Thursday, 28 March 2013

The State of the LEPs

Posted by Andy Pike, CURDS and SERC

Two and half years on the birth of Local Enterprise Partnerships (LEPs) in England, we’ve reached a critical juncture in their development. The 39 LEPs have been busy building these new institutions and forging and nurturing partnerships since 2010. Last week’s Budget took forward the recommendations in the Heseltine Review, but left the detailed implications for LEPs unclear.

Researchers in CURDS have undertaken the first national survey of all 39 LEPs as part of their involvement in SERC, and the study sought to take stock of the current position and prospects for the LEPs. In early March 2012, CURDS hosted a seminar to disseminate and discuss the findings. Here’s a flavour of what was covered.

“What is the LEP?”

This fundamental question prompted some reflection on the specific nature and purpose of LEPs. For some, the LEP constituted the Board while for others it was the locus of the local partnership for economic growth. Clarity on the aim, purpose and role of the LEPs remained a central issue on which LEPs were developing their own local views and they are were increasingly keen to better understand what Government has in mind for the longer term.

Are LEPs too small and fragmented really to add value and make a difference to local growth?

The size and scale of the LEPs and the fragmented character of the institutional arrangements was a very real concern. Unflattering comparison was drawn with European and other regions whose more substantial and “heavy-weight” institutions and resources for regional and local economic development left the LEPs looking rather limited and under-powered in the competition for the investment, jobs and innovation to generate local growth. The CURDS research revealed a diverse picture of varied capacity and resources amongst the LEPs.

Establishing the staff and finances of the LEPs is complex. Staff contributions are direct, indirect and pro bono and in-kind from partner organisations. Finances comprise a range of funding streams – European, central and local – with some allocated and some won in competition. Direct staffing ranged from up to 40 to less than 1. Finances stretched from an estimated £40m to under £5m. In this kind of resource environment, it rang very true that for local economic growth the “LEPs were only as strong as their partners”.

How can central Government provide the advice and guidance on what the longer-term vision and plan is for LEPs in ways that don’t challenge the idea of ‘localism’ and undermine the autonomy local actors?

This issue is especially thorny. The CURDS research found that LEPs were crying out for a sense of where Government policy is heading and what further responsibilities and resources are coming over the horizon. Yet mixed and unclear messages were emerging from different Ministers and Departments. LEPs want a steer and direction – not  prescription – on what kind of institutional Government would like to see.

Are LEPs competitors and/or collaborators?

While the 39 LEPs were – in numerous cases – bottom-up entities, the CURDS research and discussion at the seminar focused on the issue of how the LEPs relate to each other within the broader network or system. There is evidence of chasing investments, firms and people for individual LEP areas. There are examples too of collaboration on issues of shared concern, whether with neighbouring LEPs or those further afield for example on MoD and the defence estate. Given the national centralisation of key policy areas important to local growth in inward investment and innovation, the CURDS research revealed an uneven set of relationships between specific LEPs and the key national institutions. In a competitive model, the more capable and better connected LEPs will forge ahead leaving others in their wake. In a collaborative model, the benefits of knowledge exchange and learning might be spread out across LEP-land. If rebalancing is still a serious government concern then some thought on how the overall system inter-relates and works would be timely.

How can LEPs maintain their streamlined organisations with growing responsibilities and resources to manage?

The fear articulated here was about “bureaucratisation” and losing the agile ways in which LEPs are trying to do more with less. Balancing this concern was the need to be accountable for the decision-making and disbursement of public funds. Indeed, the CURDS research revealed many LEPs were uneasy and seeking advice on appropriate governance arrangements to address these concerns and assuage the anxieties of private sector board members. Engaging the private sector was seen by LEPs as critical to sustaining their meaningful input. But how can it be done in ways that are accountable and transparent?

How much decentralisation and for whom?

In the wake of Lord Heseltine’s review, further decentralisation of responsibilities and resources are  heading the LEPs' way. Local actors expressed concerns about exactly how this would work. Would there be decentralisation in waves? Would an initial tier of more capable and strong LEPs with recognised economic opportunity and potential to contribute to local growth emerge at the front of the queue for further resources and responsibilities? Where this left the less capable and weaker LEPs was less clear.

