1.  INTRODUCTION

  1.1  This paper sets out the LDA submission to the ODPM Select Committee to examine how the target to "reduce the persistent gap in growth rates between regions" will be achieved.

  1.2  The PSA Regional Economic Performance target to: "Make sustainable improvements in the economic performance of all English regions and over the long term reduce the persistent gap in growth rates between the regions, defining measures to improve performance and reporting progress against these measures by 2000" is a joint target between the Treasury, DTI and ODPM.

  1.3  The aim of reducing "the persistent gap in growth rates" is understood to be a stepping-stone toward an eventual reduction in disparities between the regions. The government's strategy is one of "levelling up", by "raising the performance of the weakest regions rather than simply re-distributing existing economic activity".

  1.4  The RDAs collectively form part of the policy delivery system for boosting regional growth. The LDA welcomes the national policy of supporting regional policy and seeks to work with other RDAs to achieve this. We welcome the Government's moves towards greater economic devolution. The regions will only be able to meet their full economic potential if there is continued devolution of flexible powers, regional autonomy and funding.

  1.5  This paper has been prepared within this context. In this evidence we assert that:

(a)  Although London has the highest nominal GDP/capita of all English regions, its lead in real terms is almost certainly much smaller due to a higher average price level in the capital.

(b)  London's employment rates are below average and not necessarily improving. London's unemployment rates are high and particularly high amongst certain groups and in certain geographical locations.

(c)  There are also large disparities within the regions—sometimes greater than the inter-regional. Many RDA policies are aimed at reducing intra-regional disparities eg skills development, access to employment, etc.

(d)  London's performance, although strong, is sub-optimal on a range of measures, and improved efficiencies and investment would make a net contribution to the national economy through tax, Gateway functions, business start-ups and jobs.

(e)  The LDA aims to improve London's performance in ways that deliberately minimise wasteful/zero-sum competition with other regions by focusing on efficiency and barrier removal within product and factor markets, ie improving the performance of businesses that are in London, increasing the efficiency of labour markets, providing access to land and premises. The London Economic Development Strategy is not based on competition with other UK regions.

(f)  London may have a higher real per capita income than other regions, but this advantage is balanced by being a net positive contributor to the Exchequer, and both jobs and businesses are created outside of London as a result of functions in London.

(g)  London contains a higher than national average share of growth sectors and advanced industries[34]. The majority of high value sectors would only consider a UK location in London. The competitor locations are not other regions of the UK—they are international locations. [35]

(h)  According to surveys of business intention[36] we can conclude that London "exports" businesses to the rest of the country. London acts as an "incubator" for business start-ups some of which then relocate to other regions as they grow, or new branches are opened.

(i)  London's growth also acts as a complement to activity in other regions, more than a substitute by acting as a Gateway for international tourists and foreign direct investment.

(j)  Given that reducing disparities is aimed at "leveling up" all regions, it is not appropriate to take resources away from the faster growing regions. It may be more productive to look at ways of strengthening market and other links between the higher performing regions and the lower performing regions.

(k)  London provides employment for 730,000 commuters[37] drawn from across all regions of the UK, although predominantly from the South East. Salaries earned in London but spent in other regions are positive net contributors to local economies.

2.  LONDON'S PERFORMANCE COMPARED TO OTHER REGIONS

  2.1  Evidence and data on regional disparities has substantially improved in recent years, but there are still uncertainties about the basic statistics of population and employment. There are also uncertainties that apply particularly to the London case—the significance of cost of living differences (particularly for housing) and of considerable commuting into London across the regional boundary (both from the South East and East regions but also from other regions).

  2.2  Average incomes on a residence basis.

  Nominal GDP per head, computed on the basis of incomes received by London residents in 1999 was 30% above the UK average and 13.6% above the South East and East regions, in joint second place[38].

  2.3  Differentials of broadly this scale between London and the national average have persisted in the period since 1989 though with a number of short term fluctuations (including a significant widening between 1996 and 1998). But no clear trend is evident, in contrast to the South East and East which have quite steadily improved their relative position.

  2.4  The earnings data from the New Earnings Survey (for full-timers working in London) points to an upward drift in the gap with respect to Great Britain during the 1990s, stabilising at 34% in the last three years (2000-02).

  2.6  Employment rates—London has remained below the national average in recent years (in contrast to both the South East and East). Within the working age population, the proportion employed in 2002 was 71% in London, compared with 75% nationally and 79/80% in the East and South East[39]. This reflects both higher unemployment and lower participation rates in London, which are very largely attributable to concentrations of disadvantaged groups of various kinds within the (inner) London population[40]. Since 1989 unemployment in London has exceeded the national average. Unemployment rates are currently 6.8% in London and 5.3% in Great Britain. Relative both to the national average and to neighbouring regions, London's employment rate improved between 1994 and 1999, but has fallen back since then.

  2.7  Productivity—Published ONS estimates, indicate a productivity differential between London and the UK of only about 18% in 1998-99[41].

