A place-based way of increasing national productivity

  • Election 24

Professor Paul Ormerod, Chairman of the Rochdale Development Agency 

In this piece, Professor Paul Ormerod explores spatial inequalities and suggests that tackling these could also help improve the productivity of the UK as a whole.

A key strategic goal of the current UK government is to increase both productivity and innovation in the UK as a whole. The Prime Minister, Rishi Sunak, stated that: “Innovation will make this country a beacon of science, technology, and enterprise and lift our productivity, raise our growth rate, create new jobs for decades to come.”

This goal is shared by the Leader of the Opposition, Kier Starmer. In a speech in July 2023 to the Tony Blair Institute, for example, he placed economic growth, which depends upon productivity and innovation, centre stage in his overall strategy.

A crucial issue to address in this context is the large spatial inequalities in productivity and incomes which exist across the country. The productivity levels of cities and city-regions outside London is low. The OECD noted that there is a marked gap between the productivity in second-tier cities in the UK and those in other countries.

The inequalities which are observed across regions of countries can also be seen within both the regions themselves and within the city-regions of any given region. Andy Haldane, former chief economist at the Bank of England, has presented evidence which suggests that “if anything, income inequalities within a region appear to be larger than income inequalities between regions”.  These spatial differences have been not just strong but persistent over time.

Market forces are not completely irrelevant to solving the problem of spatial inequalities.  But, in practice, in contexts which are place-based they operate both slowly and weakly.

Strong support for this latter proposition is provided by two of the 2019 Nobel Laureates in economics, Abhijit Banerjee and Esther Duflo. They spend  a considerable amount of time in their book Good Economics for Hard Times demonstrating that in spatial contexts both capital and labour are “sticky”. In other words, resources move between places both much more slowly and by less than much economic theory presumes. This leads the Nobel Laureates to conclude, in restrained tones, that “Economists have traditionally been unwilling to embrace place-based projects….This analysis seems to give too little weight to the facts on the ground.”

The next government therefore needs to devote effort and resources to place-based policies.

As the OECD points out in the report cited above “The [spatial] productivity gap is a sign of significant untapped potential”.  Embracing place-based policies more fully would considerably enhance the ability of both the main parties to meet their key aim of raising the national average levels of productivity and growth.

British governments for the foreseeable future will have to operate under resource constraints. Both the Chancellor, Jeremy Hunt, and the Shadow Chancellor, Rachel Reeves recognise this fact.

In order to generate the maximum impact from limited resources, the spending needs to be carried out within a framework which is both spatially concentrated and which facilitates  longer term planning.

The Institute for Government (IFG) has been strongly critical of what it describes as “churn” in regional policies.

Despite decades of policy interventions designed to improve incomes and productivity in the regions, the gap between London and the South East and the rest if the country has certainly not narrowed. The IFG ascribes much of this failure to the piecemeal, short-term policies which have been adopted. What is needed instead is “a stable and coherent set of policies that are built to last.”

Crucially, rather than being dispersed in small amounts across the regions as a whole, spending should be heavily concentrated geographically. This proposition is supported by economics, both old and new.

Alfred Marshall, who founded the faculty of economics at Cambridge at the beginning of the 20th century, developed the idea of industrial clusters.  He defined them as being “concentrations of specialized industries in particular localities”.

Spatial proximity facilitates knowledge spillovers between companies. A common pool of labour force skills is developed and as a result firms become even more willing to invest in training their workforce. Marshall’s third main point in favour of clusters is that they encourage greater levels of specialisation, and increased inter-firm cooperation with extensive activity links and resource ties. This enhanced cooperation reduces the cost of innovation.

In the jargon of economics, spatial proximity facilitates the ability to take advantage of increasing returns to scale external to the firm. This is the whole basis of the modern theory of economic growth, in which Nobel Laureate Paul Romer has been a seminal figure.

The practical advantages of clusters are well documented in the economics and business school literatures. An important example is provided by a 2019 report of the European Commission on clusters in the EU, which identifies 2950 regional industrial clusters.

Productivity is much higher in companies located in a cluster than in those which are not. Across the clusters as a whole, productivity is 25 per cent higher than the average for the industries. For the high performance clusters, it is a massive 140 per cent higher than average.

A prototype example of the approach which needs to be adopted is the Atom Valley Mayoral Development Zone, set up by Greater Manchester Mayor Andy Burnham (for transparency, I am the Chair of the Atom Valley MDZ board).

Led by a partnership of developers, industrialists, universities, and local government, the aim is to deliver large-scale regeneration and build a nationally significant industry cluster around advanced manufacturing in one of the most deprived parts of the UK. It will be closely integrated with Greater Manchester’s internationally significant concentration of R&D and innovation assets in sustainable advanced materials and industrial digitalisation which are predominantly, but not exclusively, located around the University of Manchester.

The concept has several key elements:

  • Location in the deprived outer boroughs of a city-region
  • Creation of a dense cluster of advanced technology companies
  • Strong links with leading universities and an existing concentration of innovation in  thriving city centre
  • A market-facing public-private partnership

The model can be replicated in the main city-regions of the UK.

About the author

Paul Ormerod is a Visiting Professor in the Department of Computer Science at University College, London (UCL). He writes a weekly opinion column on economics and related topics for City AM, a newspaper for workers in Central London. Since May 2020 Paul has been Chairman of the Rochdale Development Agency (RDA) which is responsible for economic development in the Metropolitan Borough of Rochdale, in Greater Manchester.


Photo Credit: William Maddicott on Unsplash