The easy question “what type of person should head the government?” has been answered. The reply – “someone who is not a congenital liar” – resounded around the country so loudly last week that Tory MPs realised they faced a wipeout. The question now becomes “what will that new leader say to voters?” And, inevitably, that also becomes the key question for the Labour Party.
A respectable Conservative leader will easily win back defecting southern Conservatives – they merely parked their votes with the Liberal Democrats. But the new leader will struggle to retain the Red Wall that was so key in Johnson’s 2019 majority, and without it they cannot win. Johnson claimed victory in the Red Wall because he committed to levelling up as his flagship policy. His party is vulnerable because he didn’t implement it, however. Indeed, the opposite happened. Voters are waiting to hear a credible regional strategy and they will support whichever party offers it. But unlike our first question above, that “what?” question really is hard. Regional renewal is complicated and Labour urgently needs to get on top of it.
Labour does seem to understand the importance of the policy, if not the “how” of delivering it. In a recent speech, the shadow levelling-up secretary, Lisa Nandy, was frank about the fact she wants levelling up to succeed. “For me this is personal,” she said, adding that “trust is the missing ingredient” in the Tory approach to rebalancing the economy.
The problem is by no means new. Since 1977, cities and regions in England and Wales have been diverging economically from the south-east, leading to a degree of spatial inequality far wider than any other major OECD economy. This is reflected in a vast and avoidable waste of talent. According to surveys, even before the publication of the Levelling Up white paper in February, addressing these regional inequalities had become the top priority for people around the country. Everyone agrees that a bright kid should not have to leave their region to have a successful and prosperous life. The launch of the white paper tapped into this national sentiment, presented evidence on what was wrong, and began the practical discussion of how to put it right.
Whatever the political parties do nationally, people are coming together to contribute. Frustrated by the acrimony between Brussels and Whitehall, the mayors of Manchester and Liverpool, Andy Burnham and Steve Rotheram, met with the Lord Mayor of Dublin in March to plan joint exploitation of the Irish Sea. As the English mayors quipped, they are closer to Dublin than to London.
The driving issue is fairness. In Britain, a child’s life chances depend upon advantages their parents might have. If your parents live in the right part of the country and have a degree, you are destined for a top income. If your parents live in a poor region and didn’t go to university, bad luck. This shows in the data. Social science now has a standard measure: “intergenerational income elasticity”. Britain is terrible, worse than the big-state societies like France, and even the small-state US, in this regard. We are much worse than Japan, and far behind the other Anglophone countries: Australia, Canada and New Zealand. We are even further behind the Nordics at minimising hereditary advantage.
Hereditary advantage in Britain can be reduced if we learn from these societies, but although recent polls confirm that there is overwhelming support for the goals of levelling up, many are highly skeptical that Whitehall can deliver, whoever is in charge at No 10. Britain’s highly centralised, top-down system of governance in which Whitehall provides things for citizens has been failing for 45 years. In the countries where poor regions catch up and life chances improve, the system of governance is devolved. There, agency lies with regional authorities, which are directly accountable to their citizens. Levelling up will only be achievable if we devolve power and resources. But how does levelling up, the rebalancing of the economy, actually happen?
Together with a group of scholars and practitioners from around the country, I have been distilling what different examples of place-based renewal have in common. While the defining problem of a poor region is low income, the process of renewal spans the full range of social science: it is social and political, and it can’t be addressed by some technical economic fix. Renewal is an economic phenomenon achieved predominantly by social and political processes.
Place-based renewal is social, political and moral because most people feel a sense of belonging to the place they call “home”. A good local leader brings diverse people together to create a “community of fate”, where people find common ground through circumstance. Power in Britain is too centralised for that process to work very well, but Ukraine’s President Volodymyr Zelensky, who embodies the finest principles of community leadership, is a powerful example. In taking on Putin’s Russia against the odds as the war broke out in February, he demonstrated that change can be rapid and effective. In contrast to Putin, he has not postured as the commander-in-chief, bragging about how his smart decisions will deliver victory and imposing them on his army. Zelensky first won the respect and trust of Ukraine’s people through modesty and self-sacrifice, becoming a communicator-in-chief. Then he used this authority to set a common purpose: male Ukrainians should enlist in their local resistance force, and he devolved agency to these local forces to find solutions.
