Friday, 18 June 2010

The problem is London

Never mind a double-dip recession. Many regions and sectors in the UK are already facing a double economic whammy. The problem is London.

There are huge imbalances between London and the rest of the UK. In almost no other developed country does the largest city dominate to the extent that London does in the UK. Furthermore, in some countries, such as the US and the Netherlands, the capital is not the largest city and this provides a balancing effect between two centres. The over-centralised UK means that political power is concentrated in London.

London also dominates economically as well. It has a disproportionate level of economic activity compared to other parts of the UK fuelled by the financial services sector in the City of London. The focus by governments on the financial services sector has led to a situation whereby manufacturing has been allowed to decline. Between 2000 and 2007 there was large growth in the total GDP of the country but a significant contraction in the proportion of that GDP from manufacturing. Manufacturing now comprises just 11% of GDP but provides 50% of exports. Export-led growth critical to economic recovery but an under-represented manufacturing sector means the economy might not be able to take full advantage of any upturn in global demand.

So what are the implications of this situation?

• It impedes regional economic development. When the London economy overheats, action is taken to bring down the temperature. This action can impact negatively on the rest of the UK.
• There are wide inequalities in income, wealth, health status, and housing standards
• The overheated housing market in London and the Southeast leads to inflationary pricing bubbles that eventually burst and cause huge economic damage
• Insolvency rates, unemployment levels and the state of household finances between 2008 and 2010 show a skewing of recessionary pain and hardship towards regions other than London and the Southeast.

So what might be done? What about a decision to shift the UK capital to (say) Birmingham similar to what Brazil did with its capital several decades ago. This might be an excellent idea but would fall foul of the myriad of vested interests in London.

However, there should be much greater decentralisation of public sector jobs. In spite of token efforts to transfer jobs out of London, there is still a massive preponderance of governmental and quasi-governmental jobs in the capital. There is no logic to this in this age of modern communications. This focus on London also stimulates a concentration of jobs in the head offices of third sector organisations, even though accommodation and staffing costs in the capital are much higher than elsewhere. By taking a lead, government will encourage charitable bodies to relocate their head offices out of London as some, such as Oxfam and World Vision, have already done. Also, people might think about only supporting charities who have their offices located outside London thereby incurring much lower administrative costs.

Similarly, while the government cannot direct the private sector as to where it locates jobs, it can encourage the private sector to locate jobs (and especially highly skilled ones) to different parts of the country through planning consents and other measures.

There is also a pressing need to focus on the role of manufacturing industry to help produce resurgence in the sector. This point has been emphasised for many years by, among others, Sir John Rose, the chief executive of Rolls Royce (one of the few remaining UK examples of world-class manufacturing industry). Until recently, this view seems to have fallen on deaf years as a consequence of the euphoria about the financial services sector but times are changing. Let’s hope it is not too late.

The rest of the UK (ex London) comprises over 80% of the UK population. Its time to tell the Government to start thinking about us as well.

A fuller version of this commentary can be found on
http://www.publicfinance.co.uk/features/2010/04/double-trouble/

2 comments:

  1. quick question is tomorrows budget overdoing the public sector cuts being driven by ideaological reasons or would the markets be satisfied with what labour would have done? being a public sector frontline carer, i am particularly aprehensive .i have studied economics but over 20 years ago

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  2. Personally I don’t think the budget was a Tory Party ideological exercise in cutting public expenditure. I think it was cleverly balanced to appease the markets, the general public and the Lib-Dems. If Labour had won power I think we would have had a currency crisis by now and I say this as a former but disillusioned member of the Labour Party. I think the Labour Government has done catastrophic damage to the country and I think the coalition is right that we have to revive the manufacturing sector of our economy.

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