Policy Research in Macroeconomics

The spatial hole in economics: the Regions bite back

Photo: Jeremy Smith
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Over the last decade the relationship between mainstream economics and serious spatial analysis – always sporadic – has become even more tenuous. What lies ahead for the British economy over the next ten years? Here, relentless centralisation of Westminster politics and Whitehall practice has been matched by a similar trend in much of the economics profession.

The result of this insensitivity to the geographically uneven development of the economy has been an entirely predictable political outcry from the disadvantaged regions. However, even the largely vacuous political responses, summarised in the ‘levelling-up’ slogan with the support of half-hearted initiatives like the Northern Powerhouse and Local Enterprise Partnerships, have not been matched by any serious analytical interest. Mainstream economics remains tied to the universalist assumptions of neoclassical economics. Spatial inequality, if considered at all, is seen as a second order issue of distribution, to be addressed by fine-tuning adjustments to tax and public spending. Any subnational analysis remains largely confined to mechanistic model building.

However, outside the mainstream economics profession, there has been long-standing and serious theoretical and practical analytic work at the sub national level. A significant strand of regional analysis has emerged from Marxist analysis and from econometric and specialist economic studies in areas suffering economic under and over-development. A worthy strand of theoretical study, from David Ricardo and Henry George to Doreen Massey and David Harvey, stretches back two centuries. This has shown that it’s possible to produce an integrated analysis of the economy by examining the impact of land values, transport costs, and rents on patterns of economic development. In the policy field, the Treasury did some impressive analyses of the regional dimension of the national economy in the early 2000s, led by Ed Balls. Over the years the Regional Development Agencies, big cities and the GLC (Greater London Council) have all contributed substantial studies of local and regional economies.

Since 2010 however, there has been little attempt to integrate regional and national economic analysis and policy making. This has undermined the usefulness of both levels – regional and city studies lack an overall analytic framework while national economic analysis has generally lacked any serious spatial understanding of the impact of its policy proposals.

Uneven development

Stubbornly, political reality keeps reasserting itself. Historically, especially at times of economic change, the impact of uneven development has brought the crucial relationship between geography and production back to the centre of politics. The state has been forced to respond, though usually with short-term economic programmes and administrative adjustments. In the 1930s and 1960s there were extensive programmes of regional grants and incentives, in the 1970s a substantial urban programme and in the 1990s well-resourced regional devolution agencies and substantive proposals for devolution.

The deliberate turn away from these issues by the Con-Lib Coalition and subsequent Conservative governments has proved disastrously short-sighted. The long-term impact of the economic crisis of 2008, exacerbated by austerity and now COVID-19, has seen the dramatic divergences in regional economic performance continue. The shortcomings of the limited programmes launched since 2010, most recently the devolution of modest powers and resources to city-based mayors, have also been brutally exposed. These policies sought to build on the productivity improvements and job creation successes seen in many cities across the world over recent decades. Fatally however, these initiatives have largely ignored the hinterlands of small towns and rural areas which have suffered from further industrial decline and the move of economic activity to cities. Unsurprisingly this crude targeting of support to the apparent ‘winners’ at local level has led to the political and cultural alienation of declining areas, most clearly revealed in the results of the 2019 election.

Towards a new regional policy and theory

Region-wide intervention measures are now a vital necessity on both economic and political grounds. Only the development of a regional level of government would offer comprehensive support to local economies while offering sufficient scale to allow substantive devolution from Whitehall. This logic was behind the systemic moves towards devolution started in the late 1990s, with the establishment of the Regional Development Agencies and Assemblies. However, this initiative was halted in its tracks by the failure of the 2004 referendum in the North East. The opposition campaign relied on populist attacks on bureaucracy (and was an early Cummings success) but the underlying cause was Blair’s reluctance to offer substantive devolution powers, despite John Prescott’s desperate pleas.

Devolution policy needs to be supported by a parallel development of economic theory and research to create integrated approaches to the functioning of the national and regional economies. The current concentration on econometric-driven, national-level macro-economic management is clearly insufficient. The failure to connect national fiscal and monetary policies with local level analysis has meant that systemic issues leading to uneven development have been overlooked. As a result, policy continues to be driven by ameliorative measures involving politically driven distribution of public spending and taxation. This failure has serious long-term costs not only in terms of reduced employment and economic development prospects but also in a further deepening of already gaping social and political divisions.

Dr Nick Sharman is a Research Fellow at the University of Nottingham

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