Monday, 17 April 2017

The impact of EU development funds in poorer UK regions and the prospect of Brexit

Posted by Marco Di Cataldo, LSE 

This is an updated version, originally posted on here on EUROPP.

Brexit means that UK regions would no longer be entitled to receive EU Structural Funds. Have EU funds been effective, and what might be the consequences of an interruption of EU financial support to British regions?

Recent empirical research (Di Cataldo, 2017) has looked at the economic evolution of two UK regions, Cornwall and South Yorkshire, recipients of EU Regional Policy for ‘less developed regions’ - the highest form of EU aid. 

Figure 1: EU classification of ‘less developed regions’ in the UK, 1994-2020
Shaded areas: less developed regions 
In order to single out the effects of the EU funds in the two regions, 1992-2014 regional trends of unemployment in Cornwall and South Yorkshire are compared to those of ‘counterfactual regions’ being similar in all characteristics to Cornwall or South Yorkshire except for not having being eligible to obtain the same proportion of EU Structural Funds.

The results provide clear evidence of a significant impact of EU grants in reducing unemployment. Over the fifteen analysed years in which Cornwall has been in receipt of EU funds, the proportion of unemployed people has been consistently and significantly lower than in the counterfactual comparison. In Cornwall unemployment has declined by 30 percent more than the counterfactual region. The empirical analysis makes sure that this effect is driven by EU funds and not by other potentially confounding policies.

Figure 2: unemployment in Cornwall and counterfactual region, 1992-2014 



Unlike Cornwall, South Yorkshire has been categorised as a ‘less developed region’ only for seven years. Its improved economic conditions relative to the EU average entailed that in 2006 the region lost the status of area in highest need of help and the proportion of available grants reduced substantially.

Has this change in eligibility affected the region? The evidence unveils that all the labour market improvements achieved in the period of highest financial support – certified by a lower unemployment relative to the counterfactual during 2000-2006 – are completely offset when eligibility for EU grants as ‘less developed region’ is lost. As shown in the figure below, after 2006 South Yorkshire’s unemployment trend gradually went back to the one it would have had in absence of EU funds.

Figure 3: unemployment in South Yorkshire and counterfactual region, 1992-2014


The study also indicates that the per capita GDP in the two regions follows similar trajectories to those observed for unemployment. Both regions converge to higher levels of income while being considered ‘less developed’ by the EU, however this trend is reverted in South Yorkshire when its GDP overcomes the 75 threshold and the region can no longer benefit from the highest form of EU aid.

Figure 4: GDP per capita in treated and counterfactual region, 1995-2014

Cornwall

South Yorkshire



Hence, while EU funds can have a positive impact on the creation of jobs and the promotion of regional economic growth, these outcomes may not be persistent and long-lasting, rather they may quickly disappear after the end of the high-intensity funding period.

These findings should foster a careful reflection over the future of poorer UK regions in the event of an imminent exit of the country from the EU. Losing the possibility to access EU Structural Funds is likely to expose the economy of less developed UK regions to potential adverse effects. A region like Cornwall, which has benefitted from EU regional development policies for a long period of time, faces the highest risks. In this sense, the experience of South Yorkshire may represent a valuable lesson; losing eligibility for the highest form of EU financial support can produce a short-term shock, and the labour market and economy can continue to struggle in the medium-term.

While European regions losing the status of ‘less developed’ are always entitled to receive a form of transitional funding from the EU, Cornwall would not be eligible for this stream of funding in case of Brexit. Hence, the loss of EU subsidies may be more likely to produce negative consequences on its economy if the UK national Government does not put in place any compensatory policy supporting its transition in funding environment. These potential repercussions apply not only to Cornwall but also to all economically disadvantaged regions dependent on EU aid, such as West Wales and The Valleys, the other UK ‘less developed region’ at the time of the Brexit vote.

References 
Di Cataldo, M. (2017). The impact of EU Objective 1 funds on regional development: Evidence from the UK and the prospect of Brexit, Journal of Regional Science, forthcoming. DOI: 10.1111/jors.12337


Friday, 7 April 2017

Airports and Economic Performance in China

New evidence on the impact of airport infrastructure on productivity in China


Airport construction or expansion is often proposed as a policy lever to boost cities, regions and national economies worldwide – although this case is not clear cut as some well publicized ‘white elephants’ and the recent debate over expansion of London’s airports testify. But it is in large developing countries with poor road and rail infrastructure that air transport might offer the greatest potential benefits, providing a way to bridge large distances at relatively low fixed initial costs. In these settings, airports are often built and expanded with the explicit aim of improving connections to peripheral areas, stimulating economic activity in these areas and reducing inter-area disparities (World Bank 2013). However, despite this policy enthusiasm there is relatively little solid evidence that the opening of airports and expansion of airport capacity really stimulates economic development, and none in the context of developing countries.