  2.8  Cost of Living Differences—Until recently evidence on cost of living differences between regions was only available from unofficial sources (notably Regional Rewards surveys). ONS have now published data covering most items of expenditure[42], but not yet for the costs of housing services for owner-occupiers, which is obviously a critical item, though there are conceptual problems in its measurement. Unofficial estimates, indicate that average costs of living in London in 2000 were about 12% above the UK average, reflecting price differences for goods (2.6%), services (7.3%) and particularly housing (63.8%)[43]. However, relative costs of living were found to vary considerably according to people's position in the housing system, with differentials ranging between 4% for outright owner-occupiers to 16% for new entrants to owner-occupation and 20% for low income earners in private sector housing.

  2.9  Real Earnings—Comparing the average figure with an overall differential of 34% in pay rates, suggests that real earnings in London were on average about 22% above the UK level in 2000. In the absence of a time series of price data we cannot say whether this differential has been growing or contracting in recent years.

  2.10  However, this differential reflects a concentration of more highly qualified workers and more responsible jobs in the London economy. For workers in particular occupations or with particular levels of human capital, the disparity between real earnings inside and outside London can be much smaller, and may well be negative. In a typical occupation, money earnings in London averaged about 17% above the UK average in 2001, implying a differential of just 5% in real terms, part of which may well reflect finer distinctions in job types and qualifications between London workers and those elsewhere—and in a range of unglamorous jobs real earnings seem clearly lower in London.

3.  INTRA-REGIONAL DISPARITIES

  3.1  From the point of view of equity and releasing economic potential, what really matters is the absolute number of people in poverty in each region. As well as considering average inter-regional disparities it is important to consider the disparities within regions—both geographically and between population groups.

  3.2  In terms of personal prosperity, there are very sharp divisions in London, with a concentration of areas of high unemployment and income and educational deprivation in inner, particularly east, London. There are extensive areas where the depth of poverty (particularly among children[44]) matches that in much less successful regions. According to a recent GLA report:

"53% of children in Inner London and 41% in Greater London live in poverty (after housing costs are taken into account) compared to 37% in the North East, the next highest region"[45]

  When ethnicity is considered these disparities are even more marked.

"32% of white children in Greater London live in poverty, however 55% of black children and 73% of Pakistani and Bangladeshi children live in poverty".

  3.3  These major underlying disparities, reflect both a particularly unequal distribution of incomes in London and the capital's large share of disadvantaged ethnic minority populations. Problems of poverty are greatly intensified in London by the pressure of high housing costs on households with incomes set by national benefit rates. These present major issues of equity and of under-used economic potential, to which the LDA gives a high priority.

  3.4  In terms of business performance, central London is a special case, but outside it, the main differences in business performance appear to be between a more competitive, higher paying, expanding and more export oriented west and rather weaker areas in the outer east[46]. Together with the concentration of sites for physical regeneration in the east, including Thames-side this represents a major case of under-used potential within this generally pressurised and competitive region.

4.  LONDON'S CONTRIBUTION TO UK ECONOMY

  4.1  Achieving sustainable improvements in the performance of the London economy can contribute to the development of other regions in a number of ways:

—  The net contribution which development in Greater London makes to the national exchequer—currently estimated at between £10 and £20 billion per annum[47].

—  The contribution which competitively successful services in London (where export propensities for publishing and services are twice the national average) makes to national growth potential via the balance of payments.

—  London's prime position as a "gateway" for tourists. Over half (56%) of all overseas London's airports. [48]This gateway function is recognised in law in the GLA Act 1999 requiring the Mayor to encourage people to visit London and to visit the UK by way of Greater London and to encourage the provision and improvement of tourist facilities to support this.

—  London's position as a "Gateway" for foreign direct investment into the UK, particularly from outside Europe. For inward investment projects other than large-scale manufacture, London (and closely related areas within the East and South East regions) are strongly preferred locations, because of their strong international connections, their attractions for expatriate staff, and the wide range of support services and facilities available locally. These are particularly important for businesses settling into an unfamiliar environment, who may subsequently discover suitable opportunities for transplantation or establishment of related activities in other UK regions.

—  Businesses developed in London move out to other parts of the UK creating jobs in those regions. The London Employers Survey 2000 found that 23% of respondents indicated they would or may move some or all of their operations. Of those who would move, 12% said they would move to South East England or elsewhere in the UK. This equates to approximately 500,000 jobs that might move from London to other regions.

  4.2  More fundamental than any of these, however, is the natural complementarity between the roles of the London economy—with its unique set of strengths and constraints—and those of other regions. Relative to other regions the economy of London enjoys:

—  A unique combination of specialised producer and consumer services in which it enjoys competitive advantage by international standards and strong international connections. Work by Ernst and Young in 2002 shows that London has particularly strong market status for inward investment in the following sectors—Creative industries, finance and business services, life sciences, R&D and headquarters.

