How is the economy evolving?

28th September, 2018

Some of the key questions in developing a local industrial strategy, and more generally in economic policy-making, are: how will the economy evolve? What will be the impact of technology, globalization and Brexit on the local economy? And what will be the best ways to address these challenges?

In our report Developing an effective Industrial Strategy, we highlight three potential pitfalls that places could fall into when trying to answer these questions and developing their local industrial strategy (LIS).

Using economic models as crystal balls

While it is important to understand how technological change and globalization might play out in the local economy, there is the risk that places put too much emphasis on complicated economic models. The reality is that the economic outlook of an area depends on so many variables that trying to predict it is not always that helpful – especially over the kind of time frames that will be relevant for local industrial strategies. Instead, from a policy-making point of view, a scenario approach could be a more useful way to structure the decision-making process around important trends and starting preparing for them. For example, Luton has used this scenario approach, when trying to understand how a fall in migration could have an impact on its local economy.

Supporting old industries rather than new ones

Places tend to be biased towards supporting existing industries. And this is for obvious reasons: offering tax breaks to existing companies can always be good for the people that directly benefit from the jobs that these companies keep or create. But these risk being temporary solutions. The story of Janesville, an industrial town in Wisconsin, gives a good example of how this may play out.

And there is always a trade-off between supporting old and new industries. Doing the latter could help diversify the local economy and protect it from future shocks. There are risks associated with relying on one industry. Aberdeen is a case in point: while its economy has performed well in the recent years, its reliance on the oil and gas industry has made it potentially the most vulnerable to Brexit.

One of the reasons why policy-makers tend to support old industries is that they want to avoid the displacement that large layoffs could cause. This is perhaps understandable because we know very little about how to retrain displaced workers. The What Work Centre has put together some evidence on the types of employment training that are the most effective. But places should continue to experiment and build the evidence to shed light on this important issue.

Not thinking about the sunk costs of public investment

Places that decide to make large public investments in particular activities should pay attention to two things. Firstly, places should be aware of the scale of sunk cost investments and try to make sure that the costs and risks are shared between different actors. The MediaCityUK project is a good example of how this could be achieved: it started with the BBC announcement to relocate jobs from London to Manchester and it built on previous rounds of public investment in the area. Peer Holdings led the development and the BBC, and subsequently, ITV and the University of Salford became the main tenants. This approach helped share the costs of the initial investment. Secondly, places should be realistic about the opportunity costs of such an investment. MediaCityUK has so far not created as many jobs as it was initially predicted. Before committing to large investment projects, places should consider other ways to improve the fundamentals of the local economy. For example skills programmes tend to be cheaper than infrastructure projects and they also have a wider reach. Evidence shows that there is a clear link between skills and economic growth. And this means that these interventions may be more likely to have longer-term effects on the economy – particularly when the transport network is not a binding constraint on local growth.

Understanding how the local economy will evolve is a crucial part of every effective LIS. And while it is always hard to predict how economic trends will play out, places should avoid falling into these pitfalls when devising one. 

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