Dr Marianne Sensier is a Research Fellow at the Institute for Political and Economic Governance (ipeg), University of Manchester. Here she talks about her recent study on agglomeration economies and how balance can be achieved in the economy.
Global imbalances are widely seen to have caused the financial crisis and subsequent recession. The downturn saw a sharp fall in trade and a synchronised decline of economic activity across nations. The recovery from this recession has been uneven across the world which has prompted increased discussion about economic rebalancing at regional, national and global scales.
Agglomeration economies occur when the concentration of economic activities leads to the emergence of positive externalities, which are transmitted both within and between firms through channels such as technological spillovers, an increasingly skilled labour market and enhanced firm-supplier networks. A recent ipeg study of mine (with co-authors Artis and Curran) has found that over recent years, both industry and service sectors have increased productivity in city regions (although for industry this has been accompanied by the cost of falling employment in this sector), where they benefit from the growing demand that a relatively affluent daytime population brings. The long term decline in traditional manufacturing, caused by increased competition in the global market place, also means industries are less likely to cluster together. However, we find that the financial services sector does benefit from locating near companies in the same sector.
“Made In Britain” (a book by Evan Davis to accompany his BBC 2 series to be shown in June 2011) supports the findings of this ipeg study. Evan Davis explains that traditional manufacturing was dispersed geographically mainly due to natural resources – i.e. the concentration of steel works in Wales due to the availability of pig iron and coal – but now with the rise of the knowledge industries, and the greater need for face-to-face contact, people cluster in particular regions which has lead to the regional imbalances we see today.
Globalisation has increased the size of agglomerations in that firms and workers are attracted to places with lower production costs and larger local markets which reinforce regional imbalances. In my view it seems that the only way countries can compete in the global market place is to make certain locations more desirable so that efficient firms looking to lower costs of production will move into regions. The free market does not allow this solution, agglomerations left to grow to unsustainable levels will lead to negative externalities of pollution, congestion and other social ills (as in the case of London, see the article in Saturday’s Guardian).
So what is left for policy makers to work with post Regional Spatial Strategies? Well the Coalition Government has created Enterprise Zones (announced in the March 2011 Budget and offering discounts in business rates, simplification of the planning system, superfast broadband, enhanced capital allowances for firms that focus on high value manufacturing, use of Tax Incremental Finance and support from UK Trade and Investment for inward investment and trade opportunities). In this global market place we need to compete internationally and other countries offer similar incentives for firms to locate. National and local support for business is vital to help them set-up, grow, access finance, innovate, network, train workers, export and compete in the global market place. Enhancing the regional skills base is critical and further support for education was mentioned in the Budget in the form of funding for work experience places, apprenticeships and the expansion of University Technical Colleges. Incentives to business and investment in education are essential to sustain growth of an economy, help the environment and rebalance wealth from the overcrowded regions within our nation.