By: Damon Aitken
Distributing the Gains from London’s Growth
Any discussion of the English economy must include the City of London. This global powerhouse creates 22 % of the GDP of the United Kingdom. However, there is a severe divide between the City of London and the UK’s other regions. Though some of the division is perceived more than actually present; this perception is also dangerous as it fueled the fury that guided Brexit voters. England has become an unequal country with severe economic deprivation in regions contrasting with the booming success of London as a global financial capital. Brexit was driven by voters who felt that they had not received an adequate share of the huge economic gains over the past few decades.
There have been many reasons proposed for this economic divide. The North was once England’s industrial heartland and suffered during deindustrialization and the transition to a service-oriented economy. Lancashire in the north-west (historically including Liverpool and Manchester) once dominated the world cotton textile industry. Now, it is home to 3 of the most deprived towns in Britain; let alone England. Deindustrialization took away manufacturing jobs that were never adequately replaced by a service sector that clustered in London. Elite universities have historically been clustered in the South and spending cuts to education have also exacerbated the skills gap in Northern towns.
The economy history of England emphasizes the key role that international trade has played in giving England its strong economic position. Natural resources such as coal drove the boom of industrialization and gave England a strong comparative advantage in producing goods such as textiles. Colonial possessions also gave Britain unparalleled access to natural resources. Over time, the economy of England evolved to be dominated by the service sector and this is no different in Northern England. Skilled jobs in the services sector have long been drifting towards the south and London. London attracted the financial services industry due to many factors. London’s status as the capital of the massive British Empire led to it being the hub for financial activities related to the empire that spanned the globe. Similar firms tend to cluster together as this lowers costs for them. For example, banks benefit from the concentration of skilled workers in one area and can capitalize on low transition costs when workers shift jobs. Being a part of the EU has given firms based in London access to the Eurozone economies and economic powerhouses such as the Netherlands and Germany. This is naturally under threat due to Brexit as firms will look to move to within Eurozone to retain this access.
This is not to say that the Northern economy is lacking in high-skilled industries and innovation. The large cities in the North are doing well; such as Leeds and Manchester. Manchester in particular has been the beneficiary of efforts to decentralize the media from London and the neighboring city of Salford is home to BBC offices. On a sporting side, Manchester City and Manchester United provide significant soft power recognition of Manchester abroad. Leeds is the second largest center of legal and financial services in the United Kingdom. A focus on digital growth and improving internet connectivity attracted firms in the 1990s and today Leeds boasts the most diverse economy of any English city.
The Conservative government has a proposal called Northern Powerhouse that aims to boost economic growth in the North of England. A key part of this proposal is devolution. The mayor of Greater Manchester will assume greater powers and authority to carry out economic reforms. This proposal is driven by political expediency as the Conservatives look to solidify seat gains in the North.
Infrastructure is key to economic development. Manchester Airport is the largest airport outside the London area. Much of the focus has been on the high-speed rail service linking London and Manchester but what also needs to be emphasized is connections to the ports on the Humber Estuary near Hull and on the River Mersey in Liverpool. Infrastructure is also necessary for agglomeration. As firms cluster; costs are lowered across the board.
Education is also crucial as better education has the potential to reduce the skills gap present in the North. Firms can be attracted to localities by an existing pool of high-skilled local workers. The Conservative government in charge of the Northern Powerhouse proposal has previously proposed spending cuts to education. Spending cuts will hobble the generation of high-quality human capital.
The government could also improve the situation by aiding the dissemination of venture capital firms throughout the country. Venture capital firms are concentrated in London and this means that firms founding in London have natural advantages. Manchester is also a regional hub for venture capital and is a promising area for growth in the field. Leeds, with its strong digital connections and network of professional service firms, could also be a potential center.
A potential issue with the Northern Powerhouse proposal is that it focuses on the major cities. 10 of the top 12 struggling cities in the UK are found in the North but are small in size. Struggling cities were those with the lowest rates of job creation. None of the top 10 fastest growing cities are in the North. Overall, it can be seen that the economic performances and wealth is more unevenly distributed in the North. A statistic that helps illustrate this divide is GVA (gross value added). Looking at the same situation in France or Ireland; the regional disparities in GPA per capita do not differ as widely.
Brexit poses a danger since funds provided by the EU for economic development will be lost. It remains to be seen if Parliament will make up the shortfall and if there is any concrete contingency plan. It is ironic and deeply sad that many of the poorest areas of England voted for Brexit. They stand with the most to lose from this disastrous economic undertaking. The view may be that London firms with international links may be hurt most; but the British economy is strongly linked to the European economy and Brexit’s effects will be felt throughout the system. The image below shows 9 of the most deprived cities in England with the jobs density statistic below. Jobs density is the total number of filled jobs in an area divided by the resident population in that area. For reference, the Jobs Density for Great Britain as a whole is 0.83. All of these places voted Leave during the Brexit vote.
It is imperative that the British government tackle deprivation and poverty throughout the United Kingdom. Centering efforts on increasing economic opportunity in the North of England could help prevent the thinking that led to Brexit.
- Joseph Rowntree Foundation. (2016, February 26). 10 of the top 12 struggling cities are in the Northern Powerhouse. Retrieved from https://www.jrf.org.uk/press/10-top-12-struggling-cities-are-northern-powerhouse
- Kanguole. (2007). Map of NUTS 3 Areas in England by GVA per capita [A map of England divided by NUTS 3 level subdivisons. They are coloured on a ten shade scale of green with light green having the lowest average GVA per capita in 2007 to dark green for the highest. England average is £20,458.]. Retrieved from https://commons.wikimedia.org/wiki/File:Map_of_NUTS_3_areas_in_England_by_GVA_per_capita_(2007).png
- Nomis. (2018). The National Office for Labour Statistics. Retrieved from https://www.nomisweb.co.uk/
- The Economist. (2016, September 17). How the other three-quarters live. Retrieved from https://www.economist.com/news/britain/21707246-london-and-south-east-power-britains-economic-growth-rest-country-getting
- The Guardian. (2017, August 23). The Guardian View on the Northern Powerhouse: Back On. Retrieved from https://www.theguardian.com/commentisfree/2017/aug/23/the-guardian-view-on-the-northern-powerhouse-back-on
- BBC News. (2017, November 21). North of England hardest hit by government cuts. Retrieved from http://www.bbc.com/news/uk-england-42049922
- The Northern Powerhouse Independent Economic Review (Rep.). (2016). London: SQW.
- The Financial Times (2016, January 4). Private equity finds rich pickings around Manchester. Retrieved from https://www.ft.com/content/3470f658-a34f-11e5-bc70-7ff6d4fd203a