Even given the history of flux in the governance arrangements for economic development in England and the alphabet soup of previous eras, it was felt that LEPs were likely be around for a while with little prospect of further change whatever the outcome of the General Election in 2015. Amongst the local actors there was little appetite for further institutional change and upheaval, the costs of which were still being felt by many in the wake of the dismantling of the regional tier. Fundamentally, local actors were trying to get on with the job of growing prosperity locally. “LEPs may come and go but the rationale for the local partnerships remain” as one participant put it.

Two and half years in LEPs have been largely reactive to the changing landscape of economic development governance policy emanating from the centre. In the next two and half years, LEPs might decide that their shared concerns and interests would be better articulated in a collective and proactive way. This is especially the case if the current government’s predilection for the ‘deal-making’ of “asks” and “offers” continues to shape centre-local relations in England.

A version of this piece was originally posted on the CURDS blog.  

Wednesday, 27 March 2013

Housing – and more than housing: what a bad budget!

Posted by Paul Cheshire, SERC and LSE

The British housing market, especially the English housing market, is in crisis. This is not a crisis just confined to housing: it threatens to extend to the whole economy. We have analysed these issues on this blog several times before. The supply elasticity of new housing is approaching zero. In each of the last three years fewer private market houses have been built than in any peacetime year since
early in the 20th Century. 

The noose constraining new housing development has been tightening for 30 years at least. The cause is mainly the constraints on land supply imposed by our planning system. But these are made worse by the way the planning system injects risk and uncertainty into development, reinforcing the monopoly power of larger British developers (only born and bred British developers can understand the system and only big ones really have the resources to negotiate a way through it), and by a fiscal system which still effectively fines local communities who permit development.

As I argued in 2009 this results in housing becoming ever less affordable relative to incomes, and to ever increasing price volatility. In turn, this creates problems for monetary policy. It also fuels an obsession with house prices, and sucks savings into housing consumption and speculation. Not getting onto the housing ladder is a long term disaster for someone who aspires to a decent standard of living and at least a moderately comfortable old age. Given that housing demand is highly income-elastic, and - as Nick Boles has perceptively observed - as people get richer they aspire to a patch of garden too and the fact that over the past 60 years, real house prices in England have risen more than almost any other asset, it is entirely rational for people to pour money into housing.

That does not make it good for us collectively to behave like this. It is very bad news for people who end up spending too high a fraction of their incomes on the mostcramped housing in the developed world. It is also bad for the performance of the real economy. Over-borrowing to get into the housing market was a major cause of the financial crisis; our housing obsession also almost certainly diverts both funds and the willingness to take a risk from productive entrepreneurial activity.

To illustrate with a personal anecdote: my wife – also an academic - held a chair in Switzerland and so bought a flat there in 1994. Having returned to a chair in London she sold this flat in 2012 for exactly the same number of Swiss Francs she paid in 1994. But while this was the same number of Swiss Francs, converted into pounds Sterling it represented a capital gain of some 50%. The Franc’s appreciation is not hard evidence - but certainly suggestive of a causal relationship. Real house prices in Switzerland have been stable at least since the 1960s (of course there is a cycle but there is no long term upward trend) so the Swiss feel little pressure to be owner occupiers and do not divert all their available funds and credit into buying houses. The Swiss economy has been similarly stable and hasn’t it done well?

Since 2010 the coalition has been trying to make the planning system more responsive to market signals, and give local communities incentives to allow development. As colleagues suggested at the time, it was a mistake to get rid of one planning system without having another in place. The new planning policies and incentives may help to deliver more houses but even if they do it will certainly take time. Well under half of local authorities even have local plans approved yet – a requirement of the new National Planning Policy Framework which goes live today. NIMBY resistance to allowing housing to be built where there is most demand is as strong as ever The last thing a home-owner in the green Home Counties wants is new houses occupying any rolling acres near them. Note the outrage caused by the Planning Minister when he suggested it is reasonable for those lucky enough already to have a patch of garden, not determinedly to frustrate the desires of those seeking a patch of garden of their own

 As colleagues and I have argued before the balance of our judgement is that the coalition’s changes will fall far short of what is really needed to improve things on the supply side.  But it will be at least another four years before we can judge whether the politically costly reforms of the past two years will actually deliver any improvement anyway.

