Boris Johnson’s regional agenda is doomed to fail unless we tackle Britain’s ‘finance curse’
This is part of a series of blogs by undergraduate students on the ‘Britain in the Global Economy’ 3rd year module, which is convened by Dr Scott Lavery at the Department of Politics and International Relations at the University of Sheffield.
Boris Johnson’s pledge to ‘level-up’ Britain has had many critics. Some argue that ‘levelling up’ is doomed to fail because it is too highly centralised. Others argue that levelling up is just the most recent show of pork-barrel politics, where key marginal seats now held by the Conservatives are flooded with resources. Others question whether the policy is simply a slogan without substance. While these arguments have much to their credit, they overlook two central, related problems. First, the levelling-up agenda is unlikely to succeed because of the highly imbalanced nature of Britain’s finance-led economic model. Second, there is no concrete industrial strategy driving the levelling up agenda. To understand why, we need to explore the nature of the City of London and its associated ‘finance curse’.
Britain’s Finance Curse
The City of London is often presented as the jewel in Britain’s economic crown. It draws in huge in-flows of capital, generates high pay jobs and contributes to Britain’s GDP. However, it is increasingly clear that the sheer scale and power of the City of London causes significant harm to the British economy. The City has come to control Britain’s politics and economic focus, hollowing and crowding out the economy at the expense of other regions north of the Watford Gap. Rather than bring prosperity for all, the City of London is “a cuckoo in the nest” that undermines other economic sectors. Indeed, research from SPERI has indicated that ‘too much finance’ has stymied growth at a price tag of an extraordinary £4,500 billion across a twenty-year period, concluding that the UK economy would have performed better if the financial sector was smaller and focused on supporting other areas of the economy.
The finance curse takes three forms: harmful financial agency; structural gravitational pull and distortionary price spillovers. The focus of this blog post is on structural gravitational pull or ‘brain drain’. Simply put, brain drain occurs when the City and its promise of lucrative financial income attracts financial and human capital away from the spatial areas and industrial sectors that need it the most. In this way, the City of London is effectively a vacuum cleaner that sucks highly skilled workers away from other sectors and regions to their detriment.
If the Johnson government really wants to level up, its priority must be to address this problem of ‘brain drain’. All of Britain’s regions must be attractive places to work and live for those entering the job market. There is more to Britain than the City of London.
The finance curse in historical perspective
The finance curse, far from a modern problem, is deeply embedded within Britain’s historical development. Since the 19th Century, the City of London’s role as an international ‘entrepot’ has skewed British development in favour of finance. In their famous thesis, Cain and Hopkins argue that the British economy came to be overwhelmingly organised around income generated through trading and finance. High social status was placed on less risky, less laborious and invisible sources of income, first from land and then from finance. As such, the manufacturing sector was considerably less attractive to ‘gentlemanly capitalists’ than finance, and even those at the top of their industry were not afforded the prestige attributed to financiers. Hence, the City grew to play a bigger role in financing the distribution of manufactured goods across the empire than it did in their production, reflecting the ‘gentlemanly’ principle that one should not ‘labour too obviously’.
The consequences for this have been profound. An economy that is underpinned by the principles of ‘gentlemanly capitalism’ is bad at supporting the investment and innovation necessary for a strong industrial sector. Brain drain into London is just one of many of the consequences. Unless levelling up addresses the historical tendency to neglect industry in favour of finance, it is unlikely to bring the prosperity that Johnson promises.
Levelling-up and Brain Drain
Levelling up is currently more of a poorly defined slogan than it is a tangible policy agenda. Of the limited policies that have been announced thus far, none bode well for overcoming brain drain caused by the City of London. The government’s ‘Levelling Up Fund’- which allocates £4.8 billion for infrastructure development to ‘priority areas’ – has come under intense scrutiny for failing to allocate resources to the areas that need it the most. For example, Sheffield, which has been hit particularly hard by the decline of the steel industry and brain drain from its two universities – it has on average, only 1.4% of all graduates in the region six months after graduation compared to London’s huge 25% – was not in the top tier for assistance despite its notably high deprivation levels.
If we really are to level up Britain, the distortionary impact of the City needs to be addressed. Rather than finance, the innovation of Britain’s industrial sector needs to be prioritised. We need a clean break from history to put a Britain-wide industrial strategy at the heart of economic policy.
Ending the finance curse through industrial strategy
The Institute for Public Policy Research’s report, the Commission on Economic Justice, offers a ground-breaking plan for the new economy offers the first concrete step to overcoming the legacy of the City of London. The plan involves reshaping the economy through industrial strategy so that Britain’s industrial regions will be able to retain their bright minds. This will be achieved through the development of industrial ‘clusters’ that are anchored around universities. Despite the prevalence of world-class teaching across the UK research departments have not yet been utilised as the catalysts of industrial growth that they have the potential to be. This needs to change.
Taking advantage of our innovative research will help to establish, for the first time in history, an economy that has industry at its heart. Dispersing these industrial clusters around Britain, not just London, will boost regional economies to bring wider prosperity. Crucially, doing so will help to overcome the plague of brain drain by providing ample opportunities for young professionals outside of London. Indeed, the creation of the IPPR’s industrial clusters has the potential to be the first meaningful step away from history.
Johnson needs to reconsider his plans to level up. If he wants to rebalance the economy, levelling up funds aren’t enough. A transformational industrial strategy that overcomes brain drain is needed as Britain’s first step forward.