Against the Grain: Why the rest of the UK is failing to keep up with London’s explosive growth

Paul Ormerod
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BRITAIN’s economic recovery is now firmly established. Output in the services sector, the largest part of the economy, has risen above its previous peak, reached before the crash in 2008. There is a widespread myth that the recovery is fuelled by debt-financed personal spending. Yet since the trough of the recession in 2009, the economy as a whole has grown faster than spending by consumers.

Some people, however, are never satisfied. It is the wrong sort of growth, they say. More precisely, it has been too lopsided in its geographical distribution. Research by the Centre for Research on Socio-Cultural Change at Manchester University shows that, since 2007, when the slowdown began, London and the South East have enjoyed 47.8 per cent of the UK’s total growth, compared to only 37.3 per cent between 1996 and 2007. The ranges of years chosen for the comparison are slightly unusual, but the point is surely true. London, in particular, has pulled out of recession much faster than the rest of the country.

The fundamental problem which the rest of the UK faces is that its economy simply does not have a large enough export base. Exports in this context do not refer just to goods and services which can be sold to Beijing or Bonn, but also to Basingstoke. Anything that provides something useful to outsiders is part of the export base – including tourism, call centres, universities, as well as manufacturing. Producing things which people outside the area want to buy is the only way to ensure sustainable prosperity.

In part, this weak export base is due to the fact that the rest of the UK is uncompetitive. It needs a real devaluation, not least against London and the South East. Given that the UK is a monetary union, this cannot be achieved by an exchange rate movement. The plain fact is that wages in many sectors in much of the UK are too high, not helped by the national wage rates which prevail in the public sector. Last week’s dispute at Scotland’s Grangemouth petrochemical plant illustrates this very clearly. It had become uncompetitive, and it was only the brutal strategy of actually starting to close it that finally got the message through to the workforce.

Bob Rowthorn of Cambridge University predicted the geographical pattern of recovery in 2010 in an excellent paper called Combined and uneven development: reflections on the North-South Divide. Much of Britain outside London and the South East had already experienced a long run decline in its export base, but this was disguised by the transfer of public services and jobs, especially under Gordon Brown. However, as Rowthorn wisely forecast, “the problem of the North will become more obvious during the coming period of fiscal retrenchment”.

The prosperity of any area ultimately depends on its productivity and ability to export, as countries like Greece have discovered only too dramatically. More infrastructure, and more money for its best universities can help the UK outside London. But what is really needed is a cultural change, and a determination to create its own prosperity.

Paul Ormerod is an economist at Volterra Partners, a director of the think-tank Synthesis, and author of Positive Linking: How Networks Can Revolutionise the World.