People came together around that new common purpose, unleashing the force that rose up against Putin: the willing compliance of Ukrainians in that new obligation to resist, which united communities previously divided by language. Levelling up the life chances of Britain’s children lacks the drama of Ukraine’s existential threat, but it is by no means trivial. Our society has become grossly unfair and people are rightly outraged by it. Were Whitehall to carry out true devolution across the regions, that same process would galvanise people living in many poor places to make a better future for their children.
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To recover, a place must solve a series of coordination problems. Since coordination is easier at a smaller scale, the first principle of this economic recovery is to devolve power and resources to the smallest size at which economic renewal is feasible, otherwise known as subsidiarity. Feasibility is determined by economic geography, and some regions lack economic coherence. Wales is a polity, but the economy of south Wales looks to Bristol, and the north joins Ireland to Liverpool.
Fortunately, the recent combined authorities, such as South Yorkshire, have coherent economic geographies matched to a local political authority. By aligning its political and economic entities, Britain can address this problem of coordination. Mayors like Burnham can bring people together across the silos of different agencies. A high-profile local leader like him can coax, cajole and reward people to focus on solving big local issues instead of protecting their turf. Similarly, high-calibre public employees can contribute more at the regional level than is possible in Whitehall. Howard Bernstein worked his way up from being a clerk in Manchester Town Hall to becoming the transformational chief executive of Manchester City Council, who laid the foundations for Burnham’s success. In contrast, although Whitehall attracts high-calibre officials, their fate is Sisyphean: unrelenting work without hope of success.
When economists see a need for coordination, we immediately think of the market doing the job. But the recovery of a region depends on coordination with organisations outside the market. Businesses deciding whether to invest will depend on the future decisions of local officials who plan land use, for instance. Left to market forces, once a local economy crashes, it finds itself trapped in a syndrome of mutually reinforcing problems: ossified skills deter investment by skill-intensive firms; a lack of such firms demoralises young people from aspiring to learn new skills; and in trying to understand why the region is falling behind, groups start to blame each other or see themselves as victims of external forces. The South Yorkshire of my childhood is a poignant example. The region has fragmented following the collapse of its core industries. If market forces were going to restore Britain’s crashed regional economies they would have worked by now. Instead, divergence with prosperous regions like east Scotland and south-east England has only increased.
When Marxists see a need for coordination, they think of central planning. Paradoxically, the British Treasury, scarcely Marxist, finds itself with a surprisingly similar approach to “fixing the regional problem”, a symptom of having accumulated powers for other purposes. Treasury control over the regions increased in the late 1970s when the International Monetary Fund (IMF) loaned James Callaghan’s Labour government $3.9bn to protect the value of the pound. Adherence to the IMF programme required greater central management of spending. Control was then tightened under successive chancellors – firstly, a series of Conservatives squeezed Labour-controlled local government; then Gordon Brown controlled ministries’ spending through monitorable targets; then George Osborne enforced the fiscal targets of austerity. Most recently, it has been the former chancellor, Rishi Sunak, wanting to control spend.
All this centralised power has only deepened the silos within Whitehall. Each ministry is a fiefdom headed by a minister who wants their own public initiatives and has no incentive to support those of their colleagues – or rivals. In this, a minister will be fiercely supported by their permanent secretary, the guardian of departmental autonomy. The Treasury controls how much a ministry gets, but not how it allocates its budget. A minister controls a “block grant” analogous to what Burnham is fighting to get for Manchester’s region under the “trailblazer” devolution deal pledged in February’s white paper. As a result of these centralised powers, the Treasury finds itself devolving spending within Whitehall to ministries, but micro-managing regional spending.
As ministries have created individual initiatives to help poor regions, the Treasury finds itself monitoring over 100 small pots of highly specific money created by them, such as, for instance, the Levelling Up Fund. If Greater Manchester wants to subsidise a bus route, Burnham needs the approval of a junior Treasury official. If a minister launches a fund to help the elderly in poor regions, someone in the Treasury has to assess the bids coming from Blackburn. In making those bids, Blackburn’s social enterprises know they are competing for the same money. Inadvertently, Whitehall presides over a damaging system that discourages coordination between these actors, whether to pool resources for the benefits of scale, or to specialise in different niches. As with Manchester’s bus routes, decisions on the bids are taken by junior officials who don’t necessarily know the regions bidding for the funds.
