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Dear Mr Haldane
Congratulations on your recent appointment as the chair of the newly-formed Industrial Strategy Council.
As you know, the purpose of the industrial strategy is to improve the poor productivity performance of the UK relative to other developed countries. In your role you will need to assess a number of proposals that will aim to do just that. To judge their potential effectiveness, it is worth breaking down the overall goal and measuring their ability to respond to the following three principles.
While the UK’s poor productivity is almost exclusively spoken about in terms of the national economy, there is a very strong geography to it. Not only is the Greater South East the most productive part of the UK, but it’s one of the most productive parts of Europe.
So while it is true that an average French and German worker produce more than an average UK worker, it is not true of those who work in the Greater South East. As such, the UK’s poor productivity lies elsewhere in the country, and this is where the efforts of the industrial strategy should be focused.
These patterns are driven by the underperformance of many cities outside the Greater South East. This is a worrying problem for the UK economy. Through the process of agglomeration these cities shouldn’t just be leading productivity in their wider regions, but should be leading the national economy too. That they don’t, shows that these places are not contributing in the way that they should to both local and national economic prosperity, and fixing this underperformance will go a long way in improving UK productivity overall.
Crucially, this does not mean that our most successful areas should be ignored. But their challenges sit mainly around dealing with the costs of success, specifically the supply of housing and commercial space, congestion and pollution. These all fall outside of the Government’s scope for the industrial strategy.
Much policy commentary on the UK’s poor productivity has pointed the finger at a ‘long tail’ of unproductive businesses that hold back prosperity. But the long tail is somewhat of a red herring. This rump of unproductive firms is mostly made up of local services businesses – those that sell to a local market only, such as newsagents, restaurants and hairdressers.
Not only are these activities less productive, but their scope for productivity improvement is also limited. Think of a fitness instructor – while they may use an iPhone today to play music when they would have used a ghetto blaster in the 1980s, fundamentally their job has changed little. The same applies for hairdressers, waiting and bar staff.
The productivity improvements that we need will be delivered by those ‘exporter’ businesses that sell to many markets. It is these businesses that have driven UK productivity growth over the last 30 years. And it is the varying performance of these businesses that also explain the uneven geography of productivity across the country. So any business-level intervention must focus on these types of firms.
The varying performance of exporters across the country is not just down to the underperformance of specific business. It is also due to the absence of more productive exporters in these economies.
This results from the relative benefits that different places offer. High-skilled exporter businesses look for access to high skilled workers and a network of other high-skilled businesses and crucially they will pay a premium for this. The concentration of such businesses in central London in particular, despite it being one of the most expensive places to do business in the world, is an example of this. Lower-skilled exporters (for example call centres) look for access to lower skilled workers and cheaper land. This results in the separation of exporting activities across the country according to their type of activity.
This even happens within a business – think of the investment bank that has its investment functions in London but its back office functions elsewhere, the car manufacturer that does its assembly in the North of England but its engineering and design functions in the Greater South East, and the online retailers that have a central London HQ but their distribution activities elsewhere in the country.
So policy interventions can’t just be firm or sector specific. They need to make less successful cities more attractive to investment from these types of companies, through improving the benefits that they offer (for example, better access to a skilled workforce). Only by doing this will an industrial strategy be able to sufficiently improve the number of more productive exporter businesses with underperforming cities.