—  An unmatched array of agglomeration economies, including pools of highly skilled labour for all kinds of advanced service activity, developed in, as well as attracted by a dynamic metropolitan labour market. For a large range of service activities it is because they are dependent on close access to the unique range of specialist skills, information sources and customers that the London agglomeration offers. Financial services and business and professional services are major growth sectors in London. London is home to the top five advertising agencies in the UK, it is the principal UK location for the headquarters and subsidiaries of computer and software firms.

  4.3  The more successful the London economy as a whole becomes, the stronger will the processes contributing to complementarity operate, to the benefit of other cities and regions. And, the more focused that development initiatives are on facilitating and reinforcing the distinctive strengths and potential of the London economy, the greater the benefits will be to the London economy.

5.  DOES THE CURRENT NATIONAL POLICY FRAMEWORK ALLOW FOR INTRA-REGIONAL AND INTER-REGIONAL POLICIES TO BE SUCCESSFUL?

  5.1  The approach to performance management of RDAs does not encourage RDAs to work together on initiatives that support complementarity and joint benefit. The recent campaigns to encourage businesses to leave London are clearly not a cooperative approach. It would be helpful to have a framework that encouraged explicit initiatives for co-operation between RDAs on programmes and not just on policy, eg Supply Chain initiatives, Link ups with Higher Education Institutions. For example, the RDAs met the research councils to discuss research funding across the UK. There is a particular issue related to health research concentrated in London, Oxford and Cambridge. It could be useful to undertake a joint piece of work to look at how some of the southern teaching hospitals could be twined with facilities elsewhere to share excellence and potentially establish new centres of excellence elsewhere in the country.

  5.2  Formal separation of Development Agencies from the Small Business service, the Learning and Skills Councils and the management of European Regional Funds does not help in focusing efforts on capacity building and improving competitiveness of the regional economy in a coherent way.

  5.3  Some narrowly defined tier three targets, taken over from the DTI prescription for other RDA's in terms particularly of counts of "jobs created" do not encourage a sufficiently selective, qualitatively-oriented approach.

  5.4  Important for London to work closely on the Core Cities initiative. There is an urban dimension to the competitiveness debate that involvement of London adds to.

  5.5  Important to ensure that key infrastructure—both transport and housing—is in place to avoid constraining economic growth. The involvement of RDAs in the planning and provision of infrastructure will enable this to happen. We welcome the increased role for RDAs in these matters indicated in SR 2002. The LDA anticipate continued discussion on our role in housing following the Communities Plan.

6.  ROLE OF LDA IN REDUCING BOTH INTER-REGIONAL DISPARITIES AND INTRA-REGIONAL DISPARITIES—TOOLS AVAILABLE

  6.1  The goal of individual RDAs is to maximise overall welfare of their own region by releasing market potential of economies and to ensure equitable distribution of welfare within regions. By pursuing regional market policies RDAs also contribute to inter-regional welfare. This is not a zero-sum gain.

  6.2  The Government identifies five key drivers of growth in its reports examining productivity in the UK: skills, investment, innovation, enterprise and competition. RDAs have a role in addressing market failures in these five factors.

  6.3  Examples of LDA activities to reduce inter-regional and intra-regional disparities

(a)  The Regional Selective Assistance scheme contributes to the inter-regional objective.

(b)  Concentration on the development of London's distinct strengths and business sectors by the LDA, eg tourism, creative industries, advanced manufacturing.

(c)  Removal of barriers to development of indigenous firms—as opposed to chasing mobile investment.

(d)  Removal of barriers to employment—rather than simple job creation efforts in competition with poorer regions.

(e)  Pursuing a strategy of innovation and productivity enhancement through knowledge transfer.

(f)  Priority Areas for intervention—selection of these areas reflects opportunity, need and suppressed economic potential coupled with the potential for the LDA to release opportunity and growth.

(g)  The eastward thrust of development also offers particular opportunities to enhance performance in the competitively weaker areas of outer east London.

(h)  Economic Inclusion programmes to address barriers to labour market participation by the unemployed and socially excluded.

35   Corporation of London-London- New York Study-June 2000. Back

36   London Employers Survey 2000. Back

37   Quarterly Labour Force Survey data from NOMIS. Back

38   Regional Trends 37, Table 12.1. Back

39   Quarterly Labour Force Survey data from NOMIS. Back

40   Buck N, Gordon I, Hall P, Harloe M and Kleinman M (2002) Working Capital: life and labour in contemporary London, Routledge. Back

41   Treasury/DTI op. cit, p.7; Daffin (2001) "Introducing new and improved productivity data", Economic Trends, 570, 47-62. Back

42   Baran, D. and O'Donoghue, J. (2002) "Price levels in 2000 for London and the regions compared with the national average", Economic Trends, 578, 28-38. Back

43   LSE London (2002) London's Place in the UK Economy, Corporation of London. Back

44   Mayor of London (2002) London Divided: income inequality and poverty in the capital, Greater London Authority. Back

45   MoL op. cit., p. 1. Back

46   Buck et al. op. cit. Back

47   LSE London op. cit. Back

48   The Tourism Company 2002-The case for Tourism: a scooping study for LTAG. Back