Dr Elvira Uyarra is a Senior Lecturer at the Manchester Institute of Innovation Research (MIoIR) at The University of Manchester examines current regional development in the UK and how this might change Post-Brexit.

The following blog is based on a talk she gave at an event organised by the Office for Cultural and Scientific Affairs of the Spanish Embassy in London, the Spanish Foundation for Science and Technology (FECYT) and the Instituto Cervantes Manchester in Manchester on 13 September, 2017.

• There is an increasing geographical imbalance in the UK which contrasts with a highly centralised and top-down UK governance system.
• While poorer parts of the UK voted in larger number of leave, they also rely on EU funding the most.
• Spatial imbalances will loom large post Brexit and the track record of the government in rebalancing the economy through industrial and regional policy gives little grounds for optimism.
• The UK must consider what type of regional policy it wants Post-Brexit

Post-Brexit Britain

On 15 September 2017, Boris Johnson laid out in The Telegraph newspaper his vision for a “glorious” Post-Brexit future for the UK. Free from Brussels, it can now invest in infrastructure, revive trade and modernise the economy. In this enterprise, he said, this country “will succeed mightily”.

The structural problems of the UK economy, including a dismal long-term productivity performance, low rates of business investment, low-skill levels and chronic inter-regional income disparities, as highlighted recently by the Industrial Strategy Commission, have however little to do with the EU.

The UK has the highest income inequality in the EU and one of the highest in the developed world, with a huge and widening gap between London and the rest of the UK. While the UK is home to the richest region in Europe, 31 out of the 40 UK regions (at NUTS2 level) have GDP levels below the EU28 average. Not only is productivity and R&D spending highly concentrated in London and the South East (while other industrial economies such as Germany have multiple productivity hubs). Also their productivity gains have failed to spill over to the rest of the country—as shown by Phil McCann in a recent book—despite a commonly shared view that what is good for the capital is good for the whole of Britain as prosperity will inevitably trickle down to the least-advantaged regions. This increasing geographical imbalance contrasts with the highly centralized and top-down UK governance system.

The map of Brexit votes

This geographical and economic divide was also evident in the Brexit vote. The ‘remain’ vote has been interpreted as representing the voice of metropolitan elites benefiting from EU and globalisation, and the ‘leave’ vote seen as the expression of those parts of society that have been left behind. However the reality is not that simple, according to a recent paper by Bart Los et al. The ‘geography of discontent’ of the Brexit vote maps closely onto those regions with the highest level of dependency from EU markets. England’s industrial North and the Midlands are much more dependent on European trade and have experienced much deeper integration with the EU over time compared to London (although of course London has benefited disproportionally from inflows of skilled human capital, particularly from the EU). While London trades globally, particularly in financial services, the rest of the UK economy is much more embedded in European value chains. Another recent study by the Centre for Cities argues however that the most immediate negative effect (which they quantify at around 1.2% of GVA under a soft Brexit scenario and 2% under a hard Brexit scenario) will be felt in cities with the higher shares of employment in knowledge intensive business services (KIBS), namely London and the south East.

However, in the longer term, richer and more diversified regions will be able to recover more quickly from the economic shock of Brexit, while poorer and less diverse regions will struggle. This means that the regions with the highest proportions of leave votes will also be the worst affected from the negative effects on trade from Brexit, particularly in a hard Brexit scenario. The gap between richer and poorer communities is thus likely to widen in the long run, even more so when we consider that poorer regions may no longer have access to the financial transfers from the European Union structural and investment funds (ESIF), which for decades have worked to alleviate social and economic inequalities in the UK and other parts of the EU.

The European Regional Development Fund

It is not widely known that UK had a pivotal role in the creation of the European Regional Development Fund (ERDF) in 1975 and was initially one of the main beneficiaries. The creation of the fund was meant to address the UK concerns during pre-accession negotiations about a European Community budget overly biased towards agriculture support and to address the problems of industrial reconversion afflicting UK regions at the time.

