West Midlands Performance & background on Industrial Policy

Professor David Bailey

The ‘Regional’ Challenge

“To boost the scale and pace of economic recovery in the region, create more new jobs and stimulate more demand for higher level skills, there is a need to up-skill the workforce in existing businesses, to improve their productivity and help them to exploit new market opportunities. In parallel it will be important to attract more businesses and jobs in higher skilled and value added clusters” The West Midlands Economy Post Recession: Key Issues and Challenges, West Midlands Regional Observatory, 2010; p.20

“The weak performance of the UK economy… the ongoing financial uncertainties in the Eurozone and the global economy, declining wages and cuts in the public sector mean supporting private sector growth and jobs in our cities is more critical than ever”.Cities Outlook, Centre for Cities, 2012; p.6

Set against a long-term poor track record

• Long-term underinvestment in infrastructure

• Long run process of deindustrialisation and a wider economic structure reliant on low growth sectors; lower proportion of high growth firms and lower rates of enterprise

• A relatively poor employment performance in the private sector • 2% employment growth 1998-2008 compared to 19% nationally

• Birmingham -7.7%; Stoke -16.4% (Newcastle +10.2%)

• Low rates of productivity a feature of several of the region’s key sectors (e.g. wholesale and retail; hotels and catering; and the public sector)

Set against a long-term poor track record

• A relatively poor education and skills record; dependence on lower value added sectors and clusters leads to relatively low skill levels and skills shortages

• Relatively poor performance in developing ‘knowledge economy’ sectors and in R&D spend

• Pockets of high levels of unemployment and worklessness; issues of high youth unemployment and long-term unemployment especially in Birmingham

• “There are over 32,000 young people claiming JSA in Birmingham - enough to fill Birmingham City FC’s St Andrews Stadium” (Centre for Cities, 2012); youth claimant rate 4th worst of UK cities

• Long-term unemployed accounted for 24% of Birmingham claimants by end of 2011; whilst long-term claimant rate second worst of UK cities

Poor track record in developing knowledge intensive jobs

Source: The Work Foundation, 2009

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Long-term employment growth

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Contrasts in performance of region in recession; since late1990s relative deterioration in West Midlands

Source: ONS, Regional Claimant Count Rates

1971 Q1 1973 Q3 1976 Q1 1978 Q3 1981 Q1 1983 Q3 1986 Q1 1988 Q3 1991 Q1 1993 Q3 1996 Q1 1998 Q3 2001 Q1 2003 Q3 2006 Q1 2008 Q30

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Widening GVA gap

2002 2003 2004 2005 2006 2007£10,000

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Regional Economic Performance (GVA per head)

West MidlandsEngland

Source: West Midlands Regional Observatory

Weak Industrial Structure

Sector/Cluster Industry / service

Emerging high value added private sector activities

Environmental technologies (£3bn GVA, 74,000 jobs)Medical technologies (£250m GVA, 7,000 jobs)Specialist business services (£5bn GVA) Digital media (£150m GVA, 9,500 jobs) Electricity, gas and water (£2bn GVA, 14,000 jobs)

Traditional private sector activities

Transport technologies (£4bn GVA, 92,000 jobs)Building technologies (£11bn GVA, 220,000 jobs) Food and drink (£3bn GVA, 58,000 jobs)

Lower value added private sector activities

Business services (£23bn GVA, 440,000 jobs) Wholesale and retail (£12bn GVA, 360,000 jobs)

Public Sector activities Education (£6bn GVA, 240,000 jobs)Health and social care (£7bn GVA, 277,000 jobs)

In GVA and employment terms high value added activities make relatively modest contributions to the regional economy

Source: West Midlands Regional Observatory, 2010

West Midlands – Manufacturing GVA 1997-2009

Fell by 23%: worse than any other UK region

Over-valuation of sterling badly affected our auto and transport clusters

plus it wasn't until Mandelson arrived that Labour actually took industrial policy seriously.

West Midlands: The 08-09 Recession and Beyond

• Output drop and unemployment rise in West Midlands worse than other regions during 2008-9 recession (not a surprise)

• BUT bounce back more rapid – rebalancing effect: certain parts of manufacturing, exports (?), modest ‘onshoring’

• More rapid jobs growth – WM out performed other regions.• Region reasonably placed (Deloitte, 2011): public sector job cuts;

tax rises and benefit cuts; ‘mini-revival’ in parts of manufacturing; weakness in financial services; prospect of house price falls.