Which brings me to the budget: this is pumping up the demand side and encouraging more borrowing. As Robert Peston and others have noted, the government (that’s us) are shouldering a risk banks have sensibly been fighting shy of. There has to be a significant risk that house prices have further to fall. The budget measures will feed through into house prices higher than they otherwise would be: indeed that is more or less all they will do. Supply is, after all, more or less perfectly inelastic for the reasons given above. We have shaken up a broken planning system but not yet achieved any improvement.

Higher house prices will lead to housing becoming yet more unaffordable, and yet more borrowing secured against highly volatile assets – which policy itself has made yet more volatile. In the long term, house prices tend to rise in real terms. But in the short term, this debt still has to be serviced – while incomes are stagnant, and interest rates will be rising.

All in all a recipe for double disaster: a terrible housing situation made worse and a serious additional risk in the offing. Perhaps the only explanation is the very cynical one. The election is even closer than the economic disaster to which this budget may contribute. Let the next Chancellor get out of that one!

Friday, 22 March 2013

QE: the next bubble?

Posted by Christian Hilber and Paul Cheshire, SERC and LSE

QuantitativeEasing (QE) has been pursued by Central Banks in many countries, few more diligently than in the US and in the UK. Reports from experienced watchers of commercial real estate suggest this could generate a flood of cheap money – not into productive investment but into the higher yields offered by commercial real estate or its liquid versions, Real Estate Investment Trusts. This is because QE pushes yields on bonds and securities ever further below the rate of inflation. Such shifts are already said to be visible in the US where the economy is doing just a bit better than in the UK or Europe. Of course this pushes down yields in real estate in proportion to pushing up market values. According to the FT (£) there could already be signs of this in London.

If investors really believe this low-inflation, low-interest environment is permanent, QE could well trigger yet another financial bubble. The problem is that such touted permanent changes in underlying economic relationships seldom are. Parallels are the supposed ‘step change in productivity growth’ that fuelled the late-1990s IT bubble or the low real interest rates of the 2000s that created irrational exuberance in some US mortgage and housing markets. The difference is that this time, rather than being driven by cheap funding, investment in real estate equity is driven by QE.

The question is: what happens when Central Banks roll back QE in two or three years, and money becomes more expensive? It could trigger a bust in commercial real estate markets because the real economy does not look as if it is going to be driving up rents any time soon. In turn, that could damage balance sheets of real estate companies – and of banks who have lent out the funds in search for a return. What then?

At the moment these are just the observations of well-informed insiders and some straws in the wind. But if this is really happening, then the consequences would be unpleasant indeed. Not a double dip, not a triple dip, but a triple dip recession followed by a financial crisis caused by the attempts to kick start the economy from the first financial crisis. Maybe Central Banks should turn some attention to evaluating the evidence: where are the funds going? What is happening to real estate yields? Are any changes observed in these justified by fundamentals in the economy or are they another bubble in the making?

Thursday, 21 March 2013

Budget: Housing and Heseltine

I haven't had much chance to take in the details of the budget. Two big issues in the area of spatial economics.


The decision to guarantee mortgages was the big surprise. There seem to be lots of people worrying that this might push up property prices. This is odd, because as a demand side measure it will only work if it increases property prices. OK, that's not quite true. Higher volume of sales of existing houses at current prices create more work for estate agents etc and more stamp duty for the Treasury. In growth terms, the first factor is of negligible importance. The fiscal benefits of the second will, presumably, be more than offset by the costs of the scheme. It might also allow house builders to sell some of the new build they have stuck on the books (if mortgage finance is an issue). Good for home builders profits (and share prices have risen accordingly) but no growth impact. In short, any growth impact can only come from increased supply. Easing financial constraints on home builders as a result of increased profits may have a marginal effect on this, but the big impact comes from higher house prices which make stalled deals viable and encourage developers to make new deals.

Does this do anything for affordability? The long run supply problems in this country stem from the planning system, not the system of mortgage finance so moderate short term increases in supply while good for growth won't affect affordability. The scheme could improve affordability for some buyers, but only if it favours some buyers over others. If it applies to everyone equally, then everyone gets hit by the general rise in prices and the main effect is in terms of tenure - slightly more people own, slightly less people rent.

In short, if the chancellor wants this to have any growth effects he better cross his fingers and 'hope' for price rises. I can't see it doing anything much for affordability.


