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  1. Spotlight on Policy
10 September 2021

Jim O’Neill: “Our political system is slowly deteriorating”

The renowned economist and former minister talks about the Northern Powerhouse, the city-town dilemma and the north of England’s relationship with China

By Jonny Ball

In a much anticipated July speech, Boris Johnson began to set out his vision for levelling up. He lamented the differences in life expectancy between wealthy and deprived areas of the country. He hinted at greater devolution, while having a dig at the “loony left” and elusive “municipal socialists”. He bemoaned Whitehall’s churn in regional policy that has seen dozens of short-lived schemes come and go over the past four decades, all full of the same initial promise but each falling out of favour when a new resident enters Downing Street.

“The most important factor in levelling up,” Johnson told the audience, “the yeast that lifts the whole mattress of dough, the magic sauce, the ketchup of catch-up… is leadership.”

But the Johnsonian oratory on “leadership” and the outdated spectres of the town hall “loony left” did little to disguise that the speech lacked any solutions to the maladies it diagnosed. Jim O’Neill, one of the original architects of the Northern Powerhouse project, was less than impressed. Speaking from his home in south-west London, the life peer and former commercial secretary to the Treasury, who shaped the Powerhouse agenda under David Cameron and Theresa May, told Spotlight that the “speech was notable for the fact he didn’t mention the phrase ‘Northern Powerhouse’” a single time.

Perhaps that was a sign that it has become the latest regional development programme to fall by the wayside in Westminster’s short-termist political culture. It has been eclipsed.

“But eclipsed by what?” asks O’Neill.

The Northern Powerhouse project boasted real – albeit underfunded – institutions and initiatives. A private sector consortium was founded, which O’Neill still chairs alongside former chancellor George Osborne, bringing together civic and business leaders to advocate for the region. “City deals” gave powers to new, elected mayors like Andy Burnham in Greater Manchester. Transport for the North was set up to promote infrastructure megaprojects like Northern Powerhouse Rail (NPR), which plans to link northern cities with high-speed rail.

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Levelling up, by contrast, might be high on rhetoric but is widely slammed for lacking policy substance. In response to Johnson’s speech, his former adviser Dominic Cummings described it as a “vacuous slogan”. The Centre for Cities, a think tank that promotes devolution, said the Prime Minister should “not be surprised that the speech has been widely criticised”. It has since calculated that a genuine, successful levelling-up programme would – at £2trn – rival the cost of German re-unification. The House of Commons’ Business, Energy and Industrial Strategy select committee said “lack of clarity” was in danger of relegating the levelling-up agenda to the status of an “everything and nothing” policy.

For O’Neill, levelling up is “shallow”, “disappointing” and “driven by politics rather than economics”. A proud Mancunian exiled in the capital – he “finished university, buggered off down here and never got away” – his vision for the Northern Powerhouse was based on a regeneration of the great northern cities: Liverpool, Manchester, Leeds, Sheffield, Hull and Newcastle. Economies of agglomeration would be brought about through improved transport connectivity such as NPR – or “Crossrail for the North” – which would increase growth and boost productivity. 

The model would emulate the success of the Randstad region of the Netherlands that encompasses The Hague, Utrecht, Amsterdam and Rotterdam, but which functions as a single, dynamic economic unit on account of its high level of integration. Piecing together the poorly connected and disparate cities of the north, creating multiplier and network effects and economies of scale, was intended to build an economic – and even political – counterweight to London and the south-east. But the future of that project looks uncertain.

Cities or towns?

“It’s pretty clear,” says O’Neill, “that when it relates to geography, ‘levelling up’ means more – to Johnson and his government – about disadvantaged towns than big northern cities.” After decades in which large metropolitan areas have been viewed in public policy circles as the key engines of growth, apparently bringing prosperity not only to the urban hubs themselves but also to the connected peripheries, the Prime Minister seems to have refocused efforts on investment in smaller, post-industrial conurbations – the archetypal “left-behind” towns.

It is, claims O’Neill, “because a lot of the ‘red wall’ seats are towns, and all the northern cities are – bar one – run by Labour mayors”. For him, the policy adjustment is symptomatic of “what seems to be like an incredibly opportunistic government, even by the standards of opportunistic ones of the past”. The opposition has accused ministers of indulging in “pork barrel politics”, channelling the meagre amounts of allocated level-up funding towards Conservative-held and marginal seats. But was the metropolitan orthodoxy and relentless public policy focus on larger cities misguided? Doesn’t it make sense to shift some of the attention and investment away from the cosmopolitan citadels and towards marginalised, forgotten communities?

“If you’re really trying to make a difference to the national economic performance, and you’re brutal about it in terms of economic analysis, then no – it doesn’t make any sense,” says O’Neill. The former banker, who once was responsible for managing $800bn in assets during his time as chief economist at Goldman Sachs, applies hard-headed reasoning to the town-city dichotomy. “Unless you really focus on the big places, this raises the jam-spreading issue” – i.e., that resources will be spread too thinly across too many areas.

However, he hastens to add: “If I criticise my own philosophy going back eight years, by focusing just on big cities, we were leaving others behind – at least intellectually. Ideally, you want to have a combination.”

China and the north

As well as responsibility over the Northern Powerhouse, O’Neill’s erstwhile ministerial brief also charged him with improving trade relationships with China. This latter project, it was thought, was intimately connected to the north’s prosperity, and northern mayors and heads of local authorities were keen to get on board.

Back in 2015, O’Neill joined a delegation of city leaders from Liverpool, Leeds, Manchester and elsewhere, as well as then-chancellor Osborne, on an official trip to Shanghai and Beijing to promote the north as a destination for Chinese investment. Midas, Greater Manchester Combined Authority’s inward investment promotion agency, includes the Manchester China Forum. Established by Osborne, it is a body that encourages commercial links between the northern city and the Asian giant, and boasts endorsements from Mayor Burnham.

The China connection fostered by O’Neill built on his previous work as a celebrated economist, where he came to prominence espousing the opportunities of emerging markets. In 2001, Brics – an acronym for Brazil, Russia, India and China – began to enter the nomenclature of high finance and economics. It was coined by O’Neill to describe the four countries he had identified as having the growth potential (as well as the demographic and geographic muscle) to increase their share of relative GDP and re-order the world’s global governance structures.

Twenty years ago was a simpler time. Third Way politicians were still predominant in the world centres of power, and enlightened elites basked in the promises of Francis Fukuyama’s “end of history” treatise, in which liberal, free-market democracy would surely spread across the world. The Brics seemed to be on a road to liberalisation: Putin talked of joining Nato and rapprochement with the West, India had opened up its protectionist economy, and China joined the World Trade Organization.

Today, the picture looks very different. All four countries are run by different shades of authoritarian strongmen. China’s meteoric rise has been accompanied not by political liberalisation but by a resurgent neo-Maoism. But little of this affects the core of O’Neill’s original thesis: that G7 nations would carry increasingly less economic weight in a world where the influence of the Brics steadily increased. When he wrote his seminal paper, the quartet of emerging markets accounted for around 8 per cent of global GDP. Today, they contribute around a third. China’s economy is now 15 times larger than it was in 2001. Measured by purchasing power parity, it is already larger than the US.

Despite this steady emergence of a more multipolar world and the beginnings of a less Western-dominated century, the British government has pivoted away from the “golden era” of UK-China relations touted by Cameron and Osborne, and moved towards a relationship of mutual suspicion. “Economically, it’s a real shame,” says O’Neill. And it is, he thinks, a diplomatic U-turn that will negatively impact those areas of the north that were hoping for enhanced partnerships with Chinese firms. The Manchester China Forum claims that Greater Manchester has benefitted from £6bn-worth of Chinese investment in multiple development projects, but that expansion could be under threat under the new dispensation. “China is a state-run place, so if we’re constantly trying to be brutal with them, they’re not going to invest as much. It’s pretty straightforward.”

The sight of Cameron’s Conservative government cosying up to the world’s largest communist state always felt discordant. But, says O’Neill, “this is a nation, albeit an autocratic one, that seemingly has the ability to be as powerful an economic force for the world as the US. And in fact, over the past 20 years, at the margin, it’s been economically more important than the US.” Its economic weight in the north of England was steadily increasing as local politicians attempted to compensate for the losses incurred under austerity by courting Chinese investment.

In spite of O’Neill’s misgivings – he quit the front bench in 2016 over Theresa May’s lack of interest in the Northern Powerhouse project – UK-China relations have soured, and the UK has followed President Biden in ramping up anti-China rhetoric. “The US is greatly driven by the fear of no longer being the biggest guy on the block,” O’Neill continues. “But I thought the UK was a bit more adult than that… For us, [we are] a reasonably small, open economy that’s deliberately decided to leave a free-trade zone that we’ve been in for 50 years. Why [would we sully our relations with one of the world’s largest economies]? Is it just because of some superficial political ideology that relates to something of the past?”

Today’s Conservative backbenchers would disagree. They forced a government U-turn on allowing Chinese tech giant Huawei’s involvement in rolling out new critical national infrastructure. China’s critics describe human rights abuses against China’s minority Uighur population in the Xinjiang region as a genocide. And the country’s increasing assertiveness in Hong Kong and the South China Sea has led to renewed UK military presence in the Indo-Pacific. Should the UK simply ignore these issues and pursue friendly relations regardless?

To O’Neill, the short answer seems to be “yes”. “It [isn’t] clear to me that by not engaging that we’re going to change any of those things,” he replies. “Last time I looked we were still engaged, in fact, directly trying to benefit from exporting weapons and arms to Saudi Arabia. And they’re not exactly guilt-free on some of these issues.

“It seems like a bit of a fad. I’ve followed China for a long time. It’s not like the Uighur issue just started five years ago – it’s been around for 20 years… And if you really get me going, on the day when you read about escalating real problems with Afghanistan, what exactly is it that we’re doing so well when we intervene? The world’s a difficult place… The way they’re treating the Uighurs seems pretty bad, but it’s also clear the reason why it started is because of their own fear of terrorism.” Xinjiang has a history of violent unrest linked with banned separatist and Islamist groups opposed to Chinese rule in the region, but reports by human rights organisations have shown that policies put in operation on the terrorism pretext target the Uighur population as a whole, not just suspected militants and their supporters.

A new economic model?

One of the ironies of the US’s continuation of Donald Trump’s anti-China agenda under Biden is that, just as it pursues a “decoupling” between the two superpowers, many Western countries are adopting policies that resemble, in inchoate form, something more akin to the Chinese Communist Party’s state capitalist model: more interventionist governments, vast amounts spent on infrastructure and capital budgets, state subsidies and incentives for favoured corporate behemoths, protectionist trade barriers, a focus on national industry, and higher levels of public investment.

In the UK, this shifting policy model has manifested itself in the form of a Conservative government breaking peacetime spending records, sparring with Brussels over state aid rules, nationalising Sheffield Forgemasters, and, of course, focusing so much of its as yet unrealised rhetoric on levelling up de-industrialised areas of the country.

“It’s been quite evident to me,” O’Neill says, “that going back to the turn of the millennium, there’s something about the economic model that hasn’t functioned the way that the textbooks would argue. In particular, the persistent weakness of private sector investment in many Western countries, despite very favourable circumstances in financial markets, and with it, weak productivity; and this remarkable, persistent, widening gap between profit and real wages. For the state to play a more active role in life, and redistribute resources and spend money more wisely, I think it’s basically sound, even if a bit new.”

But it remains to be seen whether this government has the leadership or ability to follow through on its promises and “obsessively recurring mantras”, as O’Neill describes them. Johnson’s rhetorical flourishes and penchant for grand projects might not sit well with the Treasury’s more fiscally conservative instincts, and O’Neill has little faith in its ability to deliver. In the autumn, a Levelling Up White Paper is due. As we begin our post-Covid recovery, that will go some way to determining the substance, if any, of the levelling-up sloganeering, and reveal whether the idea will remain a feature of Johnsonian oratory or become a genuine project.

“We never have a proper framework or substance for anything. It’s just, ‘Let me just put my finger up in the air and dream up some sort of statement that plays well on Twitter’,” O’Neill says ruefully. “There’s something about our system that seems to be slowly deteriorating.”

Under these circumstances, the prospects for a real levelling-up strategy look bleak.

This article originally appeared in our issue on Regional Development: Access to Opportunity. Download the full issue here.

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