Prosperity, congestion, and the case for regional policy

Economic prosperity has its downsides. In the UK, London and the South East have proved to be the most dynamic parts of the country in generating income and wealth in recent decades. But the way such outcomes have been managed has left these regions with a now all too familiar problem: congestion.

It is not just the roads. There is also a housing shortage, which has contributed to soaring house prices, particularly in London, where average prices have roughly doubled since the recession.

There are different ways to look at these kinds of outcomes. We could call them symptoms of ‘overcrowding’: there are too many people. Alternatively one could praise the job-creating capacity of the UK economy, and particularly in these regions. Job-creation attracts workers from other regions of the country, as well as from abroad; immigration plays a role.

On a trip to central London these days, it is hard not to notice all the cranes: many parts of the capital are home to major construction projects. In addition, it often seems as if the provision of public goods such as infrastructure and public services such as health and education are struggling to keep pace with population and private sector growth. Public sector austerity must take some of the blame for this.

Having said all that, one should note that, apart from fairly rapid job-creation, the UK economy has not performed well since the recession. The burden of private sector debt, coupled with austerity and a slowdown in the growth of world trade, have been a drag on investment and growth. Productivity and average wages have been largely stagnant, giving rise to a ‘lost decade’ for the ordinary British worker. Brexit may also prove to be a negative factor in the years to come, depending on the final form it takes.

Returning to our main theme: prosperity plays a significant role in the growth of population in faster-growing regions of any country, as workers are attracted to the latter from outside. Problems of congestion reduce the quality of life for the general population, and require management and mitigation by the state.

These issues are not new. In the post-war period, post-Keynesian economist Nicholas Kaldor explored the case for regional policy in the presence of diverging growth rates between the regions of a country. In the presence of increasing returns to scale in industry and some services, regions with a higher growth rate will see faster productivity growth, falling unit costs and increasing competitiveness relative to slower-growing regions, and this process will tend to cement the divergence in income between them.

Problems of congestion in the faster-growing regions may act as a brake on their growth, as living there becomes less attractive, but this should ideally be managed by local and national government policies.

For the nation as a whole, this does happen automatically to some degree. Regions with greater prosperity will end up contributing more tax revenue and receive less public spending than poorer regions with slower growth and higher unemployment, producing a form of fiscal stabilization. But regional policy needs to go further than this, in improving transport, housing, education and training, and encouraging the location of industrial and service-sector development in poorer areas of the country through targeted incentives. Public spending and tax policy need to effectively ‘crowd in’ private investment and development.

Any consideration of the need for an effective regional policy also brings up the following question: should policy bring ‘work to the workers, or workers to the work’? In other words, should the economic development of a nation be more strongly encouraged in poorer areas, so that growing firms create employment and prosperity where it is currently lacking, or should the state simply allow the continued expansion of already prosperous areas, and facilitate the relocation of employment to the latter?

Should the state adopt a policy of managing decline in poorer regions, or should it aim for regeneration? In practice, policy should probably aim for a mixture of the two.

Prosperity should be encouraged and be as widely shared as possible. Some of the poorest regions may require some degree of managed decline, while others could be regenerated as a public policy priority, to avoid over-rapid development in the already prosperous regions. The aim must be to try to balance growth in the private sector with the necessary provision of public goods and services which are vital to sustaining a decent quality of life for the general population.

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