The other 'big' announcement was around the implementation of Heseltine and the single pot for Local Authorities. I wasn't particularly convinced by aspects of Heseltine when first announced - in particular the idea of a competition which had Local Authorities bidding to some challenge fund with a commission of the great and the good deciding on how much they got. I also didn't like the suggestion that Local Authorities would act as delivery agents for bold national industrial strategies.The government's response appears to recognise both these problems and is proposing a process of negotiation (along the lines of city deals) while retaining some competitive element because there will be a fixed budget for the negotiation process to allocate. People will complain, but this feels like a considerably better process than might have been. Of course, details of how the money are allocated are probably of second order relative to the size of the pot. Here, the government response is bound to disappoint. At the moment the suggestion is this will involve transport, housing and some elements of the skills budget. LAs might reasonably respond that they already have control over a fairly large chunk of this. I don't expect them to be happy. At the same time, parts of central government appear to have fought a pretty hard battle against devolving expenditures - particularly in the area of skills and business support. Where they have lost those battles, central government might not be that happy either.

In short, I suspect the response to Heseltine's proposals on the single pot please no one. Standard HMT operating position, the cynics might say. But on this occasion, given issues of capacity and accountability on one side and strong opposition on the other, perhaps that's not the worst outcome. Regardless, my overall assessment would be that the response is interesting, but marginal rather than radical.

Friday, 15 March 2013

Want to live somewhere nice? Be ready to work longer

Posted by Teresa Schlueter, LSE and SERC

Everyone knows that both wages and the cost of living vary a great deal across the UK. There’s a lively debate about this, not least rows about benefit cuts and the 'bedroom tax'. Many commentators think workers on low or moderate incomes living in high price areas face an affordability problem. Others argue that these areas are more desirable places to live, workers might face lower real wages - but get better amenities in return.

These debates miss some important questions. For example, what’s the effect of real wage differences on the hours people work? To get by, poorer workers in high-price areas might have to work longer hours than similar workers in cheaper places. Alternatively, high-income people in high-price areas might trade off cash for leisure time. Understanding these choices helps policymakers understand just how ‘liveable’ some cities are.  

In a recently published SERC Discussion Paper I study the effects of differences in the regional real wage on labour supply. I use information on individual workers who move across different labour market areas, which allows me to see how working hours change when people change address.

Regional differences in working hours are quite substantial: in North West Devon the average is 31 hours per week, whereas people in Rugby work about 4 hours more per week. Similarly, the share of part-time workers in the workforce ranges from 23.4 % in Newbury to 44.7 % in North West Devon.

I then test the connection between real wages and working time, using a real wage index calculated by Steve Gibbons, Henry Overman and Guilherme Resende. I find that workers who move to lower real wage areas increase their working time: a 1000 Pound change in the annual real wage puts about 10 minutes on the working week. 

I also find that workers in nicer places put in more hours, not less. Attributes that make an area a nicer place to live (e.g. sunshine duration) increase working hours whereas attributes that make an area a less nice place to live (e.g. a lot of rain fall) decrease working hours.

As you would expect, these links matter more for lower skilled workers (who are likely to earn less). A low skilled worker who moves to an area with low real wage increases his working hours by about 0.5 % more than a high skilled worker. Low skilled workers work up to one hour longer per week than high skilled workers when moving from the highest to the lowest real wage labour market.

All of which suggests affordability is the key consideration for people living in high-cost cities. High-skilled workers pay for amenities in monetary terms only, low skilled workers who have generally lower incomes also “pay” by reducing their leisure time.

Tuesday, 12 March 2013

Linking cities and entrepreneurship

Posted by Dr Olmo Silva, SERC and LSE

Since the writings of Marshall and Schumpeter around a hundred years ago, entrepreneurs are considered a crucial ‘ingredient’ in promoting and sustaining economic growth. Paradoxically, the link between local entrepreneurship and economic dynamism is even more pronounced in today’s highly globalized world – dense local clusters of entrepreneurship are the real powerhouses of local modern economies, capable of leveraging knowledge spillovers and agglomeration forces to produce the ‘next big thing’ and project it into a global reach.

