Cities matter to the national economy because they provide benefits to businesses and workers that they can only access in urban areas. In the UK, the most successful urban economies are those that have been able to provide the competitive advantages that highly knowledge-based firms require. These include large numbers of skilled workers with the ability to create and share lots of knowledge face-to-face.
Economic complexity is an analytical approach that attempts to measure how developed an economy is, based on the amount of accumulated knowledge a place has. Economic complexity has been widely used to compare countries, but to date has been less commonly applied at the subnational level, especially in the UK. Using this approach for cities and large towns for the first time with historical data, this briefing shows:
- Present and past economic complexity of British cities and large towns is highly associated with current productivity levels. Successful cities and large towns today – mostly located in the Greater South East – had higher levels of complexity in 1981.
- The largest cities outside the Greater South East are much more complex today than they were in 1981. For example, Manchester was the 52nd most complex local economy in Britain in 1981 – today it is 18th. Likewise, Glasgow was the 38th most complex city, and today it is 7th.
- However, despite their greater complexity, the large cities outside the Greater South East still underperform in terms of productivity. Although they are more productive than their smaller neighbours, they are still less productive than smaller cities in the Greater South East. In addition, and despite these recent gains, the largest British cities still lag their French and German counterparts.
This matters not just for their local economies, but the national economy too, as the continued underperformance of Britain’s large cities creates a cost to the national economy that is estimated to be at least £48 billion per year. Closing this gap is essential if the Government is to meet its ambition of having an internationally competitive city in every region.
The key messages for policymakers from this analysis are:
- Levelling up the economy must focus on the geography of knowledge. For levelling up to truly occur, the geography of knowledge in Britain must change. Over the past four decades this has already begun to shift, as the renaissance of large cities outside of the capital has been driven by them becoming places of knowledge creation and diffusion, and this progress must not be squandered.
- Big cities are the most promising places for levelling up. As complex jobs have shown a preference to locate in these cities, policies to further improve their economies would go with the grain of changing trends in the British and global economy. The evidence shows that the Government’s goal of an internationally competitive city in every region is achievable because the geography of knowledge in Britain has already changed to make it possible.
- This research also offers a note of caution for those who urge local areas to ‘build on their strengths’. The cities and large towns which saw their relative economic complexity decline over the past four decades were those which had ‘doubled down’ on a single or few sectors which were complex in the 1980s, and did not broaden their export base beyond these activities, such as Aberdeen with oil. The most complex local economies are those which are strong across a large number of high-value, knowledge-intensive industries.
In many struggling places, it is not what a place has, but rather what a place does not have that should be of concern. Many places in the North and Midlands will not see a turnaround in their economies if they continue to focus on what they already have, particularly in lower-skilled parts of manufacturing and services. They need to focus on addressing the barriers that stop more complex activities from investing in their areas.