West Midlands’ Performance & ‘Rebalancing’ in Perspective URESG meeting, Cardiff

West Midlands’ Performance & ‘Rebalancing’ in Perspective

URESG meeting, Cardiff

David Bailey

Recession and recovery? (Diagram from the NIESR, 2013)

Comparative Recovery

The ‘Regional’ Challenge

“To boost the scale and pace of economic recovery in the region, create more new jobs and stimulate more demand for higher level skills, there is a need to up-skill the workforce in existing businesses, to improve their productivity and help them to exploit new market opportunities. In parallel it will be important to attract more businesses and jobs in higher skilled and value added clusters” The West Midlands Economy Post Recession: Key Issues and Challenges, West Midlands Regional Observatory, 2010; p.20

“The weak performance of the UK economy… the ongoing financial uncertainties in the Eurozone and the global economy, declining wages and cuts in the public sector mean supporting private sector growth and jobs in our cities is more critical than ever”.Cities Outlook, Centre for Cities, 2012; p.6

Set against a long-term poor track record

• Long-term underinvestment in infrastructure

• Long run process of deindustrialisation and a wider economic structure reliant on low growth sectors; lower proportion of high growth firms and lower rates of enterprise

• A relatively poor employment performance in the private sector • 2% employment growth 1998-2008 compared to 19% nationally• Birmingham -7.7%; Stoke -16.4% (Newcastle +10.2%)

• Not enough High GVA industries

Set against a long-term poor track record

• A relatively poor education and skills record; dependence on lower value added sectors and clusters leads to relatively low skill levels and skills shortages

• Relatively poor performance in developing ‘knowledge economy’ sectors and in R&D spend

• Pockets of high levels of unemployment and worklessness; issues of high youth unemployment and long-term unemployment especially in Birmingham

• “There are over 32,000 young people claiming JSA in Birmingham - enough to fill Birmingham City FC’s St Andrews Stadium” (Centre for Cities, 2012); youth claimant rate 4th worst of UK cities

• Long-term unemployed accounted for 24% of Birmingham claimants by end of 2011; whilst long-term claimant rate second worst of UK cities

Poor track record in developing knowledge intensive jobs

Source: The Work Foundation, 2009

60

70

80

90

100

110

120

130

140

150

160

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Empl

oym

ent I

ndex

197

1=10

0

South EastNorth EastEast MidlandsWest MidlandsEasternYorks-HumberNorth West

Long-term employment growth

9

Contrasts in performance of region in recession; since late1990s relative deterioration in West Midlands

Source: ONS, Regional Claimant Count Rates

1971 Q1 1973 Q3 1976 Q1 1978 Q3 1981 Q1 1983 Q3 1986 Q1 1988 Q3 1991 Q1 1993 Q3 1996 Q1 1998 Q3 2001 Q1 2003 Q3 2006 Q1 2008 Q30

2

4

6

8

10

12

14

16

18

UK

West Midlands

East Midlands

North East

South East

Reg

iona

l Cla

iman

t Cou

nt R

ate

(%)

Widening GVA gap

2002 2003 2004 2005 2006 2007£10,000

£12,000

£14,000

£16,000

£18,000

£20,000

£22,000

Regional Economic Performance (GVA per head)

West MidlandsEngland

Source: West Midlands Regional Observatory

Weak Industrial Structure

Sector/Cluster Industry / service

Emerging high value added private sector activities

Environmental technologies (£3bn GVA, 74,000 jobs)Medical technologies (£250m GVA, 7,000 jobs)Specialist business services (£5bn GVA) Digital media (£150m GVA, 9,500 jobs) Electricity, gas and water (£2bn GVA, 14,000 jobs)

Traditional private sector activities

Transport technologies (£4bn GVA, 92,000 jobs)Building technologies (£11bn GVA, 220,000 jobs) Food and drink (£3bn GVA, 58,000 jobs)

Lower value added private sector activities

Business services (£23bn GVA, 440,000 jobs) Wholesale and retail (£12bn GVA, 360,000 jobs)

Public Sector activities Education (£6bn GVA, 240,000 jobs)Health and social care (£7bn GVA, 277,000 jobs)

In GVA and employment terms high value added activities make relatively modest contributions to the regional economy

Source: West Midlands Regional Observatory, 2010

West Midlands – Manufacturing GVA 1997-2009

Fell by 23%: worse than any other UK region

Over-valuation of sterling badly affected the region’s auto and transport clusters

plus it wasn't until Mandelson arrived that Labour actually had an industrial policy

West Midlands: The 08-09 Recession and Beyond

• Output drop and unemployment rise in West Midlands worse than many other regions during 2008-9 recession (not a surprise)

• BUT bounce back more rapid until 2012 – rebalancing effect? certain parts of manufacturing, exports (?), modest ‘onshoring’

• More rapid jobs growth – WM out performed other regions until 2012 then slowed – now unemployment rising.

• Region reasonably placed? (Deloitte, 2011/12): public sector job cuts; tax rises and benefit cuts; ‘mini-revival’ in parts of manufacturing; weakness in financial services; prospect for house prices.

• Output PMI early 2013: 52.5 (51.5 UK) for last 12 months

• Challenges around youth unemployment esp. in cities • Private sector job growth sufficient to offset public sector cuts?

