UK Global Competitiveness

Agglomerations – clusters of economic activity, that is – are increasingly recognized as having important implications for productivity. In general, as cities get larger, productivity increases. A rule of thumb might be that doubling a city’s size raises productivity 5-10 per cent. The productivity benefits of agglomeration arise from technological spill-overs, the services of specialized suppliers, access to information flows, a deep labour pool and
high-quality skills. This has long been recognized, and British economic history is replete with wellknown examples, such as the cotton-industry agglomeration Lancashire in the 19th century, the motor-industry agglomeration in the West Midlands during the 20th century, and, of course, the financial-services agglomeration that has flourished
in London for the last 200 years. In fact, perhaps contrary to popular perceptions, evidence suggests that agglomeration matters more in financial and business services than in manufacturing.

International trade has changed dramatically in the last 30 years as a result of what has been called the ‘second unbundling’ based on the use of ICT and the widespread move to trade liberalization. As a result, we see much more vertically disintegrated trade with many stages of production each taking place in different locations. In future, we can expect international trade to be based increasingly on competitive advantage in a stage of production rather than in the whole supply-chain of an industry. This has important implications for supply-side policies and the role of agglomerations in the UK

The UK has international comparative advantage in sophisticated services that use high-skilled people. This potentially presents the UK with an opportunity: to fill positions in international value chains where much of the value added will be generated in future pre- and post- fabrication services that contribute to the consumer price of a ‘manufactured product’. The well-documented example of the breakdown of the price of a Nokia mobile phone, shown here, illustrates the idea. Obtaining the ‘intangibles’ from R&D, design, branding, etc., is where the money was, and it is likely to be where the money will continue to be.

The UK will be better able to take advantage of these opportunities if it facilitates the necessary agglomerations. This calls for an approach different from that of traditional industrial policy with its emphasis on subsidies to physical investment or promoting particular manufacturing industries. Instead, developing well-designed transport infrastructure and land-use planning policies will be key.

Unfortunately, these are areas in which British policies leave a lot to be desired. The symptoms of these policy failures are evident: Successful cities are constrained in their growth. They have skyhigh land prices plus road systems that suffer from serious congestion. A planning system that imposes a regulatory tax on office space often approaching 300 per cent, and transport policies that persistently under-invest in roads are not conducive to UK competitive advantage. The British government would do well to follow the lead of the “The Netherlands of 2040”, a report by the Bureau for Economic Policy Analysis in that country that has emphasised investing in its cities and the skills of its people as essential ingredients of long-term economic success.