In our recent study (Gibbons and Wu, 2017) , we provide new evidence to answer this question, focusing on the rapid expansion of the airport network in China over the first decade of this century. China provides an ideal setting for this investigation, with around 60 new civil airports opening over the decade accompanied by a massive expansion in air transportation (See Fig 1). Passenger numbers in China increased by around 13% per year after 2006, with 14% per year growth in domestic travel, many times faster than major developed economies. Air freight has also grown rapidly, with an 8-9% per year growth in freight tonne-kilometres. In our analysis, we link information on the opening of airports – mainly small regional airports – to firm level data on manufacturing firms and to county-level administrative data on other economic indicators. Using these data we estimate to what extent improvements in accessibility from these airport openings lead to higher productivity and GDP.
Figure 1: Airports in China up to 2009


Our key finding is that implied travel time reductions and consequent improvements in access to domestic markets boosted industrial productivity and GDP in areas affected by the opening of new airports. The effects are substantial, with a 10% increase in access stimulating industrial output by around 2.5%. Most of this impact comes from the fact that a new airport reduces land-side journey times for places nearby, highlighting the obvious but overlooked fact that the accessibility of airports on the land side is the key factor that should guide airport location decisions. These gains in the industrial sector are presumably attributable to cost reductions in business travel and air freight transport and associated ‘agglomeration’ economies, but we lack data to confirm the exact channels.

The productivity impacts are more pronounced in privately owned firms in high population, lower educated counties. We find no effects on employment or wages, but some effects on fixed asset investment, hinting that these productivity changes have largely benefited capital owners. We do not find any clear effects in the service sector, which runs counter to common assumptions and evidence about the role of air transport in business dealings in finance and other services in developed countries (Sheard 2014, Airports Commission 2015).

An important feature of our research design is that we focus on the implied travel time reductions and the way these change population accessibility – using an index defined by the population that can be reached per unit of time. This index provides a proxy for access to markets of various types (labour markets, product markets, intermediate inputs, other businesses). The very large changes in accessibility by air generated by new airports in China are illustrated in Fig 2, for the 2006-2009 period (the scale of the changes is such that 0.10 means a 10% change).
Figure 2: Population accessibility changes due to airport construction 2006-2009




When it comes to estimation, we drill down specifically to the impacts on firms in counties which are some way from a new airport, but ‘incidentally’ experience travel time reductions because the new airport is closer than their previous nearest. This aspect of the design brings various advantages. It means that we are comparing places experiencing large access improvements with similar neighbouring places experiencing smaller or zero access changes. It reduces the risks of us finding correlations between airports and economic performance that come about because new airports have been targeted at growing or declining places. It also means we can infer the productivity benefits of the travel time reductions, rather than changes in local economic activity directly generated by airport operations. All previous research on airports has looked at the combined effects of the local economic activity created by operating an airport and any impacts coming about through travel time and trade cost reductions. Doing so can be misleading, because much of the employment associated with airport operations should properly be considered in terms of the opportunity cost, not as an economic benefit – despite the common policy rhetoric of ‘job creation’ from this type of infrastructure investment.  

Based on this evidence, airport construction policy in China has been successful in boosting local growth in the manufacturing sector. Extrapolating our estimates to the national level, the 35% increase in market access generated by airport network expansion over our study period implies an 8% increase in industrial output. The overall gain in industrial output in this period was 210%, so airports could explain a small but non-trivial proportion of aggregate growth. Some of the increases we observe may represent displacement and sorting of activity between high and low access places, although our estimates are based on within-industry changes, are conditional on employment and capital inputs, and we see no corresponding changes in employment. These facts suggest that our findings are more likely attributable to firm-level productivity improvements.

Generalising these findings to other contexts is always risky and it would be very bold to claim similar gains from expanding Heathrow! We have also said nothing about the environmental costs. But air transport infrastructure clearly has an important part to play in large rapidly developing economies, such as China, where distances are vast and manufacturing plays a dominant role.

Authors:

Stephen Gibbons is a Professor of Economic Geography at the London School of Economics and Political Science (LSE), and the Director of Spatial Economics Research Center  and Centre for Economic Performance Urban and Spatial Programme

Wenjie Wu is an Associate Professor in the Urban Institute, Heriot-Watt University, Edinburgh, UK, and a research affiliate in LSE’s Spatial Economics Research Center [Centre for Economic Performance(CEP)’s urban and spatial programme].

References

Airports Commission (2015) Airports Commission: Final Report. London, July

Gibbons, S. and W. Wu (2017) "Airports, Market Access and Local Economic Performance: Evidence from China", Spatial Economics Research Centre/Centre for Economic Performance Discussion Paper SERCDP0211

Sheard, N. (2014) “Airports and Urban Sectoral Employment”, Journal of Urban Economics, 80, 133– 152.