West Mids Economic Performance

Not surprising given structure of West Mids economy

Exports

… where to?

Upgrading the ‘middle’?

Some recent shifts:• ‘Personalised manufacturing’... Car industry?• ‘Functional’ to ‘hybrid’ goods: hybridity. Creative/design and

service element• Brands, market repositioning• Links ‘creative’ non ‘creative’ sectors – ‘platforms’ – see report by

Lisa De Propris and others for NESTA on mapping creative industries

• Diversity / ‘serendipitous spillovers’ • related variety: ‘smart specialisation’ (clusters and a regional

approach)

Industrial Policy in the Auto Industry…

• Automotive Council e.g. sourcing road map 2011• Skills• Loan Guarantees• RGF support JLR, Nissan, GM, supply chain,• AMSCI (£125 m)• TSB + EPSRC investment into research• OLEV• MAS• Scrappage scheme (2009-10)• Automotive Campus at Warwick Uni• Local ‘smart specialisation’ approaches: NVN open innovation approach

And if we really want to ‘rebalance’ the economy...

Industrial Policy targeted at manufacturing• Capital allowances• Focus corporation tax cuts for manufacturing firms

that increase output• National insurance holidays for firms that take on

workers• Better R&D tax credits• Better support for exporters• Manufacturing loan fund? (Automotive –

Relocalisation / Repatriation of supply chain)• Green Investment Bank? SME Bank?

Plus...

• Lessons from Germany: Part-time wage subsidies

• Takeover Law• Rebuilding fractured supply chains• Other instruments: procurement policy

Assembly success but more support needed for Supply Chain…

Big assembly success, but not enough components sourced here…

Reshoring/onshoring opportunity: depreciation of sterling, plus rise in transport costs, plus rising wage costs in far east also make it possible to repatriate some components sourcing to UK…

Plus supply chain ‘resilience’ issue (Japanese earthquake/tsunami)

Automotive Council, + Work of SMMT in ‘matching’ OEMs and component suppliers

Big issue for smaller firms – access to finance, RGF / LEPs bid to address this, and Advanced Manufacturing Supply Chain Initiative BUT small scale

Key local question: how to make most of JLR and other investment for supply chain in UK? And help local suppliers win more work? help with winning orders, access to finance, skills.

What type of IP is this?

• Not ‘picking winners’ – rather sees Industrial Policy as a process of discovery (see Dani Rodrick) + linked to ‘smart specialisation’

Policy: (How) can LEPs be effective RDAs?

‘Old’ system of RDAs not perfect BUT...

• Still not clear exactly what regional growth drivers / levers LEPs will be able to influence

• What’s the Offer? Localism Act, RGF, Enterprise Zones, possibility for faster planning, Growing Places Fund, City Deals...

Recentralisation / Decentralisation

Recentralisation of IP to Whitehall Centralised industrial policy not likely to work LEPs: transport, housing, planning, enterprise (?) Skills? ** Business engagement? RGF big cut in funding – need more scope for

LEPs to raise finance (TiFs / Business Rates / bonds?)

RDAs assets back to Whitehall / HCA. But, ‘City Deals’ a good first step?

Cont’d...

Risk of excessive fragmentation – functional economic geography? B’ham / Black Country? **

Capability/capacity to make strategically informed decisions on economic development?

• Need for ‘intermediate level’: Intelligence, monitoring, accessing EU funding, regional planning, clusters and innovation

• Recent BIS Select Ctte Report on LEPs: short-termism, confusion, lack of confidence

• Question: can we really ‘do’ smart specialisation regionally?

‘Under-development traps’ - lack of capacity or unwillingness of ‘local elites’.

• Lack of trust– Within single local authority– Across two (or more ) local authorities within ‘natural economy’– Between two overlapping authorities in a two tier situation

• Under-bounding– Serious under-bounding of local authority– Inappropriate bounding for LEP – key problem

• Culture of ‘conditional localism’– Priority of ‘local’ becomes to respond to the ‘national’, rather than local needs

and priorities

• Insufficient local capacity

Birmingham, Black Country and Coventry

Birmingham

CoventrySolihull

Wolverhampton

Dudley

Lichfield

Sandwell Walsall

Travel to work

Built-up area

Do LEPs reflect natural economies in practice?

Greater Birmingham and Solihull LEP – strange boundaries?

Economics behind move to LEPs

Competing economic ideas in government: neo-classical perspective (NEG) AND place-based approachesSix key limitations of economics behind new approach:• 1. A two region model• 2. tension in approach to cities outside London• 3. Conditional Tone towards cities outside London• 4. limited outcomes in practice?• 5. Bottom-up creation of LEPs ‘right geography’?• 6. what happens to LEPs not connected to a core city?

Summary

• West Mids: relatively poor long-run economic performance, but reasonably well placed today if we can develop a regional IP?

• Industrial Policy: process, smart specialisation but regional scale important

• LEPs need genuine powers and the ability to raise funding: for some cities, govt listening?

• Right scale? Intermediate ‘join up’ of LEPs’ work critical to use public monies effectively – as a minimum: intelligence and info gathering base, pursuing effective cluster and innovation strategies and accessing EU funding

• Heseltine Report how much real decentralisation? • Competing economic ideas in government

Thanks for listening. Comments, Questions welcome!

[email protected]