Such decisions would be better taken locally. Renewal has to be locally led because people know their local areas, and locals are better placed to develop effective and inclusive strategy. But in England, public finance and decision-taking have become so exceptionally centralised that failure is almost inevitable. And Whitehall’s priority has been to avoid taking the responsibility for it. Instead, central government’s solution has been to pile statutory duties onto local authorities and other public agencies for housing, social care, schooling and healthcare. As a result, local politicians and public employees have found themselves with responsibilities that they lack the power to fulfill. The same critique applies to the Scottish government in Edinburgh and the Welsh one in Cardiff. Having clawed power out of Whitehall, the central governments of Scotland and Wales are loath to share it.
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Where regions have powers, people vote. Turnout in recent regional elections in Sweden, Norway, Demark, Germany and Spain ranges from 65 per cent to 85 per cent. In Britain’s broken regions turnout is around a third of that. At the same time, Britain’s local governments have hemorrhaged high-calibre people. Before the creation of the combined authorities – the first of which, Greater Manchester, was established in 2011 – there was little job satisfaction or prestige in local government.
It’s a vicious circle. Because of low voter participation and the perceived low calibre of local government, Whitehall has had little real appetite for devolution. After all, local politicians have less legitimacy than national ones, and their staff are thought by Whitehall mandarins to be less competent. But our city regions, the new combined authorities, have not failed – they are a recent innovation already with some successes. With high-profile mayors like the two Andys – Burnham and Street, Mayor of the West Midlands – at last, local government is attracting leaders of national calibre, responsible for a geographic entity sufficiently large for a growth strategy to reap scale economies. And, most importantly, in contrast to Whitehall, we now have a structure in which rapid learning is likely. The ten metro mayors, most of them Labour, have formed a network where they can learn from each other and collaborate.
This is key because Whitehall cannot know enough to “fix” Blackburn or anywhere else. So, although market forces and Whitehall central planning have roles in regional renewal, coordination needs to be orchestrated through networks between and within regions. Just as subsidiarity was our first principle for regional recovery, the need to forge partnerships for purposes is our second. Since economic recovery needs to ignite innovation and enterprise, within each region local authorities and research organisations such as universities, teaching hospitals and major companies need to work together with local firms and social enterprises.
These networks have to be catalysed, which is our third principle. Catalysing depends on effective local leadership, whether by politicians, prominent local citizens, or in tandem. The Business Purpose Commission for Scotland, for instance, brings people together to promote the development of Scotland as a purposeful economy. It has been recognised as a key condition for the recently launched National Strategy for Economic Transformation in Scotland.
A similar approach will be required for the successful development of the levelling-up agenda in England’s regions, and it is indeed starting to happen independently of the government’s pledges. In South Yorkshire, local leaders of public authorities and enterprises came together to catalyse change at an economic summit in March. It was followed up by an event jointly convened in Sheffield Town Hall by the region’s top officials and representatives from business and social enterprise. It celebrated a new common purpose: different sectors and communities working together to build a better future.
Local context, though essential, is not enough, however. There is much to learn from examples around the globe, and from statistical analysis. This leads us to the fourth principle: fusion. One of the tasks of effective local leaders is to partner with local, national and international academics to make use of available research. But even fused knowledge has limits. The next principle, then, is the recognition of uncertainty. Strategies almost never work out quite as intended. They need periodic adjustment, so outcomes must be tracked in real time. This requires local leaders to build a reliable capacity to track initiatives, and to use the feedback to determine what needs to change. Tracking can span both highly specific objectives and subjective attitudes: is more finance reaching local firms? Do residents think bright young people will want to stay in Blackburn?
Local leaders in South Yorkshire are forging just such a three-way partnership with the specialist research groups in Sheffield University, Sheffield Hallam University, and the national consortium of specialist academics I mentioned above. Through a strategic sequence that starts with catalysis, progresses to networking and fusion, and then builds capacity for tracking change, the partnership can enable the region to take charge of its own future.