In the early years the UK received around 30% of structural funds (initially ERDF and European Social Fund, ESF), and has subsequently been a major beneficiary of regional assistance after their reform in 1988. During the 1990s over 40% of the UK population came within the ERDF designated areas (those defined as less developed in relation to the EU average), and almost a third in the 2000s, even with enlargement of the EU to the East. (In the last programming period all regions are eligible, however most funding still goes to regions economically lagging behind), Overall allocations to the UK structural funds during 1975-2020 amount to around £66 billion and the highest allocations go to the poorer parts of the UK in Wales, Northern Ireland, Northeast England and Southwest England, as shown by SPERI. This means that the loss of structural funds is likely to disproportionally affect certain parts of the UK, particularly the less developed regions of West Wales & the Valleys, Cornwall and the Isles of Scilly, even more so when we consider the requirement of these funds to be match-funded by the public and private sector.

Of the €5.4billion allocated to the UK from the ERDF (around EUR 12.4 per head per year) during 2007-2013, 30% was spent on innovation and research and technical development (RTD) and 21% on entrepreneurship support. According to a recent evaluation, it funded almost 1,800 RTD projects, over 7,300 cooperation projects between enterprises and research institutes, and helped over 52,700 businesses to start up, overall leading to the direct creation of over 152,000 jobs. In addition to ERDF, ESF funding has contributed to improving employment rates and skill levels in the UK.

While the total amount of funding mobilised may not be that great, in poorer parts of the UK this has been a significant source of income that has been used to invest in innovation and enterprise support projects, for instance. Without this funding, it is doubtful that such projects would have been funded in these regions at the same scale, or at all.

Perhaps more important than the amount of money mobilised is that EU Cohesion Policy has provided UK regions with a clear framework for long term development funding. Co-financing requirements and multi-annual programming have provided stability & predictability of funding. The principles of partnership and concentration required that development plans were drawn up in collaboration between local and central government and the EU, and provided a set of clear priorities on which to focus spending. While initially more focused on funding infrastructure over time regions have been encouraged to adopt a more strategic approach to investment, including a greater focus on R&D and innovation. Since the financial crisis, cohesion policies have been more goal oriented, promoting ‘smart, sustainable and inclusive growth’ and regions have been steered towards adopting a smart specialisation approach, which requires them to think through the logic behind their priorities for investment before they can receive any funding.

EU Cohesion Policy has been a rare example of stability and continuous funding for regional development in the UK in the recent years, which has otherwise been characterised by a lack of continuity in funding, priorities and governance structures, driven by political expediency and a sort of ‘reinvention’ malaise rather than evidence. Constantly changing policies, instruments and governance structures have increased complexity and reduced effectiveness.

Rebalancing the economy after Brexit

Spatial imbalances will inevitably loom large in post Brexit Britain, and the track record of the government in rebalancing the economy through industrial and regional policy gives little grounds for optimism, despite some positive notes about addressing place based inequalities contained in the recent industrial policy green paper. It remains unclear what extra funding will be available as a result of ending membership, given the still uncertain divorce bill and the likely impact that a Brexit-induced economic slowdown will have on already deteriorated public finances (according to the IFS, Brexit will lead to a net loss in public funding), let alone whether it will be redirected towards regional development. In this context, it is worrying that the uneven spatial implications of Brexit have been insufficiently considered, and that places outside of London have so far had limited involvement in the Brexit negotiations over policy areas that affect them directly.

The UK has been able to get away with not investing sufficiently in skills, infrastructure, science and regional policy for a long time because of the benefits that EU membership brought, in terms of its deep integration in EU global value chains, the availability of high skilled EU migrants, and access to EU research and regional funding. EU membership helped to alleviate rather than cause UK’s economic ills. Instruments such as structural funds helped cushion and to an extent disguise deep-seated territorial and social inequalities in the UK, which have been aggravated by austerity policies after 2010.

Perhaps Brexit is an opportunity to take control, or rather take responsibility for what Boris Johnson himself referred to in February 2016 as “the real problems of this country — low skills, low social mobility, low investment etc. — that have nothing to do with Europe”. The UK now needs to consider what type of regional policy it wants, underpinned with what type of resources, driven by which objectives and with what forms of coordination and governance. As recently suggested by the Industrial Strategy Commission and the OECD, addressing the regional productivity divide will require further policy decentralisation, regionally focused investments in transportation and housing, as well as efforts to boost technology adoption and skills levels. Without the established European structures that the UK has benefitted from over the last 40 years, this, as with much of Brexit, will be a mammoth task.