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14 February 2020updated 09 Sep 2021 4:14pm

Levelling up means focusing on people, not just places

The government must encourage investment in human capital to attract and hold on to highly skilled workers. 

By Ana Rincon-Aznar

HS2 has finally received government go-ahead. The long-awaited high-speed rail infrastructure project has been portrayed as one of the main pillars of Prime Minister Boris Johnson’s “levelling-up” agenda, which aims to reduce regional disparities within the UK. But there is a weakness in the strategy. According to estimates by the National Institute of Economic and Social Research, the government’s ambition of increasing investment by £20bn per annum for five years will only boost economic growth in the UK by 0.3-0.4 per cent, and it will take a decade for the benefits to be felt. Without other initiatives the approach is unlikely to boost longer-term growth rates – or help people much in the “left behind” areas. 

Spatial economic and social disparities in the UK are growing, and this has put regional initiatives front and centre of the policy and research agenda. There are several dimensions to the problem, including income, poverty, employment, wellbeing and health. A particularly severe issue is inequality in access to housing. For the poorest fifth of households, the cost of housing takes up 20 per cent of their weekly budget, double the share for the richest fifth of households. 

Many argue that infrastructure projects such as HS2 are necessary for bringing growth and opportunity to places, particularly in the North, that have been scarred by deindustrialisation and globalisation. At the heart of this is the need to increase worker productivity, which is the main engine of job creation, higher wages, and to ensure better healthcare, culture and leisure opportunities. Indeed, improvements in rail connectivity can help employees locate work opportunities and enable less prosperous areas to flourish. It can contribute to closing the gap between better and worse performing areas, as the benefits of the most successful cities spill over to the rest of the country. 

But a region’s level of productivity – the output that each worker can produce – is usually determined by quite a wide range of different closely-linked factors. Having a better-skilled workforce, higher quality of local institutions, and more investment (both public and private) can all boost productivity. Also important is the ability to specialise in high-value activities, and the clustering of firms, workers, and networks of expertise in areas with better resources and a more favourable business landscape. Some examples of successful clusters outside London include the emerging digital health sector in Birmingham, a financial cluster in the Leeds region and North East of England Process Industry Cluster in the chemicals manufacturing sector. 

But while there might be greater scope for using place-based policies, for example with respect to infrastructure spending, or devolution, ultimately, we should care about the effect of policies on people more than on places. We need to ensure that lagging regions foster investment in human capital and skills to attract and hold on to highly skilled workers. The lack of suitable skills can be a drag on productivity when employers are unable to fill jobs with workers who have the right skill-set. This problem can be exacerbated in UK regions with the lowest share of university graduates , such as the North East and the West Midlands. 

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There is an urgent need to promote innovation. Increasing R&D spending in academia and industry is a fundamental step on the way to improving national and international competitiveness. The UK must keep up with the pace of global technological innovation including the discovery and application of sustainable sources of growth. The East of England is the only region where the share of R&D expenditure over regional output is more than 3 per cent, close to US levels. The UK average is just 1.7 per cent and far below the national target of 2.4 per cent of GDP.

It is critical to identify the constraints that have been stifling regional growth. Access to finance critically influences private investment by firms. Small- and medium-sized enterprises (SMEs) in the least developed areas of the country face high barriers to access to finance and to public support schemes. One in four small firms that apply to banks have their loan applications rejected, the Bank of England said last year. However, for the SMEs that are less than five years old, the rejection rate rises to 40 per cent. There is a real cost to this. According to the National Audit Office, SMEs face a funding gap of £22bn. 

Poor digital infrastructure can stifle the pursuit of excellence in the modern economy. Digital connectivity prevents the benefits of technology from spreading wider, with internet infrastructure highly unevenly distributed across places in the UK. For example, while three-quarters of premises in London have access to ultra-fast broadband, in Wales it is only one in three. 

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A recent report by the Industrial Strategy Council emphasises that “a comprehensive set of local industrial strategies, consistently applied are key to ‘levelling-up’ the UK”. This is also the message of so much of our work: There is no silver bullet. While targeting investment into specific places and projects is positive, the government must ensure it focusses on people in left-behind areas. It should integrate different policies into a larger whole, with the aim of raising the wellbeing of all. 

Ana Rincon-Aznar is a Principal Economist at the National Institute of Economic and Social Research