivity rates.

“If a very large part of the country is economically weak, it offsets any kind of gains you are making in the rest of the country,” Bart told the panel. “Large regions that are falling behind are creating a national problem.”

To what extent does lower productivity outside London and the South East affect UK-wide performance – and can policies make a difference?

We asked @bart_ark from @UoMPolicy.

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“Regional differences in the UK are not a matter of different employment rates – employment is pretty good across the country and do not differ much between regions. It’s the productivity growth rates and differences in productivity levels which are exceptionally large.”

The UK is in unique in terms of the “capital versus the rest” issue – there is no country in the OECD which has such an imbalance – and continued divergence. “It’s not just that London and the South East continue to outpace the rest, it’s that the level differences became persistent and the regions that had fallen behind have no opportunity to catch up,” he said.

“Local productivity challenges are nation-wide in nature. They are systemic. This is not just a cities versus towns issue. This is really London versus the rest – and it is in particular second tier cities –  which are very large, accounting for about 40% of the UK population – that are really falling behind. The kind of skill-productivity relationships that you get from agglomeration effects don’t really play out in the UK as well as they play out in other places.”

Economically weaker parts of the UK also tend to be less resilient, and their ability to upskill their populations, to attract investment, to create better health conditions, and more well-being are becoming problematic. Rising regional inequalities also create a political geography, sometimes called the geography of discontent.

“The issue is that these problems tend to be worse in the UK than in other countries and I think we need to analyse what it is that makes it worse and what can we possibly do about it,” Bart said.

Bart van Ark, Adam Hawksbee and Gemma Tetlow on the panel

Building local capacity

The Levelling Up White Paper has listed six capitals – physical, human, intangible, financial, social, and institutional – to underpin regional transformation. Bart would add natural capital as a seventh, given the country’s Net Zero commitments.

“It’s a great concept, but these capitals sound a somewhat academic,” Bart said. “How do we make this concrete so that cities and towns can create a broad based investment strategy around those capitals? That does require significant local government capacity. There are trade-offs and there are complementarities. You need to carefully track and analyse those different investments over time.”

The UK is characterised by a limited amount of fiscal authority for local government, for example to go to capital markets, making it unique within the OECD.

“All the money is coming centrally and there is very little leverage and flexibility for local government, for example to use local capital markets or access capital markets in general,” Bart said. “It’s not just a matter of more money, it’s part of the devolution process. Those are big transitions, but in many respects, the UK remains an over centralised economy, having built very little capacity on the ground. And certainly, on the fiscal side, we will have to do a lot more of that before we really see the flexibility that towns and cities will need.”

Bart also argues for more collaboration between national and local governments and a longer-term approach.

“It goes to the whole issue of fragmentation that we’ve been seeing,” he said. “There are many initiatives but often short-term and below scale. If there was one thing I would plea for, it would be to build an institutional framework that gives more horizontal coordination across different government departments that do pro-productivity policies, because there are different departments that deal with this. But we also need to coordinate vertically with these local councils. What are the institutional implications of a successful levelling up policy? Coordination is absolutely critical.

“Trailblazers are a good start but we need to build this out in a much more systemic and long term focus rather than just a few experiments to see if it works, with the risk of pulling back when we run out of money again. It’s a lot about policy coordination and building the institutions underpinning that have a long-term sustainability.”

For more information

• Watch the whole Institute for Government panel session:

Research from The Productivity Institute has found that the UK’s existing institutional and governance set up cannot address endemic regional inequalities. For more information read:

• Levelling Up: The Need for an Institutionally Coordinated Approach to National and Regional Productivity by Philip McCann which argues for the introduction of a middle layer of governance, in the form of an institution, body or forum, to fill the vacuum.
• Tradability, Productivity and Regional Disparities: theory and UK evidence by Tony Venables, which details an analytical framework which shows how sectoral characteristics determine regional outcomes and how the effects from the industrial upheavals of the 1970s and 1980s are still being felt.
• Philip McCann also co-wrote a paper for the National Institute Economic Review The Productivity Performance of Different Types of UK Regions and the Challenges of Levelling Up with Pei-Yu Yuan.

The Productivity Puzzles podcast also addressed this issue in the episode Levelling Up through industrial policy, institutions, and fiscal mechanisms.

• Listen to the podcast, recorded before the Levelling Up White Paper was published
• Read the accompanying blog

A review of the analytic work and policy recommendations for 10 national productivity commissions worldwide can be found in Dirk Pilat’s paper The Rise of Pro-Productivity Institutions: A Review of Analysis and Policy Recommendations and executive summary.