The failure of regional policy

Scotland and the North of England have been in relative economic decline for almost a century. This situation has not essentially changed. Between 1985 and 1987 the Scottish GDP grew more slowly than that of the UK.

There has been more business optimism of late. However, Scotland’s economy tends to have a late flowering in a UK summer — but winter comes faster: the high rates of interest required to damp down inflationary pressures arise from conditions in the south, not in Scotland, but that does not make them less of an impediment to economic growth.

Despite enormous efforts British Governments have been universally unsuccessful in correcting regional imbalances, no matter the ideological basis of their policies. Figures recently published in the OECD Employment Outlook show that between 1975 and 1987 there was very little change in the relative prosperity of regions in the UK and other European countries, as measured in unemployment rates. This contrasted with the experience of the US, where old unemployment patterns have been reversed and states have moved up and down the league table.

This is thought to be partly because US states have more fiscal discretion than European regions. But conventional wisdom among British economists is that the culprits are our housing and labour markets, which do not work properly.

When a region finds itself in industrial decline, the argument goes, it should be able to cut its wages in real terms. This would spur workers to leave and find jobs elsewhere, thus easing unemployment, and at the same time encourage capital from outside to set up new industries. That presupposes that people can, as in the US, easily give up their homes and go off in search of a new life.

You don’t have to be an economist or social scientist to know that things do not work out like that in Britain. There is strong cultural resistance to moving to different parts of the country. The housing market prevents labour mobility in various ways, and not just because traditionally most people in Scotland have been rooted to their low-rent council houses.

In the private sector high prices seal off the south-east to potential immigrants almost as surely as the Berlin Wall separates east from west; the arrival of ”white settlers” with fat purses drives up house prices at home; and even where public housing has been sold price differentials may mean that the home-owner enjoys hardly any more mobility in real terms. The rented sector remains inadequate.

Because of national agreements in the labour market it is difficult to vary wages regionally, and indeed we have the paradox that Scotland, though in relative economic decline, has among the highest wage rates among UK regions. The desire of the employer to vary wage rates regionally has been at the root of some recent labour disputes in the public sector.

Some writers claim that European-wide wage bargaining would make things even more rigid. This is doubtless correct, but low wages themselves are a recipe for economic decline: high-wage economies can provide capital with a powerful stimulus for renewed investment to improve methods of production.

The historic growth of the US economy took place at a time when its wages were much higher than those in Europe; and the West German and Japanese economies have shown great resilience in face of unfavourable variables. A high-wage economy also supports a flourishing service sector. By contrast much new employment in Scotland has offered low wages, often to women, and many skilled people must emigrate to find employment commensurate with their qualifications…

The British Government has identified and is attacking many of the structural problems. It has been working hard to increase the stock of private housing, and will soon begin its attempt to correlate development with training under Enterprise Scotland.

It is fixated on private-sector initiatives and market mechanisms. These are fine where genuine market conditions can exist. But there is no evidence that the private sector is the best way of delivering socially-necessary services; indeed, the evidence appears to be rather to the contrary.

It has also been slow to accept its key task of improving the infrastructure. Its policy on aviation in Scotland is a bad joke and its neglect of the railways is only now being moderated because of political pressure in the south.

Market forces are not as incapable of delivering mobility as the old centralist doctrines of socialism but it is not enough to hope that over-heating in the south will drive capital to the north in a kind of overflow. It is more probable that the bludgeon of interest rates will drive the south-east back into stagnation, dragging the rest with it.

Indeed, regional imbalances may be at the heart of a more generalised economic failure. If growth can never be sustained without parts of the economy over-heating, and if that over-heating must always be checked, then that implies a permanent waste of human resources elsewhere and an in-built limit to national ambition.

Given the failure of regional policies (under all governments), the option of giving Scotland and other parts of Europe greater political discretion cannot be dis-missed…

The English have tended to dismiss Scottish political aspirations as symptoms of sullen ingratitude. Some English commentators are now beginning to see that a stagnant Scotland (and North of England) is bad news for the whole nation. In the merging of sovereignty that is ahead of us all in the Community, the hegemony of the UK looks out of date.

Raising the level of economic discretion in Scotland has been a key message of Thatcherism. It cannot be separated from its political consequences.