But the future of a region’s economy depends upon many interlinked decisions. In a region that has been poor and slow-growing, the expectation of continued failure becomes pervasive and self-fulfilling. Coordinated change therefore depends upon actions that reset expectations on a more hopeful future. This takes us to the final principle: local leaders must build a public-private partnership of pioneer investors who provide fertile ground for hope by making irreversible commitments.
Whitehall, and other national entities such as the major banks and capital markets, can play a supporting role in this, but at no stage can they drive it. They need to learn how to support activities that are regionally initiated and led, and for that they need to learn modesty and develop a new capacity to listen.
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In regions like the west of Scotland and South Yorkshire, where the old economy has imploded, the six principles I have outlined need to be applied to three processes essential for a thriving 21st century economy. Entrepreneurs need access to locally informed finance and commercial services. Silicon Valley thrives on risk-taking finance for new ideas. Reinforcing that process, innovative businesses in the same sector need to be near each other so that they can reap opportunities for collaboration and mutual learning, as well as face the stimulus of competition. Cambridge pioneered a science park that has become a model for clusters of rapid innovation. Complementing the (hopefully) rapid growth of innovative firms, the local workforce needs to be equipped for the skilled jobs they will generate.
Poor regions start with none of these components, however. Their firms are operating in financial deserts. The innovative companies they do have are scattered. And the local workforce has deskilled, finding jobs in low-pay, low-skill activities. This needs to change.
Successful regions abound in fast-growing enterprises, so a new entrepreneur will be inspired by these role models. Successful entrepreneurs often enjoy mentoring new ones on the difficult journey from an idea forged by two friends to the formalised management structures of a firm with hundreds of employees. Sometimes, these mentors become “angels”, putting up risk capital for early-stage commercialisation and proof of concept. But two-thirds of Britain’s venture capital for small to medium-size enterprise growth goes to the south-east. It is only there and in east Scotland that these basic conditions for economic growth are met.
Which takes us back to the puzzle that levelling up needs to solve. This set of circumstances means the majority of our national innovative talent is going to waste. Professional services firms go where they can find fast-growing companies. These are the financial coordination problems that local leaders need to address. In other countries, pioneering local leaders have built public-private partnerships that have transformed their business habitat. Pittsburgh in the US is one example. The most promising English role model for coordinated change is a contest between Manchester and the West Midlands. In the latter, a partnership between the University of Birmingham and local politicians is rapidly building a deep financial-cum-business habitat, encouraging HSBC to shift its headquarters from London to Birmingham in 2018.
If innovative firms can come together in close proximity, the stimulus of competition and the opportunities for collaboration accelerate their growth. For that to happen, a different but equally complex coordination is needed, however. Local planners need to be partnered with national developers, local construction companies, and local spin-out specialists with intimate knowledge of the enterprises that could be brought together. That expertise is often found at local universities.
In thriving Oxford, from my office, I can see a massive transformation due to a partnership between Oxford University and Legal and General. The financial services firm is investing over £4bn in initiatives that include a “Life and Mind Building”, which will be the largest teaching and research facility at the university. This is the scale of coordinated change needed in much poorer regions. Encouragingly, levelling up has already induced some major developers to recognise their responsibility to contribute to partnerships that make it happen. A new innovation district is the sort of irreversible and highly visible commitment that can decisively reset local expectations, shifting them towards optimism for the future.
Local people also need to be equipped to fill the skilled jobs coming to their region. Britain’s policy towards skills has been astonishingly lopsided, though this government had pledged to redress the balance. The expansion of universities, which now caters for the fortunate half of our teenagers, has contrasted with the neglect verging on collapse of vocational training. For Britain’s youth and their parents, the choice has shrivelled to “get a degree or be written off”. Faced with this, parents frantically devote their resources to getting their offspring into higher education. However, given the appalling difference in life chances across the country’s regions, a larger majority of the young people whose parents neither live in a prosperous place nor went to university, draw the short straw, reliant on a system of vocational training worse than almost anywhere else in Europe.
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The solution is not to send everyone to university; we need a radical upgrade of the status, finance and performance of vocational training. That implies a massive reallocation of public funding; a reconfiguration of training courses, better integrated with local firms; and changed incentives for further education colleges. Admittedly, our more prestigious universities could also do a better job of attracting teenagers from poor regions. Beyond reporting on the proportion of state-educated versus privately educated applications, they could report the spatial composition of their intake.
