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The North West’s productivity crisis: Causes, challenges and solutions

Kieron Flanagan reflects on the newly released North West Productivity Forum Green Paper on the causes of the region’s productivity gap and how it might be addressed.

The North West has a long-term productivity problem, with the productivity gap widening over the past 15 years. But there is much that policymakers can do.

The UK’s productivity challenges are well documented, and the North West is a lagging region in a lagging nation. In 2018, productivity, measured by Gross Value Added (GVA) per hour worked, stood at £32.10 – 8% below the UK average. This gap has widened over the past 15 years. Indeed, London and the South East are the only regions to consistently outperform the UK average.

These disparities are not a new phenomenon. Estimates suggest a consistent productivity gap between London and the South East, and the rest of the country, over more than a century. For around three decades following the end of World War Two the gap was shrinking, but it has been growing more or less continuously since the mid-1970s.

Going against the grain

There are also marked differences in productivity performance within the North West. Cheshire performs relatively well, whereas Merseyside, Lancashire, Greater Manchester and Cumbria all lag behind. At a local level, the differences are even more striking. Cheshire East, with its high-value life sciences and chemicals activity, is the 19th most productive of the UK’s 170 NUTS-3 areas, whilst North East Greater Manchester, within the same travel-to-work area but still suffering from the scarring effects of deindustrialisation, ranks 160th.

It is striking that these intra-regional differences do not conform to the typical international pattern of productivity gaps between high performing cities and lagging towns and rural areas. High and low productivity areas are distributed throughout the region, and are often neighbours.

The most productive local authority districts in the North West are in semi-rural and urban fringe locations – Cheshire East, South Ribble, Halton, and Pendle – which are areas with concentrations of very high value (but relatively low employment) advanced manufacturing, life sciences, aerospace and chemicals activity. The location of these industries reflects natural advantages or a legacy of contingent past business and policy choices. Their high-productivity performance is typically down to a small number of highly productive companies, masking underperformance in other sectors and smaller firms.

Historic problem

The North West Productivity Forum Green Paper analysis suggests that low productivity in the North West is the result of chronic underinvestment in key growth drivers such as hard and soft infrastructure, R&D activity, and human capital. Many of these challenges affect other parts of the UK, but the North West is particularly afflicted.

This may be due in part to:

• long-term scarring effects from industrial decline;
• the legacy of worklessness, ill-health and deprivation this has left in many places;
• a pattern of public spending oriented towards ameliorating these human and social costs of poor productivity, rather than towards productivity-enhancing investments in infrastructure, skills and innovation that could attract further private investment;
• a lack of opportunities including finance for high growth potential firms;
• mismatches between skills supply and demand (including significant problems on the demand side);
• absence of the critical mass of activity necessary to drive growth in the main urban centres of Liverpool and Manchester;
• decades of over-centralisation and micro-management from Whitehall, with a consequent hollowing out of capacity in local government – made worse by austerity cuts.

The North West needs a concerted effort, at scale, over decades, to address these issues. This will require a major and long-term commitment by central government. But it will also require a renewed commitment to devolution as a process, and an investment in the capacity to analyse, make and implement policies at the local and regional levels.

We need to look again at finance and support for growth and innovation, at the benefits of exposure to international competition, at our ability to adopt and adapt practices and technologies from anywhere in the world, and at not just the workforce but also the management skills that might be required for a more digitally enabled, net zero economy.

The need for understanding

Despite the long-term discrepancies in productivity performance between UK regions, there is still too little analysis and understanding of what drives poor or high productivity in specific places. In research terms, we urgently need to look critically at the quality of regional productivity data, to ensure we are tackling real problems that matter to people’s lives and futures, and not just statistical phantoms.

We also need to look more critically at digitalisation and digital adoption, and at the potential and limitations of digital technologies to drive productivity and wellbeing improvement. And we urgently need to better understand the lessons we can learn from places where lagging regions and places have been the focus of successful intervention.

The temptation will always be to go for quick wins by targeting efforts at those firms, sectors and places that are already doing well. However, if productivity gains are to actually benefit the people of the North West, policy will need to broadly address the often less glamorous service sectors that are the mainstay of our economy, and in particular the ‘foundational’ sectors that not only underpin health and wellbeing but which are also important employers in communities across the region.

Read the North West Productivity Forum Green Paper.

Blog posts give the views of the author, and are not necessarily those of Alliance Manchester Business School and The University of Manchester.

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