Inequality knows no compass points

11 February 2016

Neil McInroy - Chief Executive of the Centre for Local Economic Strategies (CLES)

Matthew Jackson -  Deputy Chief Executive of the CLES

The North/South divide is not the problem. Economic centralism is.  

For decades, the North/South divide has been a strong narrative in England’s approach to economic development. However, inequality now goes far beyond these narrow geographical debates. Inequality knows no compass points in the England of today.  There is no land of milk and honey in the south.  London also has over 600,000 children are living in poverty – 12 per cent above the national average.

The economic gap between London and the rest (London and the South East now account for 36 per cent of total GVA) has been in place for decades. However, the national divide is growing at a faster pace than elsewhere in Europe, as is the divide within regions, including those in the north.

The North/South debate and attempted policy to address it has a long history. Successive governments have struggled with solutions to little effect. From the Barlow Commission in 1940, through Beveridge (1942), the industrial policies of Labour’s Wilson government, and the last 30 years of economic development policy and regeneration activity. There have been successes, but policy has broadly failed to end economic divides and the longstanding disparities of economic and social disadvantage.

The northern Regional Development Agencies (RDAs) and the Northern Way spent a decade (up to their abolition in 2010) trying to bridge the economic output gap between London, the South East and the rest of England. These Whitehall owned agencies documented a range of economic problems, strove to lever in private investment.  However, they were fettered by what the UK centralised economic model would allow, and went some way in accelerating a sense that there here was a unique northern English frame to the problems and the solutions.

Things have changed, and not necessary for the better. Inequality in all parts of the UK, has now deepened.  The present devolution context is shrouded in talk of places on the cusp of economic ‘take off’, power-housing their way onwards and upwards via a ‘devolution revolution’.  There is of course the hope and promise of further devolution and we must keep the pressure on for more. However, without systemic changes to the economic and financial model, it is fettered.  We must learn from the RDA experience.  We must not follow Whitehall prescriptions, which talk of a ‘northern powerhouse’ whilst leaving central economic control and the power of the City intact.

It could well be that by making the case for a northern economic ’special case’, we are merely repeating past mistakes, and are merely playing into the hands of the economic centralists and the powerful economic bureaucracy. It is convenient for them to isolate this as a northern problem, rather than challenge a central economic model which is geographically indiscriminate as to who wins or loses.

The economic policy of devolution views growth of much higher importance than that of addressing social inequality and the distribution of that growth. Specific and bespoke place needs (including improving democracy, poverty and social inequality) are of lesser importance, compared to place as the site for a generic economic agglomeration policy.  That is why there has been so much focus on the larger cities and already successful areas where the potential for even greater economic growth can be readily realized.  The narrowness of this place-blind policy is unlikely to disrupt the long time, settled unequal English economic geography.

Poorer places, or those more distanced from economic growth are seen as benefiting either through trickle down in wealth through jobs or a ‘trickle outwards’ of wealth toward any outlying (and poorer) areas of cities and neighbouring towns. The focus is not on deep rooted spatial inequalities.  Quite the reverse, it rather cruelly sees some places as ‘losers’,  as the inevitable price to pay for the higher order importance of winning on opportunities, economic growth and global competitiveness.  The retention, or even acceleration, of economic inequality across the country is inevitable.

We must become more bullish in questioning the systemic causes which create divides in the first place. Central to this is some serious rebalancing of the economy, through an active plan and central economic reform of where investment flows and who it flows to.  However there is little sign of that.

A global recession, would suggest that mindsets would have changed. However, before the financial crash, policy which supported the City of London and financial return to shareholders and investors were king.  Eight years on from the crash, they remain king.  Despite the Chancellor talking up manufacturing and the ‘march of the makers’, return from activity in the financial markets still takes precedence over good old profit earned through investment in manufacturing and industry. In 1948, nearly 42 % of UK national income was accrued through industrial production.  Today it is just 15 per cent.  In 1950, 65 per cent of bank lending was to industry, it is now around 15 per cent.

The investment sector – when it does look to the real economy – prefers those businesses in the north or south with collateral, which can be pledged against the investment. This means property and developers.  It does not mean small manufacturers, or businesses whose pledge is the knowledge and ideas within their own heads.

The City also has a stronghold on the UK’s economic mind-set and, from this, policies, public resources and investment flow. Public investment remains skewed, and an economic culture of thinking is dominated around the narrow confines of the square mile.  Economic policies, which truly recognised the problems of economic centralism and investment, and was focussed on rebuilding manufacturing, in the north, west, east or the south would create a beefy national industrial strategy, a national strategic plan, a dedicated regional investment vehicles.  No such things are in place.  As a result, many areas across the land remain investment ready, but are underinvested in.

The progressive future for UK economic steerage must acknowledge that part of the issue here is the dominant role that the City plays upon UK economic life. A report by the Centre for Research in Socio-cultural Change (CRESC), written in 2009, describes the financial sector as the ‘great un-leveller’ in the UK economy because it: ‘Promotes a distribution of income which has increased social inequality from top to bottom, and a distribution of jobs which has increased regional inequality. Vertically and horizontally, socially and spatially, the finance sector concentrates prosperity within the UK’.

The report goes on to describe this trend as being associated with a group of ‘working rich’ centred on finance, where bonuses tap a huge financial sector turnover base. To date, this inequality story has been ignored by north/south divide narratives.  Indeed, even in the high peak of regionalism, the RDAs never sought to actively diffuse prosperity around the country, as was done with regional policy in respect of manufacturing in the 1970s.  As CRESC’s report states: ‘finance is actively concentrating prosperity spatially in a way which undermines most kinds of regional policy and the problem is barely registered in political discourse’.

This financial investment model has to be disrupted. Key to this, are sets of policies which develop investment models and structures focused on the real national economy opposed to buying and selling in financial markets.  In Germany there is a regional dimension to the banking system.  In Scotland, the economic strategy has laid out plans for a Scottish Business Bank.  In Wales there are similar considerations.  If we are serious about rebalancing the economy, we must advance financial institutions which cater more for investment in industry, SME activity and the real economy across England – developing entrepreneurship, and accelerating local businesses, supply chains and clusters.

History is in danger of repeating itself. Successive governments have allowed a skewed economic geography to flourish and many of us have been complicit in framing the North as a problem, ignoring the flawed financial investment markets and the hold the City has over our economic mindset.  As inequality increasingly knows no compass points, we need to talk less about the north and turn our gaze onto the systemic economic root causes.

Neil and Matthew’s blog is also a chapter in a new e-book ‘The Politics of the North: Governance, Territory and Identity in Northern England’, co-edited by SPERI’s deputy director Craig Berry and SPERI researcher Arianna Giovannini. Find out more and download the e-book here.

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