World Bank. (2013) World Bank Transport Business Strategy 2008-2012, Washington DC.

Friday, 10 March 2017

What should we do to help make our economy work for everyone?

Posted by Henry G. Overman (SERC, LSE and What Works Centre for Local Economic Growth)

The report of the Inclusive Growth Commission, published earlier this week, asks an incredibly important question: What should we do to help make our economy work for everyone?

Despite being one of the Commissioners, I should confess up front that I don’t share the reports certainty in terms of specific policy reforms that would work.

Some I like a lot, at least at the broader level. I support the general argument that the UK remains overly centralised and that further devolution could include some aspects of social policy. I like some of the detailed recommendations around using a small basket of indicators to measure ‘quality GVA’ – although more for the focus on distributional impacts than the proposed re-labelling. I’d like to see greater consideration given to these indicators in policy development and investment prioritisation. I also quite like the idea of a UK Inclusive Growth Investment Fund incorporating repatriated European Structural and Investment Funds (ESIF) – although I’d want to see that sit alongside a more traditional fund, as well as a non-ring fenced needs-based allocation to local areas.

I flat out disagree with some of the other recommendations. I’m very wary about place-based industrial strategies. Particularly if they involve ‘sectoral coalitions’, local jobs for local people or public procurement procedures that emphasise local purchasing over transparency or value for money. I also remain to be convinced on regional banks.

This list is far from exhaustive, and people that are familiar with my thinking can probably guess which of the remaining recommendations fit in which camp. But, for me, none of this matters relative to the importance of three central messages that emerge from the report.

First, as Stephanie Flanders' introduction puts it: “we need to do a better job of measuring what counts”. As the report argues: “Traditional metrics of economic performance, such as GDP or at a regional level GVA, are a poor guide to social and economic welfare. They also do not tell us anything about how the opportunities and benefits of growth are distributed across different spatial areas and social or income groups.” For me, it is the second part of this argument that is absolutely crucial. I am fed up with seeing arguments for (e.g.) ‘high-tech’ strategies for poorly performing places that don’t (and can’t) spell out how particular investments would ever benefit lower income households in the area.

Second, “investment in social infrastructure – including public health, early years support, skills and employment services – should go hand in hand with investment in physical infrastructure”. Back in 2008, the Manchester Independent Economic Review made a similar point. Right then, and right now.

Third, we need to “align social and economic policy around promoting inclusive growth”. Again, this is crucially important. For many parts of central and local government, the key policy interventions for delivering inclusive growth lie far outside the traditional remit of local economic growth policy.

Forget the details, it’s these three key messages that are central to developing policy that will help make the economy work for all.

[This post first appeared on the RSA Inclusive Growth Commission Blog]

Monday, 13 February 2017

Spot the Difference Housing White Paper: have we been here before or is this déjà vu?

Posted by Felipe Carozzi (SERC and LSE) & Paul Cheshire (SERC and LSE)


Given the severity of the housing crisis, the new Housing White Paper is a sad creature. Any policy announcement welcomed by the CPRE almost by definition signals throwing in the towel on the serious reform needed to build more houses. Its aspiration of building “many more houses, of the type people want to live in, in the places they want to live” would be most welcome, if it wasn’t an echo from down the ages.  We find an identical aspiration in every government publication since the Barker report of 2004. In 2008 the then National Housing and Planning Advice Unit issued advice on housing supply and argued: “we must increase housing supply, delivering the right number of new homes, of the right type, in the right place and at the right time”. This exact phrase was invented by one of us as a coded way of saying we needed to be willing to build on parts of the Green Belt!  If we go back a little further to the Green Paper of 2007 Homes for the future: more affordable, more sustainable, we find a whole section on “How we create places and homes that people want to live in?” Even the number of houses we need to build – 275000 a year – in the current White Paper is drawn for the Barker work. While previous proposals had no mechanism to deliver the ‘right’ homes in the ‘right’ places they did at least have a mechanism – albeit a dirigiste one – to get LAs to allocate more land for housing and set targets for house building. There was also some power to see the targets were more or less met.

The White Paper’s diagnosis of the problem is broadly correct – the affordability problem is caused by insufficient building. And the primary cause of this long term lack of building is restrictions on the supply of developable land. However, the White Paper’s claim that “The housing market in this country is broken, and the cause is very simple: for too long, we haven’t built enough homes” does get it the wrong way round: our lack of building is a symptom not a cause of a broken housing supply process. This supply process includes the planning system, local government finance and the monopolised structure of the development industry that these two broken systems have created.

