Will Tanner: Everyone knows the moral arguments for upgrading. But it also makes economic sense.

Will Tanner is director of Onward and former deputy director of policy at number 10 Downing Street.

“Our plan now, this new government that I lead, is to unite our country and take it to the next level.” So said Boris Johnson in his first speech as Prime Minister more than two years ago. Today, the government is finally presenting this plan in the form of the white paper on upgrading. But why is it important?

The political argument for the upgrade is simple. The Conservatives have assembled an electoral coalition in 2019 that is both more likely to live in poorer and more working-class places than even the Labor Party. These votes, in the Prime Minister’s words, were “loaned”. They must be repaid. If the Conservatives are to retain their majority, it is politically essential that the race to the top bears fruit.

The moral case is simple. The past few decades have been good for some places and some people, and very bad for others. The gap between the richest and poorest parts of the UK has widened. Returns to graduate labor have increased and returns to vocations have declined. The social fabric coastal and industrial cities, in particular, has deteriorated. Civic pride was wasted.

But the economic case is less intuitive. Economic orthodoxy would say that the best thing governments can do for growth is step aside. For neoclassical economists, leveling up is the economic equivalent of pushing water up: extremely costly and ultimately futile.

This conventional wisdom appeals to centre-right thinkers because it prioritizes market forces and downplays the role of the state. But it is also a narrow view of how economies work in practice and a short-term view of the damage that regional disparities can cause to growth. Here are five reasons why upgrading is not only morally and politically sensible, but also economically the right thing to do.

1. Economies that are more regionally balanced are wealthier overall

The UK is one of the most interregional unequal countries of the industrialized world. Only Romania and Poland show larger productivity gaps between regions. UK, thrice the share of the population (35%) lives in regions where the average income is 10% below the national average compared to Germany (12%). As Philip McCann has painstakingly assessed, the UK ranks among the worst economies on 24 measures of spatial equality, covering regional GDP, productivity and disposable income, and across all geographies.

Regional productivity disparities between the UK and 18 EU regions

Source: Industrial Strategy Council

This is important because more balanced economies tend to be stronger overall. Within the G20, there are no major countries more regionally unbalanced than the UK and also wealthier than the UK per capita.

The reverse is also true; all the major countries that are richer than the UK appear to be more balanced. This suggests that far from the flowing water of superstar regions like London, the reverse may be true. The UK’s overall productivity level could be undermined by the decoupling of London from the rest of the economy.

2. The UK has been actively unbalancing for decades

An argument frequently made against upgrading is that it means cutting down tall poppies to grow green shoots elsewhere. Obviously, that would be a mistake. Upgrading will clearly fail if it pits places against each other and doesn’t learn from our successes.

But we must also recognize that the current system suffers from a Matthew effect that directs growth-enhancing spending to places that are already prosperous and away from places most likely to suffer from market failure. To extend the analogy, poppies get all the fertilizer.

This is evident almost everywhere government plays a role in the economy. Over the past few decades, London has has received nearly three times more transportation spending, five times more funding for affordable housing, and five times more cultural spending than the average region.

The effect of this is twofold. Firstly, to accelerate the growing rift between the capital and the rest, and secondly, to increase pressure on housing and infrastructure in the places most opposed to further development – London and the South East.

3. UK innovation drivers will further exacerbate divisions if left unchecked

Productivity stems from innovation, broadly defined, at both national and regional level. The development of new ideas, processes and technologies leads to spillovers that increase the hourly output of workers and businesses and, therefore, the standard of living. But the UK’s innovation economy is heavily oriented towards the Greater South East, meaning that these spillovers are also geographically concentrated.

This is particularly visible in the financing of R&D. Half (47%) of the core government’s research budget is spent in just three cities: Oxford, Cambridge and London, and the capital receives twice as much R&D funding per capita as the UK average. According to some studies, this gap equates to a £4 billion a year gap in R&D spending for the less prosperous parts of the UK.

R&D expenditure by NUTS1 region in the United Kingdom, 2016 (broken down by market (corporate) and non-market oriented (government, university and charity)

Source: Richard Jones and Tom Forth

The effect on economic performance is considerable. Last year, forward show that 72% of the R&D-intensive jobs created over the last decade were created in regions including London, Oxford and Cambridge, despite these places representing only 20% of the population.

But the price is even greater: a recent report sponsored by BEIS estimated that spending the entire increase in R&D spending outside of London, Cambridge and Oxford would increase GDP by 0.8% by 2040, compared to spending the money equally across the country .

4. Modern economies make leveling more important, not less

These challenges are exacerbated by the way the global knowledge economy fuels inequality and undermines high levels of growth – in terms of the competitiveness of workers, the power of businesses and the connectivity of places.

Returns rise for highly skilled workers in the knowledge economy. Robert Reich wrote in the 1980s about an emerging divide between “symbolic analysts”, routine production workers and in-person service workers. David Goodhart divided them faster as ‘head, hand, heart.’ Our skills system has not kept pace with these rapid changes in the structure of the labor market, and workers in low-productivity places are increasingly unable to access higher-paying jobs.

The structure of modern businesses presents challenges, with technology companies adopting platform models that operate differently from previous industrial titans. David Autor highlighted the rise of ‘superstar companies’ who benefit from the network effects and highly scalable returns to intangible capital identified by Jonathan Haskel and Stain Westlake. Superstar firms present a challenge to workers by reducing wage competition and can deepen regional inequalities by concentrating economic activity without shouldering the tax burden to support investment elsewhere.

Knowledge economies also reward places with high levels of connectivity. Anna Lee Saxenian’s study The reason Silicon Valley beat Boston’s Route 128 to become a global tech hub underscores the dense and nimble web of relationships between workers, businesses, and universities. In the UK, these networks are weak – characterized by Andy Haldane as a ‘Hub (London) without spokes’. We have world-class companies and universities, but we are not connecting them to other clusters or places in a way that is rewarded by the new global economic structure.

5. UK cities are underperforming their international competitors

This lack of networks is particularly true for second-tier UK cities, which punch well below their weight. Places like Birmingham, Manchester and Glasgow are significantly less productive than cities like Brussels, Marseilles and Madrid, and do not see the agglomeration effects one would expect based on their size and available labor market.

Like the work of the Center for Cities has highlighted, if all cities were as productive as those in the Greater South East, the UK economy would be 15% more productive and £225 billion bigger. While transport connectivity has often been cited as the main barrier to productivity, Forward research pointed out that factors such as skills and R&D intensity contributed the most to this gap.

Conclusion

For all these reasons, the government is right to want to change the economic geography of the United Kingdom. It is true that the regional differences of the UK are old. It is true that they will be difficult to move.

But that doesn’t make the challenge any less urgent, morally, politically or economically. Leveling Up is not about reducing everyone to the lowest common denominator. It’s about bringing everyone to their potential.

As Margaret Thatcher once said, “People think there’s not much room at the top. They tend to think of it as an Everest. My message is that there is tons of room at the top. We have already done so, as shown below. We have to do it again.

Regional productivity differences in the UK between 1901 and 2017

Source: Industrial Strategy Council

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