03The past four decades of economic complexity (1981-2019)

The puzzle of why big cities are complex but not especially productive can be answered by looking back through history. Using data from the Census in 1981 to compare economic complexity in the same cities across an almost forty-year period provides insights into how their economies and the national economy have or have not changed.

Cities that are complex today were usually complex in 1981 too

The majority of cities that were the most complex in 1981 are also the most complex today. As Figure 6 shows, cities and large towns in the Greater South East had a higher likelihood of attracting knowledge-intensive workers and businesses. Box 3 looks in more detail at London’s development over this period which goes well beyond the general characterisation of the impact of the ‘Big Bang’.

At the opposite end of the spectrum, most cities and large towns in the North and Midlands remained ‘trapped’ in low complexity economies. With comparatively little knowledge in 1981, these cities have since struggled to attract new innovative businesses, which would have consequently increased their productivity.

Big cities are an exception, and have become more complex over time

Most big cities were able to break out of the ‘low complexity’ trap and substantially increase their complexity. The relatively complex nature of the economies of large cities today is the result of four decades of improvement. This has meant that as a group, Britain’s large cities (excluding London) have shifted from having below-average levels of complexity in 1981 to being substantially more complex than the urban average today, as shown in Figure 8.

From the 63 cities under analysis, Manchester is the city that improved its economic complexity the most, in relative terms, followed by Glasgow.²¹ Manchester was the 52^nd most complex economy in Britain in 1981 – today it is 18^th. Likewise, Glasgow was the 38^th most complex city, and today it is 7^th. Leeds went from being the 40^th to the 13^th most complex economy, and  Liverpool moved from 36^th to 17^th.

The re-emergence of the largest cities is not a phenomenon specific to the UK, but is a part of a global shift that larger cities have been able to benefit from the most.²² But across the largest cities, Birmingham and Sheffield are the two exceptions: they had comparatively low complexity economies in 1981 and saw their complexity decline in relative terms.

As Box 4 discusses, big cities were unusual in that they were to attract complex businesses without having a large share of jobs in related activities by 1981. Big cities have begun to prosper because of this change.

The big picture is that the geography of knowledge in 2019 is less Southern than it was in 1981, because big cities outside London in the Midlands, North of England, and Scotland have become much more important places of knowledge creation.

Big cities have benefitted from how the economy has changed, not from policy bias

The turnaround of most of Britain’s large cities goes somewhat against economic complexity theory, which says that the evolution of an economy is related to its past specialisms.

One explanation in the public debate is that large cities have been explicitly favoured by policy in recent decades. This has sucked jobs into cities, so the argument goes, at the cost of their surrounding areas.

But finding evidence for this view is difficult. First, there is no consistent pattern of pro-urban policy over this period. For instance, the Local Government Act 1986 abolished the Greater London Council and the metropolitan county councils, and these were not reversed until 2000 and the 2010s respectively.

Second, there have been city-specific policies, such as Michael Heseltine’s City Challenge or City Deals under the Cameron-led government.²⁵ But as Box 5 illustrates, in the wide gamut of local growth policies that have been put in place in the last 40 years, very few have been city focussed.

Furthermore, all local growth policies tend to be relatively marginal compared to other policies or spending decisions by national government. This affects how the nationally economy adapts and changes, with consequences for local economies too.

Another explanation for why large cities have improved over the past forty years is that the national and global economy has moved from manufacturing towards knowledge-based services. The inherent benefits that large cities offer has meant they have been well-positioned to make the most of this change.

And, cities have benefitted from non-spatial policies that were introduced by successive governments over the past 40 years. For instance, the expansion of higher education has seen the growth of universities that are largely city-based and immigration policy has also benefited London in particular. But this has not been the result of an explicit policy focus towards cities, but rather one that implicitly benefits cities due to their role in driving economic growth.

In other words, the big cities are stepping into a new role that the global economy has demanded of them. As their relationship to knowledge has changed and improved so much since 1981, their current productivity underperformance suggests this process is unfinished. Further improvements to their economic performance are possible.

‘Building on your strengths’ is unlikely to turn around struggling economies

Yet not every urban area has seen its relative economic complexity improve. When looking at the cities and large towns that have struggled in Figure 6, the data suggests policymakers should be cautious about economic strategies that encourage struggling places to ‘build on their strengths’ and ‘smart specialisation’. These cities have either failed to transition from activities that were complex in 1981 to new industries that are complex in 2019, or they have replaced one set of low-knowledge activities with another set of low-knowledge activities. They fall broadly into three groups:

Complex cities that did not develop new specialisms are less complex today

In contrast to the improving complexity of many large cities, there is a group of cities and large towns where the opposite is the case, and which have become less complex. Cities and large towns found in the bottom right of Figure 6 – such as Aberdeen, Blackpool and Swansea – have taken a backward step in the last 40 years. They had above-average levels of complexity in 1981 but have below-average levels in 2019.

A common characteristic of these places is that they continued to specialise in the same activities as they did in 1981 while the global economy has shifted towards knowledge-based services, as Table 2 shows. Aberdeen has not moved beyond oil. Blackpool continues to specialise in aerospace manufacture. And steel still dominates in Swansea.

This is in contrast to those cities and large towns that remained complex throughout the period, such as Reading and Edinburgh. These cities changed their main specialisation patterns from electronics to IT-related activities, allowing them to maintain their comparatively high productivity levels.

Cities dominated by a single industry

Cities with low complexity today tended to be more specialised in a single activity in 1981, having on average 18.8 per cent of their exporting jobs in a single occupation, compared to the urban average of 11.1 per cent. From the 15 cities that were dominated by a single industry (20 per cent or more of their exporting jobs) in 1981, only three are complex today.²⁶

This is likely to be because overreliance on a small number of activities has limited the ability of cities to innovate and move to new economic activities.²⁷ The observed dynamic has similarities with the economic concept of the ‘resource curse’, which argues that high reliance on few economic activities, associated with natural resources hinders long-term growth.²⁸

Cities that moved from one low complexity activity to another

The final set of cities are those that have been ‘trapped’ in low complexity activities of different types over the past four decades, shown in the bottom left of Figure 6.

These cities offer a counterexample to the experience of most large cities. Like the large cities, their development also appears to have been guided by the inherent benefits that they offer to businesses, rather than their past industrial structure. The problem is that the benefits they have offered, such as large pools of labour and cheap land or geographic location, have appealed to lower productivity and lower wage activities (e.g. warehousing, distribution or food manufacturing).

Of the 22 cities and large towns that are ‘trapped’ in low complex activities, six of them specialised in coal mining in 1981. Today, these urban areas have moved away from coal, and are specialised in other activities, as Table 3 shows. None of these sectors are related to coal mining, suggesting their earlier specialism driven by the location of coal seams had no direct impact on the subsequent specialisms they developed.

But all are lower skilled activities, suggesting that it is the inherent benefits – often driven by indirect legacy of previous activities (e.g. contamination affecting land values) – that these places offer to businesses that has driven their development, rather than the specific accumulated knowledge from past industrial structure. Box 6 gives an example of how policy that aims to increase economic growth can sometimes inadvertently reinforce these qualities, and how replicating the existing geography of knowledge does not always mean retaining the same industrial structure.