Ending school segregation is the key to social mobility

Half-baked reforms offering only an illusion of choice risk compounding the problem of wealthy paren

This week, the Deputy Prime Minister unveiled indicators the government will be using to measure the extent of social mobility in the UK – in other words, the degree to which labour market success is determined by the socio-economic status of your parents.

In today’s economy, now more than ever, high human capital is critical for future individual prosperity and health. So educational attainment is critical for social mobility. Just look at the premium from attending university: on average, £108,000 over a lifetime.

Parental background, particularly in countries such as the United Kingdom with high income inequality, is a key determinant of social and economic outcomes.  But, despair not, because our genes and our parents don’t have to determine our destiny: high-quality educational institutions - schools and especially nurseries - can mitigate the disadvantages associated with growing up poor.

Good schools have good teachers. A wealth of US literature shows that children who have effective teachers reap significant long-term rewards: in one study, pupils learning from an excellent teacher for just one year gained on average a quarter of a million dollars more in their lifetime earnings than similar students who didn’t.  For the British Government, fretting about the country’s decline in the international league tables for students’ reading, the key task is to drive up the quality of teaching.

We have financial incentives for high-quality graduates to join the profession, with discounts on the repayment of their tuition fee loans. And the House of Commons Education Select Committee has recently proposed performance-related pay for teachers. But the Secretary of State’s main mission is supply-side liberalisation to encourage more choice - through more free schools – and to increase competition – through greater autonomy for schools from local authorities and Whitehall to allow freedom to innovate.

Promoting choice and competition is the right direction of travel, but there are limits to how effective the current strategy will be. Many parents and community groups simply do not have the capital, especially when government won’t fork out, to set up new schools to facilitate greater choice. And government, wrongly, will not allow for-profit providers to set up schools. As Nick Clegg’s special adviser commented in the FT last year, “If nothing changes a few good schools will open, but not the hundreds needed for competition to have an impact on standards”.

In fact, a half-baked choice strategy can have damaging implications for the most disadvantaged pupils. When choice is limited, there is no competitive pressure on poor performing schools, which can fill their rolls regardless. Meanwhile parents with more resources monopolise the best schools, effectively buying a place by having the funds to move into the catchment area. This dynamic is confirmed by research from the Centre for the Economics of Education at the LSE, which showed that the modest expansion of choice for parents in some parts of England led to children from the same socio-economic background being more likely to be educated together.

Increased segregation then compounds the social mobility problem. Work by OECD in 2009 demonstrated that there is a significant advantage for poorer students to be educated in socially mixed schools, and this has no negative effect on overall performance. Without mixed school populations, the attainment gap between rich and poor children just widens.

So, how can we use parental choice without it resulting in damaging social segregation? A school-specific lottery for admissions would help. Here, parents could be free to apply to a school of their choice. Where schools are over-subscribed, places would be allocated in full or in part by a lottery, rather than by catchment areas, giving a greater chance to ambitious poorer parents who didn’t have the funds to move into the local area. Why not insist that schools do this if they want pupil premium funding or academy status?

Another mechanism would be to incentivise more affluent parents to hedge their bets on sending their children to a school which traditionally doesn’t do as well in the league tables. In the late 1990s, Texas introduced a rule where pupils who were in the top 10% for exam results in every school were automatically guaranteed a place at a state university. Recent research has shown that the policy led to greater social diversity in schools.  It would be possible to apply this scheme in the UK without undermining the independence of universities, by creating a pool of extra places universities could bid for which includes the top 10% of students from a select number of schools.

Parental choice is an important tool for driving up quality in schools. But we need to be realistic about its limits when public money is short. The challenge is to use choice to improve performance while avoiding the unintended consequences of entrenching disadvantage through social polarisation. Lotteries and an adaption of the Texas 10% plan are ways to square this circle.

Ryan Shorthouse is a researcher at the Social Market Foundation

Ryan Shorthouse is the Director of Bright Blue, a think tank for liberal conservativism 

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation