Mid-sized cities hold the key to a rapid return to growth

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IPPR North, devolution and localism, economy, regional issues

Author(s):  Ed Cox
Published date:  28 Mar 2012
Source:  IPPR

Big city logic is on trial. For over two decades, national growth strategies – led by the World Bank – have piled investment and policy focus into the big capitals of commerce.

When the provinces complain, they have been treated charitably with dollops of cash and new institutions to worry about. But there's an emerging evidence base that is showing that a focus on medium-sized cities and their hinterlands might not only be better for equity, but also better for growth and efficiency. Sound economics, rather than good politics, should be the reason for a fresh look at regional strategy.

As long ago as 2009, Fabrizio Barca produced an independent report for the European Commission which argued very clearly for a move away from a spatially-blind approach to European funding, handing out funds according to fairness alone, in favour of a place-based approach focused on tapping underutilised potential in European economies. Last year McKinseys produced a report highlighting the increasing significance of the rapidly growing mid-sized cities in Asia in comparison with the congested mega-cities of Mumbai, Shanghai and Singapore.

Now this month, the OECD has unveiled the findings of an extensive three-year study of different types of economic region – Promoting Growth in All Types of Place – which has revealed some surprising results:

  • Although just a handful of big cities generate nearly a third of total growth in the OECD, the bulk of national growth is found outside of these leading regions where mid-sized cities offer some low-hanging fruit. In the UK, between 1995 and 2007 so-called ‘intermediate regions’ accounted for 57 per cent of net aggregate growth despite the (now widely criticised) emphasis placed on the City of London during that period.
  • Broader-based growth has been vital to national economic resilience. Not only do intermediate regions mitigate against sector-specific shocks, but underperforming regions impose substantial costs on national budgets as well as the opportunity costs and lower tax revenues of missed growth opportunties. Contrast the UK and Germany.
  • Big cities may generate a greater quantum of economic output but they grow relatively slowly in comparison to areas with lower concentrations of population and economic activity. The fastest growing regions have tended to be rural areas and intermediate regions where the conditions for growth have been nurtured.
  • The conditions for growth vary from region to region. Human capital is the basic pre-requisite for less developed regions to get onto the path to growth – transport investment too soon can simply lead to a brain drain. Intermediate regions have a greater need for infrastructure – with a focus on internal and international connectivity, not just links with their capital cities. Whilst the big cities need to focus on innovation – the marginal rates of return on big infrastructure projects are negligible in such places and increasingly represent the costs of inefficiency and congestion.
  • There is a premium on institutional stability. The form and function of economic governance and policy-making is important – too many policies or too few, clear vision and leadership, cross-boundary links – but long-term coherence is more important than having perfect structures or co-terminous boundaries.

In summary, we need a regional policy focused on mid-sized cities but tailored to the different stages of development that different cities and regions find themselves in and well-led at the local level. The Coalition government may well argue that they have provided for these conditions through the formation of Local Enterprise Partnerships (LEPs), the introduction of City Deals and the emphasis on City Mayors but there is still a way to go.

The argument against ‘spatial blindness’ is still far from won in Whitehall. It is not that we don’t have a ‘regional policy’ in England, but that our regional policy is not as blind as we suppose, rather it is a thinly-veiled leaning towards London and the South East, whose modesty is protected by complicated appraisal formulae (as in the case of transport spending) or independent national bodies (as in the case of the Technology Strategy Board).

It was a welcome admission by the Chancellor in his budget speech that under successive government there has been “massive under-investment in infrastructure in the North” but this is some way short of the recognition of the need for a tailored regional policy which places much greater emphasis on the economic growth potential of our mid-sized cities.

To properly recognise the emerging economic logic that the most rapid economic recovery will come from hitherto lagging regions, the playing field doesn’t just need leveling for a time, it needs tilting significantly the other way:

  • We need a massive focus on skills development in our least developed LEP areas with far greater devolution of spending and decision-making at the LEP level but with all the vigour of a national emergency in places where youth unemployment is over 25 per cent;

  • We need to heap infrastructure investment into the connectivity between our core cities and their international gateways on a scale now only thought viable to tackle London’s congestion and radically revise the NATA transport appraisal methodology to rebalance it away from transport user benefits in favour of speeding up economic growth;

  • And we need a national innovation strategy based on the principles of smart specialization that recognizes the unique strengths of all areas and not just those who have discovered the latest wonder-substance or those who have less far to project their voices.

Finally, the changes to EU Structural Funds from 2014 onwards represent a huge opportunity for mid-sized cities to make the most of this new direction of travel. Many intermediate regions across Europe are already taking unilateral action to post their growth plans on the EU’s smart specialization platform. But with the dismantling of the regional architecture in England and with it the capacity to engage with the up-coming Brussels spending round there is a huge risk our fragmented LEPs will have little scope to influence our national negotiation. With just 5 months to go, the price of LEP collaboration on this agenda – and the opportunities it presents to be at the forefront of European thinking on driving growth and recovery - could not be higher.

 
 

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Ed Cox, Director, IPPR North