Wednesday, 25 May 2016

Local protectionism is no way to raise economic growth in poor places - a critique of inclusive growth


The RSA, that trendiest of slightly left wing think tanks, has launched a thing called the 'Inclusive Growth Commission':

Chaired by former BBC economics editor Stephanie Flanders and building on the success of the RSA’s City Growth Commission, the Commission will seek to devise new models for place-based growth, which enable the widest range of people to participate fully in, and benefit from, the growth of their local area.

The core of the Commission's argument is:

Public services and welfare remain fragmented; economic and social policies often seem to pull in opposite directions. Although growth is happening and unemployment falling, large sections of the population are not benefiting. Big wealth gaps and large numbers of economically inactive people have negative impacts on local economies, life chances and social cohesion. Costs to the state remain high, growth is low and prosperity the privilege of a few.

It seems an entirely noble idea to look more closely at how, to borrow a phrase, the proceeds of growth can be shared. The focus - entirely right for a geographer like me - is place-based, stressing the uniqueness of a particular town or city and seeking development solutions that resonate with that locality. The problem is that the RSA, like many other such organisations, has taken as its text the idea that inequality is the cause of poverty in places like Manchester, Liverpool and Bradford.

The worry I have with this place-based model, especially when coming from a centrist, 'government is good' ideology, is that we fall easily into the ideas about resilience, the local multiplier and social models of business. Here's Neil McInroy from the Centre for Local Economic Studies (CLES):

Overall, the plans to build a more inclusive growth model faces a choice. On the one hand the commission can add a stronger social face to an economy which works for the few, not the many. In this, they will reveal some of the problems of growth and this will prompt some policy changes. However, will the commission’s recommendations alter the longstanding frame to local economic activity – where productivity and growth has a pre-eminent position and is viewed as having much higher importance than that of inequality and poverty?

McInroy sets out a 'critique' based on his organisation's position - alongside the New Economics Foundation, Transition Towns and the New Weather Institute - as advocates of what I call local protectionism. For McInroy there is a dominant regional growth model - agglomeration - that needs to be challenged if we are to get an inclusive economy. Essentially in the critique the place-based model means that growth has to be spread across a region rather than being focused on city centres and 'growth hubs'. McInroy will point to the success of Manchester city centre and then to the fact that, despite this success, the metropolitan area of Manchester still contains many of England's poorest places.

It also has losers – city region peripheries, smaller towns and the low skilled. We must look at areas beyond city centres to outer boroughs. We must focus much more on local supply chains and ensure investment to local small businesses is on an equal footing to global corporates and global investors.

In here we have the problem - that reference to 'local supply chains' will be familiar to anyone reading the output of CLES, NEF and NWI. It refers to the view that local supply chains keep more money within the community than supply chains based on the national economy. The idea of the local or regional multiplier is central to this assertion - NEF make a good living from plugging their LM3 model to all and sundry (despite it having no real theoretical basis or any robust empirical support). The problem is that the local multiplier is something of a myth - the impact of excluding national supply chains is, in effect, the same as any act of protectionism. So any gain from having the money circulate within the community for longer is lost in that community having to pay higher prices.

The second element here is the persistence of the view that welfare payments somehow contribute to a local economy. It's true that the very poor places in Manchester and Liverpool receive large amounts of the money we redistribute (giving the lie to those who say there is no dispersal, no 'trickle down') but it is also true that, however valid that welfare payment might be, it still carries an opportunity cost. If the money wasn't raised in taxes it would have been used in another way - perhaps on consumption, maybe invested.

No-one disputes the objective - we'd like more of those people dependent on benefits not to be dependent on benefits. I'm guessing that's what the RSA mean by inclusive growth. The issue is how we go about this - do we run the risk of a slower rate of growth by insisting that large sums are redistributed in some way. If we reject the idea of agglomeration as a driver of growth, then we have to put something in its place. The problem is that the alternatives on offer from the likes of McInroy will act only to futher damage local economies by raising prices and decoupling them from the more successful national economy.

In the end local economies thrive because government does not direct them - the vanity of the RSA position and the stupidity of the CLES outlook is that there is some magical role for local or regional government in delivering both economic growth and a less unequal society. For me the reduction of actual poverty is more important than endlessly fretting over measures of inequality (or 'relative poverty' as folk like to call it) and this is brought about by government not obstructing the drivers of growth. It implies lower taxes when often poorer places have high taxes. It demands less regulation and intervention when the preference of big city governments is to intervene more. And it requires that we connect poor places to the rich places making it possible for people to travel - economically and physically - from the former to the latter.


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