As to funding, in France, when President Emmanuel Macron was first elected, he announced a lifetime training entitlement for all young people of €5,000. It works regardless of whether it is used for a university course or vocational training, and regardless of whether it is used when aged 19 by a teenager with the confidence that comes from successful parents, or at 35 by someone whose teen years were disastrous. Johnson’s Lifetime Skills Guarantee – which only has £95m pounds in funding – is hardly a comparison. In Britain, the government did want to announce something closer to the Macron initiative, but can’t because banks have turned student loans into an opaque labyrinth. We also need supplementary funding for obvious purposes like training enough doctors, but we don’t even manage that.
As to training courses, we currently have a plethora of short courses with no clear path between them. We need to consolidate them. We need fewer courses, each defined more broadly, nationally accredited and much longer, providing clear pathways to skilled jobs. They need to be taught through a partnership between colleges and the local businesses offering skilled jobs. Elsewhere in Europe, many local firms commit to employing the people they train and this gives them an incentive to get involved. Through building purposeful local partnerships with employers and colleges, local leaders can reset how firms see their responsibilities to their community. It will take time, but unless we change it will take an eternity.
We could reset the incentives for further education colleges. Currently, they are so starved of cash that their struggle is to get enough bums on seats for next year’s courses – that is how they stay afloat. But their funding is not well related to why a local community wants them. Local people want their kids to be equipped to do skilled jobs available within the region, so they don’t face a choice between family and opportunity. If colleges were rewarded not for bums on seats, but for the earnings of students who went on to work locally, they would have an incentive to collaborate with the firms that are generating skilled jobs. Both students and firms would benefit, and rather than losing talent to other regions, it would offer people the opportunity to build a career in their local area.
West Germans regard the devolution of power and revenues to cities and businesses as self-evident, and so that informed their strategy for the renewal of East Germany. The east had been even more highly centralised than Britain is today. Beyond Berlin, its cities lacked community, and its state-run businesses lacked purpose. After 30 years and vast devolved budgets, Leipzig and Dresden have made huge progress, and the east has grown its own firms. That is how to level up.
The Treasury could give the poorer regions control over some of the tax that it collects nationally. All tax choices are complicated, but it would learn faster if it piloted fiscal commitments to those regions. For example, two poor regions with high but different levels of social deprivation might be guaranteed a share of the revenue already being raised by HMRC from the 40 per cent rate of income tax collected in them. For each, that share could be linked to its level of social deprivation. The more deprived region would get a larger share.
By rewarding the local authorities for helping successful local enterprises to grow, the commitment would address the “incentive compatibility” that economists rightly worry about. Their mayors would know that by helping enterprises, they would get extra revenues from the Treasury freed from negotiated earmarks. With that incentive in place, there would no longer be a rationale for the Treasury to micromanage spending. Further, the approach would not require a local government in a poor region to impose new taxes. Local citizens would know that by helping local firms, their mayors were enabling public services to be improved and generating well-paid jobs.
By relating the proportion of the revenue returned to a poor region to its deprivation, the Treasury would finally have an automatic fiscal transfer mechanism that reduced Britain’s regional inequalities. It could potentially be of a scale commensurate with the problem so that, as in Germany, the gaps would close. This automatic mechanism would replace the pressure for fidgety Whitehall initiatives. It would be goodbye to bids for little pots of earmarked money. Agency would lie with each region, and soon the more innovative local leaders would use it to bring people together around an effective strategy. Voters and leaders in other poor regions would learn from them. And the country would be better equipped to deal with economic dips, such as the current cost-of-living crisis.
Whatever the fate of this government, the urgency and scale of the problems levelling up purports to address cannot be ducked. At the very least, the Conservative Tees Valley mayor, Ben Houchen, has published an open letter to all Tory leadership candidates, urging them commit to a “Levelling Up Pledge”, but his pledge contains five modest steps that won’t do the job of rebalancing the economy. Whoever our prime minister, they must not neglect the rampant inequality and unjust impediments to high-skilled work that face working-class youth. These inequalities are shameful and hold back our economy. Labour can claim the moral high ground and win economic credibility by showing the electorate that it takes them seriously.
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