Navigating the currents of productivity: Transport and the Industrial Strategy

25 October 2017

To increase prosperity, we need to increase productivity – of our people, our firms and industries, our public services, and ultimately the national economy. This is a key goal of the UK’s Industrial Strategy.

The first Industrial Strategy dates back almost 100 years to 1921 when the government aimed to increase productivity through consolidation of the railway companies. Until the 1980s and 1990s, when the focus shifted to privatisation of government enterprises – UK Industrial Strategy overtly concentrated on selecting ‘winners’ and through direct government interventions in the economy.

Because of its historical evolution, many people still think of the Industrial Strategy as an interventionist policy. But today, it focuses on creating the horizontal conditions that allow businesses across all sectors to grow, rather than ‘vertical’ selection of sectors – or even companies – as the winners (or losers).

Most advanced economies have experienced a recent slow-down in economic growth, which begs the crucial question of how best to change this. One of the key levers with potential to increase UK productivity is improved transport connectivity. But what does this mean in practice for government policy?

We recently held a roundtable with senior leaders from the transport sector to investigate this issue, with a focus on how transport can contribute to a successful industrial strategy. The discussion under Chatham House Rule was lively and thought provoking, and raised some important issues for consideration:

1. Does transport investment involve picking winners by region rather than sector?

While we no longer prop up private companies with government investment, or subsidise specific sectors, investment in transport is – by its nature – location based. As we choose certain areas or localities to be ‘better connected’, who wins and who loses? What are the consequences for efficiency? Should we be aiming to re-balance the well-known North-South divide, the less well-known North-North or South-South divides, or seeking to selectively link up key centres of economic mass (e.g. London with Birmingham and Manchester; Oxford with Cambridge; Manchester with Sheffield)?

The exact answer needs to be thought through carefully, mindful of unintended negative impacts. For example, at the national level, the Industrial Strategy might consider how different regions specialise and trade with each other, aim to connect certain regional industry clusters to others, and explicitly consider the relationships between the different types of infrastructure that is required (e.g. housing and energy in addition to transport). Transport is an important policy lever but it needs to be part of a cohesive policy package (covering, for example, energy, digital, water, waste and housing) to boost local and regional productivity and make places more attractive to private sector investment.

2. The currents of agglomeration are powerful but nuanced

UK economic activity is becoming more and more agglomerated (or concentrated) in London and the South East (estimated to account for 40% of GDP by 2022). Is any effort to spatially rebalance the economy just a ‘Canute like’ attempt to turn back the sweeping tide of agglomeration? Despite the powerful ‘virtuous circles’ of agglomeration and productivity, which go a long way to explaining why and how cities have developed for hundreds of years, the answer is more nuanced. Adequate transport investment in London is vital for our international competitiveness.

At some point, however, there could be diminishing marginal benefits to investment in London (e.g. from increased prices and congestion). We are already seeing some firms react to the heat of the London economy by growing presence in other regions. The nuanced answer for government investment is that spatial rebalancing ought not to be a zero-sum game. Areas outside of London should and could benefit from a strong London rather than at the expense of it and encouraging those places to focus on their comparative strengths can help in this regard. Better connectivity for people in other regions to a strong London can help to improve their economic opportunities.

3. We need to think big – and small

In an increasingly global and interconnected world, people in the UK will benefit from better transport connections between major centres, and with the rest of the world. Sufficient port and airport capacity will be needed (particularly given various Brexit scenarios) if trade is not to be constrained. All of this requires thinking big – that is, sufficient investment in large-scale transport infrastructure. Equally though, we must not forget smaller projects. It is easy to forget the impact of the development of Canary Wharf and the DLR, which effectively increased the size of the City of London, helping it to remain one of the world’s very few truly global hubs. Large efficiency gains can be made from relatively small scale transport interventions such as station upgrades and feeder roads. These projects can also often help to unlock much needed opportunities for housing development.

It is also crucial to consider how the world of transport is changing and is likely to change more given new technologies – these shifting currents could have profound implications for decisions about future transport infrastructure.

The currents of productivity are powerful and complex; and navigating them requires a nuanced and well-planned approach. Thankfully we have a compass.

In our next roundtable discussion for leaders in the transport sector on 21 November we will discuss the challenges in developing the workforce of the future. If you are interested in attending please get in touch.

 

Daniel Hanson | Director
Profile | Email | +44 (0)20 7804 5774

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