Industrial strategy can’t do it all

Why a new economic settlement needs adaptive local change across the “three economies”: growth, everyday and care.

In an analysis last week I created a map and analysis of “three economies”: growth, everyday and care*. The task here is to further understand how these three economies intersect with geography and what that might mean for future policy at different levels. As we will see, the data strongly demonstrates why industrial policy, ie a strategy that targets particular growth sectors, is not enough by itself.

There is further detail on the definitions and sectoral mapping of the three economies here.

Before we dive in, it’s useful to be clear about what I do not argue. Firstly, it is absolutely right that the Government pursues an industrial strategy and that it discriminates in favour of critical growth and security industries. And this is precisely what the draft strategy published last week does as I have outlined. 

Furthermore, by arguing that the “everyday” and “care” economies need to be given further attention it is not the case that they are being ignored: far from it. From house-building targets, to the creation of Skills England, to the health mission, and the Employment Rights Bill, youth guarantee and welfare reform, both the everyday and care economies are directly in scope. My argument is more that the range of policies touching on “everyday” and “care” will need to be brought together coherently over time- and across geographies. 

The reason for thinking, in strategic and policy terms, about all three economies together, is that they are codependent. Take for example health: the NHS is crucial to fostering a strategic life sciences industry, its success in treating people is critical for enabling people to work, and the way in which it supports those who care creates social value in the care economy. The NHS is a critical strategic, everyday and care economy institution. More of these codependencies - and policy implications - will be explored in the next blog in this series. 

Using ONS standard industrial classification codes plus some assumptions about the non-monetary care economy I have roughly mapped the size of the aggregate growth, everyday and care economies in each region:

The first thing we notice is that the growth economy is heavily clustered. The everyday economy is moderately clustered and the care economy is highly dispersed (it broadly coincides with population as we’ll see below). This speaks to the respective characteristics of each. Growth comes from what economists call agglomerated industries. And the UK’s comparative advantage is highly clustered (especially when we factor in export potential) in sectors such as finance, professional services, and creative industries. And we can see this when we see which regions account for the most output in high growth sectors. These data, if anything, underplay divergence as the exporting, high productivity sub-sectors and firms will be even more densely clustered. 

What the very astute Brexit watchers amongst you will spot straight away is the degree to which it is frankly astonishing that the architects of leaving the EU ever got away with the claim that it was a levelling up strategy. Service exports which predominate in the UK’s case, and which are far less prone to the sorts of trade frictions that beset trade in goods, have been able to weather Brexit far more than the physically traded goods. Those high value-added services are heavily geographically concentrated. 

Anyway, leaving the insanities of Brexit to one side, water and bridges, milk and spillages and all that, something else becomes immediately apparent. It is imperative that regions (and localities) need to think very hard about how they synchronise with the emerging industrial strategy. Put more directly, local and regional growth strategies can’t just be mini versions of the national industrial strategy. They have to respond to their local and regional characteristics. 

Whilst it is highly plausible to redirect some of the output of growth sectors, for example by locating national cultural and media assets outside of London (think the BBC and Salford Quays) or HQ or consumer facing aspects of finance in Birmingham, Leeds or Edinburgh, there is still a global economy generated centripetal pull towards London in a lot of the industries where the UK has strengths. Of course, this is definitely not the case, in fact the opposite, in some of the newer industries such as installation of green technology.

What this means in practice is that the “everyday” and “care” economies are vitally important at a local and regional level and it is critical to think about how, for example, productivity can be enhanced in the “everyday” economy to secure regional growth. The strategic questions at a local or regional level become: 

• What can we reasonably grow and catch within the “growth” economy?

• How can we enhance the productive potential and inclusive characteristics of the everyday economy?

• How can we increase the social value and esteem of the “care” economy?

And, when we look at the per capita footprints of the three economies, we can see why these questions are important. 

In all of the nations and regions other than London, the “everyday” economy is far and away the most important economically. In almost half of those nations and regions the care economy is more important economically - and, of course, is vital for health, community, learning, economic security, pride and place and social mobility. Moreover, the gap of the output per capita in London and rest in the everyday economy might signify that there are productivity gains to be had elsewhere (though I would very heavily caveat that with the fact that a dense capital city operates very differently and allows for scale advantages that don’t accrue as naturally elsewhere). One point to make in passing is just how similar, in terms of the three economies, each region and nation is and how different London is.

For the Government this means understanding that the growth mission has to go way beyond the industrial strategy. It also means seeing the accelerating policy development in employment rights, humanising social security, and reform of the NHS as fundamental components of a new economic settlement. This settlement combines the insights of productivism (or supply-side progressivism) with a commitment to inclusive economy. 

And this then begs the question: how on earth did a country that looked like this ever become so centralised? Or at least, why was it so slow in decentralising?  And then, how can we avoid the same mistakes yet again? In a blog on the evolution of mayoral combined authorities, Steve Skelton observes a risk in the “second chapter” of their evolution that they become a “delivery arm of Government”. The three economies analysis shows why this would be a profound error. And bear in mind that these authorities don’t cover anywhere near the whole of England.  

What we are then led to is a need to think about not just a new economic settlement - supply-side progressivism plus inclusive economy - but a new form of governance. In her wonderful work, How China Escaped the Poverty Trap, Yuen Yuen Ang outlines a model of adaptive governance in a complex environment. Post-Chairman Mao China may seem to have few resemblances with modern Britain. Yet, the need to adapt and evolve against national imperatives, allowing for variation, niche creation, and selection balancing national, local and regional at least contains a metaphorical canvass.

Central Government in the UK is very well used to resorting to deliverism, ie cascading administrative goals and management, when faced with complex challenges. It treats complex as complicated. When we consider the three economies we see the risk of this as an overarching approach. Each of these economies has different spatial characteristics. The growth economy requires a greater level of central coordination within sectors to remove strategic barriers and open up strategic opportunities (such as new trade deals). 

In contrast, the needs of the everyday economy are more balanced with the need for more local and regional leverage including on technological diffusion, skills and spatial development and management. Central Government creates the core rules and policy to which regional actors are able to respond entrepreneurially.  

And the care economy relies on a diffuse constellation of local authorities, public services, the social sector with national and regional support including via resources and standard setting. In each of the economies, different requirements require this complex interaction of market, society and state in multiple forms.  

We are now a decade and a half on from the global financial crisis, almost a decade on from the EU referendum, half a decade on from the beginning of Covid, and a quarter of a century away from Net Zero- we hope. Regional, income and wealth inequalities persist. Political trust has been in steep decline. The early months of a new Government has shown they recognise that muddling through or false promises no longer suffice and there aren’t shortcuts to transformative change. A three economies lens might help shine a light on the adaptive change we need. And, well, there are always alternative models out there - the Make America Great Again model for instance. The stakes are high.  

I plan to start mapping out further thoughts on how the three economies frame might help to support a new economic settlement- policies and institutions. But I’d really love to hear thoughts, perspectives and ideas. Please do share any thoughts either here or on BlueSky/LinkedIn. 

*Some of you will have noticed the conspicuous absence of nature in this model. There is a movement in economics to capitalise nature (“natural capital”) and in finance and governance to incorporate it into corporate risk, reporting and strategy (nature-related financial disclosures). To the extent that these movements will mitigate environmental damage they are to be welcomed. I will say more on the interrelationship between the three economies and nature in the future. For now, it might be useful to see the three economies in the context of Kate Raworth’s doughnut with social floors and natural limits very much in mind.