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From capitalism grounded to grounded capitalism – Part 1

We can partly situate the grounding of Britain’s pre-crisis growth model in its geographical unevenness – but the left must also situate its response to regional inequalities in a new understanding of capitalism’s spatiality

Craig Berry, Deputy Director at SPERI

Craig BerryThe North-South divide, albeit loosely defined, has long been part of the British pathos. The country’s political elite has, ostensibly, often sought to address the very real geographical inequalities which underpin this rather simplistic trope. But the 2008 financial crisis led to an identifiable gear-shift, as the divide began to feature heavily in both elite and popular diagnoses of the crisis, and how Britain’s subsequent economic malaise might be addressed.

Just because there is a will, however, it does not mean there is (yet) a way. How should the left approach the task of improving economic conditions – jobs, incomes, productivity, resilience – in disadvantaged regions? In this essay I outline what a more ‘grounded’ approach to managing capitalism at the local level should entail. Before we get to the answers, Part 1 of this essay explores the political and economic context in which this question must be situated.

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The notion of ‘rebalancing’ has framed elite discourse since the crisis, in recognition of the economy’s over-dependence on growth in London and the South-East. But in suggesting that Britain’s economic model is fundamentally sound, but merely distended in some ways, rebalancing has not given rise to a suitably transformative policy agenda.

Related discourses such as the ‘Northern Powerhouse’ and ‘Midlands Engine’ are, at best, rather hollow – comically, on 18th August 2016, Theresa May published near-identical op-eds in The Yorkshire Post and The Birmingham Mail endorsing both agendas – and, at worst, quite infantilising. They put the emphasis on poorer regions needing to take responsibility for their own disadvantage, rather than the very longstanding political and economic inequalities that characterise our economy and structure the relationship between regions. They also overlook the roles that poorer regions play in supporting prosperity elsewhere in the economy.

Lower household incomes in poorer regions are one of the main signifiers of Britain’s geographical inequalities. This inequality has worsened in recent decades, before and after the crisis, as a result of various downward pressures on earnings. Manufacturing industries once sustained earnings around the median point, but deindustrialisation – a process arguably dating back to the nineteenth century, but which accelerated from the 1980s – has hollowed out labour markets, particularly in the Northern regions, the West Midlands and Wales.

The rise of low-value service industries has failed to fill the earnings gap. These industries are more dependent on local consumption, rather than exports, and are therefore held back by sluggish local earnings growth, a self-reinforcing trend which creates a low-wage equilibrium in many local economies. Wages in services industries have been driven further down by digitalisation, precarious employment practices and the consolidation of market share by key firms.

London and the South East have not been immune from these trends. Just as we do not often enough consider the geographical dimension of the earnings squeeze, we also too quickly gloss over the fact that geographical differences in many ways reflect class-based inequalities. These inequalities are clearly evident in London and its hinterland – but as a whole these areas are more economically diverse.

Key industries in London and the South East are also deemed more strategically significant within the national growth model, and therefore receive extensive public sector support. The growth of public sector employment in the North supported incomes in the 1990s and 2000s, but a reversal of this trend since 2010 has barely registered in London and the South East.

The international context is crucial here too. As financial markets synchronise and production networks internationalise, the global capitalist system has changed in character, with new core/periphery dynamics rendering the divide between developed and developing worlds highly anachronistic. The globalist capitalist core consists instead of a network of large city-regions across the world.

London is Britain’s only truly global city, due primarily to the finance sector’s international significance, and how this shapes the capital’s economy more generally. But whereas policy elites tend to present this apparent success story in isolation from the rest of the domestic economy, in reality London’s global city status is buttressed by the import of human and financial resources from provincial regions, part of a dynamic some observers now refer to as a ‘finance curse’.

Crucially, however, this process does not simply leave Britain’s local economies starved of resources. It also offers significant power to London-centred firms, and their international partners, to reorder local economies for their own benefit. The way that outsourcing firms design contracts to extract value from local authorities, while leading the deterioration of local labour market conditions, offers an instructive example.

In this context, Brexit is the last thing Britain’s disadvantaged regions need. One of the paradoxes of ‘globalisation’ is that trade has become more local: it is hard to trade services across long distances, and goods trade increasingly consists of components, via integrated production chains, rather than finished products.

The ‘Remainer’ left will get nowhere pretending that EU membership has not buttressed London’s privileged status, due to the City’s entrepôt function for the Eurozone. Britain could not have remained outside the Eurozone indefinitely in these circumstances, and the European Commission’s moves towards establishing authority over certain City functions is a key factor behind elite support for Brexit.

At the same time, however, single market and customs union membership is vital for maintaining what is left of Britain’s manufacturing capacity, since production processes are highly integrated across the continent. Yet the perennial weakness of British industrial policy means this capacity has become concentrated in relatively isolated pockets of high-value manufacturing activity, often dependent on overseas firms, with limited integration with the local economies in which they are physically located.

This dynamic lies behind the so-called ‘left behind’ phenomenon in smaller urban and coastal areas, which triggered popular support for Brexit. Leave voters in these communities voted to reject a failing national growth model, in perverse alliance with elites interested solely in preserving it. Part 2 of this essay seeks a way out of this new progressive dilemma, by sketching a new approach to supporting local economies in disadvantaged regions.

The full version of this essay was first published in the Fabian Society pamphlet, Raising the Bar: How household incomes can grow like they used to, which is available here.

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