19 August 2019

Tackling Spatial Inequalities within the UK, by Martyn Jenkins

The UK’s spatially unbalanced economy is a long standing, deep rooted issue, with both economic and social implications for society.

 

In this series of blog posts, I will look at the nature of the problem, as well as its historical context and evolution. Having set the scene, I will consider the implications of such imbalances, before following this up with some thoughts on how such imbalances could be alleviated, drawing on research recently undertaken by the UK2070 Commission.


Inequality is inevitable in a market economy

It is first important to acknowledge that there will always be some spatial inequalities within a Market Economy, as over time employment and growth opportunities cluster and accumulate together. As a result, imbalances are an inherent consequence of economic growth, and the policy challenge is to make such growth as inclusive as possible, in order to mitigate the damaging implications of an unequal society. This is not a challenge unique to the UK either, with the IMF highlighting regional inequalities across a range of OECD countries including Germany, Spain and Italy.

We also need to remember that while inequalities might be apparent in economic metrics at certain spatial area levels (eg local authorities, regions) it’s important to recognise that inequality is more granulated than this and, ultimately, deprivation and poverty are experienced by individuals and households. Indeed, areas that by usual measures appear wealthy, will include less affluent households which are not captured in the data. A good example being the former Grenfell Tower block which was located in one of the wealthiest boroughs in London – Kensington and Chelsea.

The term north / south divide, and the relative prosperity of the regions referred to in the rest of this blog series is therefore a broad-brush term based on the economic data available.

The problem – the North/South divide

The spatial inequalities that exist in the UK, commonly symbolised by the notion of the North-South divide, are deeply entrenched, dating back to the 19th century and before.

It is interesting to note that the divergence as we know it, was actually inversed in the 18th and 19th centuries, as the North of England cemented its status as the manufacturing centre of the world during the Industrial Revolution, while southern regions tended to rely more on the less affluent agriculture sector.

However, the industrial prosperity of the “north” began to change markedly in the 1920s and 1930s, with the start of the long-term decline in the fortunes of the manufacturing sector, and a shift in location patterns to favour the southern regions of the country among growing light industries and the service sector. This also coincided with the great depression of the late 1920s.

This trend continued over the course of the 20th century, before really coming to prominence as we know it in the 1980s, as the deregulation and liberalisation of financial markets in 1986 (commonly known as the “Big Bang”) turned the City of London into a financial capital to rival New York. The subsequent decades have seen the capital experience extraordinary growth as the new “finance-led economy” has taken off.

The last 20 years has seen this divergence endure, as the rise of the digital economy has taken hold, benefiting London and the southern regions disproportionally. In fact, the uncomfortable truth is that despite government initiatives, the economic disparities, particularly between London and the rest of the UK, have grown.

This is illustrated in the graph below which shows the year on year cumulative difference between each region’s annual percentage growth of GVA and the corresponding rate for the UK economy as a whole.

The graph depicts the gulf in economic performance experienced between the best and worst performing regions within the UK, with London quite clearly leading the way.

Graph 1 - cumulative regional output gaps (1999 – 2017)

North defined as: West Midlands, North West, Yorkshire-Humberside, North East, Wales and Scotland.  
South defined as: London, South East, South West and East of England.

Productivity Implications

The divergence in economic performance is reflected within the UK’s regional productivity performance, with the southern regions outstripping productivity performance (as defined as output per hour) in comparison to all northern regions. Indeed, London’s productivity is over 50% higher than the worst performing region (the East Midlands), and the productivity gap amongst English regions is estimated to cost the economy around £40 billion a year.

As highlighted in my previous blog productivity is the primary long run driver of economic growth and prosperity in an economy, and such imbalances are of great concern for the relative wealth of the regions.

Graph 2 – the North/South divide is reflected in the regional productivity performance

The divergence in economic growth and productivity – and resulting inequality - is illustrated in a myriad of other economic metrics, which have both social and health implications on society. Check out part 2 of this series (coming soon) where I will be considering the implications of a spatially unbalanced economy.