05Implications for policy

In the wake of the EU referendum result, Theresa May has placed particular emphasis on a new industrial strategy as the way to achieve her priorities for the economy.

“…we need a proper industrial strategy that focuses on improving productivity, rewarding hard-working people with higher wages and creating more opportunities for young people so that, whatever their background, they go as far as their talents will take them. We also need a plan to drive growth up and down the country – from rural areas to our great cities.”

Theresa May, 2 August 2016 20

Globalisation means that the national economy is likely to continue to specialise in ever more knowledge-based activity – there are many countries where production costs are lower, but few that can compete for more knowledge-focused businesses. The shift in the export base away from low-skilled activities (be they in manufacturing or services) towards more high-skilled ones is therefore likely to continue. The result is that productivity growth, wage growth and the creation of new job opportunities will become increasingly dependent on the performance of high-skilled service exporters.

Given the location preferences of service exporters, this means that an even greater share of the export base will concentrate in cities, and city centres in particular. This means that supporting growth of our cities will become increasingly important for the performance of the national economy as a whole.

This has three implications for policy:

1. Industrial policy needs to be place-based

Our research shows that the national economy is not flat, meaning that policy to boost growth needs to start from a place-based perspective. Previous industrial strategies have focused on picking specific sectors, and have been place-blind. Greg Clark has recently made a commitment that the Government’s economic plan will “take advantage of the differences and unique strengths that exist across the country”. If the Government’s new approach is to be more successful than past attempts, putting place at the heart of its industrial strategy will be critical.

2. To do this, policy needs a deeper understanding of the different advantages that different places offer to businesses

Different places offer different benefits to businesses. Cities, and city centres in particular, offer businesses access to knowledge, workers and other businesses, while hinterlands and more rural areas offer larger premises at a cheaper price. Both industrial and wider economic policy needs to work within this context. This more realistic approach would recognise the limits of policy designed to encourage the growth of high-skilled services exporters in every place across the country. It would also recognise and strengthen the relationships between places – for example city centres rely on suburbs and hinterlands for workers and customers, while hinterlands rely on cities for jobs (see Figure 12).

Figure 12: Where workers live, 2011 (%)

Trading Places Live Work table

Source: ONS (2016), Census 2011, origin-destination data (WU02UK)

3. Policy should not focus on micro-managing the location decisions that businesses make

Policies encouraging business growth have had a tendency in the past to micro-manage the location decisions that individual firms make, either through business support policies or through relocation subsidies. Encouraging growth in the urban context will need to focus on strengthening the benefits of an urban location (through policies to improve skills, planning and transport) and reducing the negatives (by putting policies in place to reduce congestion, pollution and housing costs).