Despite its crucial importance to policy making and a deeper understanding of the functioning of our economic activities, relatively little economics research has focused on measuring and modeling entrepreneurship, and not enough is known about what role entrepreneurs play in fostering agglomeration and urban economies. 

Increasing our understanding of this crucial issue is the aim of a new network which looks to bring the ‘entrepreneur’ into urban and spatial economics.

A first workshop took place at the University of Stirling a few weeks ago. The local organizers were Stephan Heblich (one of our SERC affiliates) and George Panos. With the help of Stephan and George, we managed to put together a gathering of academics working on the economics of entrepreneurship, policy makers and local small-business entrepreneurs. 

During our first meeting, we heard a number of interesting pieces on the actual importance of entrepreneurs for the functioning and performance of their business; on the role of risk aversion in determining who chooses to be an entrepreneur and when; and on the role of entrepreneurial education.

The debate that followed revealed once again how little we know about these issues. Although entrepreneurs are clearly important and capable of taking on more risk, we have little evidence that education can really make random individuals more entrepreneurial and more risk-tolerant.

Fortunately, the entrepreneurs attending the meeting brought to the table some very interesting and somewhat more practical remarks: though we all agree it’s hard to make people entrepreneurial, we can set in place the conditions that ‘unleash’ the most entrepreneurial spirits. Surprisingly, credit availability was barely mentioned. What seems important instead is a tight network of other entrepreneurs with whom to share ideas, expertise, and information about market opportunities, needed inputs and motivated workers looking for job opportunities. That is, entrepreneurs really seem to benefit from being in a highly agglomerated urban environment. 

To sum up, it is definitely time to bring back entrepreneurship back from the cold and into our research on clustering and agglomeration economies. This is what this network aims to do.

We are hoping to organize another meeting in 2013 and two more in 2014. If you want to be kept in the loop, simply let me know by dropping me an email!

Thursday, 7 March 2013

What Works Centre for Local Economic Growth

I wrote yesterday about the problem with Portas Pilots, arguing that the way the scheme was implemented will make it almost impossible to figure out whether the projects actually have an impact. This is just one example of a more general failure - government is often very bad at generating convincing evaluation evidence and (arguably) even worse at using that evidence to inform policy making. Could a NICE for social policy help fix this? It appears that we may be about to find out as the government has announced the establishment of four 'What Works centres' covering the areas of crime, ageing, early intervention and local economic growth.

The main task of these independent centres will be to undertake a systematic review of existing evidence to "produce a sound, accurate, clear and actionable synthesis of the global evidence base which:
  • ranks interventions on the basis of effectiveness and cost effectiveness
  • shows applicability
  • shows the relative cost of interventions
  • shows the strength of evidence on the agreed scale."
That is clearly going to be a massive challenge as our recent work for the National Audit Office reveals. In that report (to be published soon) we assessed the quality of a selection of government evaluation reports. Overall, we concluded that the reports that we looked at in the areas of business support and spatial policy (those that would be covered by the what works centre) were arguably not fit for purpose. We would be very wary about drawing any conclusions on the cost effectiveness of government interventions from these reports.

That said, there are some government evaluations and academic studies out there that would provide more convincing evidence. Presumably the What Works centre would rank these as of high quality and the others of (very) low quality and that would help local policy makers, right?

The problem, of course, is that the less careful the study the greater is the tendency to find big positive impacts of the policy. In contrast, more careful studies tend to have a hard time detecting much impact. In fact, for the NAO study, it appears that the correlation between these two attributes (quality of the study and claims about impact) was depressingly negative. When you take this kind of evidence to local government I am very worried that there will be a tendency to ignore the quality ranking and focus on the impact ranking. After all, evaluation is hard, and even well trained central government analysts, who should know better, are willing to claim that the robust evaluation of spatial policies (e.g. that would score high on the Maryland scale) is not possible. Those concerns multiply once you get to politicians (either local or national) particularly if the convincing evidence is overwhelmingly negative on policies that government seem determined to introduce. Just look at Enterprise Zones.

Does all of this mean we shouldn't even try? Of course not. Indeed, it's good to see the government and ESRC investing money in these new centres. And, it should go without saying, in many policy areas Britain is already streets ahead of other countries in terms of the role that evidence plays in policy formation. But embedding the use of evidence in the development of local economic growth policy is certainly going to be a challenging task for whoever picks up the baton ...