Economics blog

Grangemouth highlights the competitive problems of the Rest of the UK

The recovery in the British economy is now firmly established. Output in the services sector, the largest part of the economy, is above the previous peak level prior to 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. 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 slow down began, London and the South East have enjoyed 47.8 per cent of the total amount of growth in the UK, compared to only 37.3 per cent 1996-2007.

The ranges of years chosen for the comparison are slightly unusual, but their 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 (RUK) faces is that their economy simply does not have a big 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 which provides something useful to outsiders in return for the money the RUK receives is part of the export base, so this includes tourism, call centres, universities, as well as manufactures. Producing things which people outside the RUK want to buy is the only way to ensure sustainable prosperity.

In part, the weak export base is due to the fact that the RUK 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 of the RUK are too high, not helped by the national wage rates which prevail in the public sector. The Grangemouth plant illustrates this very clearly. The plant had become uncompetitive, and it was only the brutal strategy of actually closing 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 ‘Combined and uneven development: reflections on the North-South Divide’.

The RUK 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, “the problem of the North will become more obvious during the coming period of fiscal retrenchment”.

The prosperity of any area ultimately depends upon its productivity and ability to export, as countries like Greece have discovered only too dramatically. More infrastructure, more money for its best universities can help the RUK. 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 LLP, a director of the think-tank Synthesis and author of Positive Linking: How Networks Can Revolutionise the World

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