The Industrial Strategy: can economic growth include everyone?

Raj Patel

As we start to see Local Industrial Strategies being agreed, what can government and partners do to make growth inclusive?

The first wave of Local Industrial Strategies, negotiated with the government and based on functional economic areas, has been published, with more to follow. These are the next stage in the government’s industrial strategy, launched well over a year ago to set out a road map towards productivity growth and wealth creation. The strategy identified five foundations of productivity:

  • ideas
  • people
  • infrastructure
  • places
  • the business environment

…and four areas, or ‘grand challenges’, where “Britain can lead the global technological revolution”:

  • artificial intelligence and big data
  • clean growth
  • the future of mobility
  • meeting the needs of an ageing society

Put simply, what we’re primarily talking about is investment in infrastructure and technology and investment in people.

What is inclusive growth?

That focus on people brings us to what is, perhaps, the heart of the matter: inclusive growth. It’s increasingly fashionable in urban and regional development – especially as policy makers start to acknowledge that economic development does not always deliver quality jobs and higher wages. But what does the term mean?

Neil Lee at LSE calls it “a long-overdue recognition that urban economic development has tended to focus on growth, with little consideration of who benefits” – but adds that what it means in practice is still rather difficult to pin down. It also “has only a limited evidence base, and reflects an overconfidence in local government’s ability to create or shape growth”.

David Burch and Neil McInroy, in their ‘policy provocation’ on the concept say one can strategise about how to distribute the proceeds of growth in places that are growing, but the idea has little to offer ‘left behind’ places which lack any kind of real growth and momentum. This is critical, because the UK has the biggest gap in economic performance between regions compared to other EU nations. It also doesn’t factor in environmental considerations.

A long-term approach that focuses on cities between 1971 and 2015 (opens PDF), identifies three broad types of place: those pulling ahead, keeping pace or falling behind. But it’s difficult to measure how inequality is distributed across local areas.

Building an evidence base

Our policy briefing The Industrial Strategy: Building a more productive society, has started to contribute to the evidence base and ideas on inclusive growth. Bringing together research by various academics, using Understanding Society and other data sources, these research projects found that:

  • Regional imbalances are extremely persistent in the UK. Internal migration can partly compensate for these imbalances over time, and is generally higher than people think, but population changes always lag behind changes in demand, making for persistent regional differences in employment rates. Outside London, there is a correlation (but not causation) between the proportion of graduates and unemployment among those with low skills, i.e. a positive employment effect.
  • The challenge of taking forward the Industrial Strategy is getting the balance right between the industries of tomorrow, and the development of low-paid sectors (or ‘every-day economy’) that account for significant employment. Employers need to tackle low pay which has a structural base, rather than being a reflection of the employees who work in these sectors. Local growth can provide greater opportunities for workers to switch firms and earn more, but such growth is proportionately more likely to benefit those in higher skilled occupations.
  • R&D investment by firms can be a mixed blessing for employment, with tensions between increasing innovation, creating employment and reducing inequality within and between regions. On balance, an increase in R&D investment had little impact on employment rates, but played an important part in changing the composition of employment in local labour markets. The precise effects varied according to the nature of local labour markets. In areas with a lower proportion of routine jobs, R&D growth induced a decrease in employment, but an increase in highly educated workers. In areas with a high proportion of routine jobs, there was an increase in employment but mainly in non-tradeable services. This can be attributed to an increase in self-employment. (An interesting finding is that R&D investments also significantly increase the gender pay gap – an issue that needs more exploration.)
  • On the whole, the recent growth in self-employment seems to be explained by ‘prosperity pull’ of growth leading to further growth, but this presents a particular challenge for less prosperous areas given the dependency of self-employment on local economic conditions and higher wages in particular areas.

And what about the ‘B’ word…?

To change our traditional approach to economic development and understand the wider mix of policy tools needed for inclusive growth will take a lot of work – and the industrial strategy is not immune from what we might euphemistically call ‘other political forces’. Brexit is something of an elephant in the room when economic policy is being discussed.

We don’t know which version of leaving the EU (if any) will happen, or what it will mean for the economy – or what that might mean for our ability to invest, and for the success of the Industrial Strategy. One of the impacts of leaving the EU will be the loss of EU structural funds. The government has said it will come up with a Shared Prosperity Fund to take the place of the EU money, but it is not yet clear how much money will be in the replacement fund or how it will be allocated.

In the government’s own words, one of the industrial strategy’s goals is to “spread the proceeds of growth and address disparities in regional productivity”. Surely then, that investment needs to start flowing to these communities anyway, in proportion to the opportunities and challenges they face?

Author

Raj Patel

Raj Patel is Impact Fellow at Understanding Society, focusing on how data can be used to address the challenges society faces.