• Output PMI Oct 2012: 54.8 (52.4 UK) last 12 months; 52.4 (51.1 UK) last 3 months; 52.1 (51.3) last month

• Challenges around youth unemployment esp. in cities • Private sector job growth sufficient to offset public sector cuts?

West Mids Economic Performance

Not surprising given structure of West Mids economy

Exports

… where to?

Upgrading the ‘middle’?

Some recent shifts:• ‘Personalised manufacturing’... Car industry?• ‘Functional’ to ‘hybrid’ goods: hybridity. Creative/design and

service element• Brands, market repositioning• Links ‘creative’ non ‘creative’ sectors – ‘platforms’ – see report by

Lisa De Propris and others for NESTA on mapping creative industries

• Diversity / ‘serendipitous spillovers’ / • related variety: ‘smart specialisation’ (clusters and a regional

approach)

And if we really want to ‘rebalance’ the economy...

Industrial Policy targeted at manufacturing• Capital allowances• Focus corporation tax cuts for manufacturing firms

that increase output• National insurance holidays for firms that take on

workers• Better R&D tax credits• Better support for exporters• Manufacturing loan fund? (Automotive –

Relocalisation / Repatriation of supply chain)• Green Investment Bank? SME Bank?

Plus...

• Lessons from Germany: Part-time wage subsidies

• Takeover Law• Rebuilding fractured supply chains• Other instruments: procurement policy

Some IP issues to consider…

Industrial Policy or Industrial Strategy? Top Down / Bottom Up ?

Vertical (discriminatory or sectoral) versus Horizontal (non-discriminatory)?

Alleged shift Vertical Horizontal in 1990s

(and back again?) Reactive or Proactive?

(Reactive: market failures, Proactive: shaping industrial development)

Different Perspectives on IP

David Coates: What is the Case for Industrial Policy?

Policy Positions Defending the Market Creating/Supplementing the Market Managing the Market Shaping the Market Controlling/Democratising the Market

All but 1: some forms of market failure inspired policy to strengthen competition, overcome inadequacies in capital provision, restructure international competitive advantage…

British IP in historical perspective

Discontinuity (except recently?) Inconsistency Reactiveness Liberal stance Last government: ‘competitiveness’

(=?), ‘clusters’ and regional-level delivery

Post 2010: ‘localism’ or re-centralisation?

But in Auto Industry…

• Automotive Council e.g. sourcing road map 2011• Skills• Loan Guarantees• RGF support JLR, Nissan, GM, supply chain,• AMSCI (£125 m)• TSB + EPSRC investment into research• OLEV• MAS• Scrappage scheme (2009-10)• Automotive Campus at Warwick Uni

What type of IP is this?

• Not ‘picking winners’ – rather sees Industrial Policy as a process of discovery (see Dani Rodrick) + linked to ‘smart specialisation’

Policy: (How) can LEPs be effective RDAs?

‘Old’ system of RDAs not perfect BUT...

• Still not clear what regional growth drivers / levers LEPs will be able to influence

• What’s the Offer? Localism Act, RGF, Enterprise Zones, possibility for faster planning, Growing Places Fund, City Deals? ...

Recentralisation / Decentralisation

Recentralisation of IP to Whitehall Centralised industrial policy not likely to work LEPs: transport, housing, planning, enterprise (?) Skills? Business engagement? RGF big cut in funding – need scope for LEPs to

raise finance (TiFs / Business Rates / bonds?) RDAs assets back to Whitehall / HCA. But, ‘City Deals’ a good first step?

Cont’d...

Risk of excessive fragmentation – functional economic geography? B’ham / Black Country?

Capability/capacity to make strategically informed decisions on economic development?

Need to retain key knowledge base built up by RDAs – RDA ‘Brain Drain’

• Need for ‘intermediate level’: Intelligence, monitoring, accessing EU funding, regional planning, clusters and innovation

Summary

• LEPs need genuine powers and the ability to raise funding: for some cities, govt listening?

• Right scale? Intermediate ‘join up’ of work of LEPs between local and national level critical to use public monies effectively – minimum: intelligence and info gathering base, pursuing effective cluster and innovation strategies and accessing EU funding

Thanks for listening.

Comments, Questions welcome!

david.bailey@coventry.ac.uk