We have a tax system that effectively fines local communities if they allow houses to be built as the increase in the number of households puts additional strains on local public services. That does not seem a good starting point. House building is then helped along by a planning system that is cumbersome, uncertain in its decision making and subject to political pressures and expediency. As a result, whether there is a local plan or not, developers can have no idea of the likelihood any application will succeed and even less idea as to the cost of the ‘planning obligations’ that will be imposed if it does. Then – above all – LAs are prevented from delivering enough land both by the religious exclusion of economic ideas in the system they use to determine how much land to supply and by direct restrictions in the form of Green Belts and heights on their ability to supply it. The paper’s repeated emphasis on upholding Green Belt boundaries bars the possibility of development in previously unbuilt areas. Likewise, little reference is made to new incentives for local planners to modify existing building height restrictions.

These are the fundamental causes of why we have consistently built too few houses over more than 40 years. And about these fundamental causes the White Paper proposes to do precisely nothing. Our estimates of the accumulated shortfall of house building between 1994 and 2012 were between 1.6 and 2.3 million. Since then we have built some 125 000 a year too few. So since 2012 we can add about 0.5 million to those numbers. And we have consistently built the wrong sort of houses in the wrong sort of places.

Among the White Paper’s ‘solutions’ are more local plans – but these plans are very fallible guides to actual decisions about actual proposals. They are often overridden by immediate political pressures and community lobbying, and hence are at best only weakly enforced. We need a ‘rule-based’ system, such as a Master Planning or Zoning system. Indeed, we already have one element in the house building process that successfully works in that way: Building Regulations. Then, the White Paper claims bringing forward more brownfield sites and better use of public land will solve the land supply problem. Well, we have been saying the same things about brownfield and public land since the late 1990s and have excellent data on both (see example here). As we have consistently argued this cannot solve the problem; nor will it. Too much of the brownfield land is in the wrong places or too expensive to build on sensibly. And anyway there is far too little to catalyse the real competition between sellers needed in land markets.

A standardised system of forecasting local housing ‘need’ might conceivably help to address the coordination problem implicit in local authorities free riding on each other. But the real problem with our system for deciding how much land to supply is that prices are determined by the interaction of supply not with need, but with demand and demand is largely driven by income. The number of households – even if accurately forecast – which is not possible given that the numbers of households in a LA are themselves determined by the relative price of houses  does not much affect demand, so it has surprisingly little influence on price. Indeed a LA can always price households out of its area and so have no unmet ‘need’ at the observed price of housing. Moreover, close reading of the White Paper reveals the proposal to standardise the method LAs use to forecast housing need is not in fact a proposal. It is a proposal to consult about a proposal. Any actual change would require a consultation period, a review period and then bringing forward changes in legislation. And then finally rolling out these changes and implementing them successfully at the local level. There is little hope any actual changes could be in place in even the medium term, even if having a standardised method to forecast need would help: which it would not!

This White Paper emphatically represents yet another missed opportunity. Not a single proposal will have any measurable impact on the supply of houses by 2020 and most will never have an impact. There are a few useful suggestions. The Housing Infrastructure Fund is welcome and could make a difference. But that was announced some time ago and the more sceptical of us would want to examine the books very closely to satisfy ourselves it really was new money. A provision for New Town Corporations might help. But again this is for thought not action. Taking steps to improve the transparency of ownership of land and of options to develop it is a good idea: but again it is not action, only possible action. And, of course, the need for it is only because the shortage of building land is so acute that land prices are now so high they financially justify the complicated legal and financial shenanigans such options on options on land represent. One thing is totally clear, however; they represent a deadweight loss to us all.

The fundamental problems with housing remain the same as in the last fifteen years and of those the most fundamental is the lack of land for development. Only fundamental reforms of our housing supply process will help and this proposes none. Indeed it in some ways goes backwards. It goes from a set of (not very good) mechanisms delivered in 2007 with the Regional Spatial Strategies to a set of aspirational gestures. Frankly the Secretary of State could build more houses with a magic wand.


Friday, 20 January 2017

Can a new generation of political leaders tackle Britain’s regional inequalities?

A guest post by Stephen Clarke of the Resolution Foundation


2017 will see the UK begin its departure from the European Union. However, as the UK seeks to shed some politicians in Brussels, we will be getting some new ones at home. Greater Manchester, Liverpool, Tees, West Midlands, Bristol and Bath, and Cambridgeshire and Peterborough will all go to the polls to elect mayors and will gain new powers over transport, housing, business support and skills.

Unfortunately last week it was reported that the Sheffield City Region would miss out. That’s a concern as new research by the Resolution Foundation shows that the area has some pretty fundamental living standards challenges that need to be addressed. Our analysis find that the city region is the low pay capital of Britain – with typical workers earn £43 less a week than the UK average. The region desperately needs to get devolution back on track.

Sheffield may be the low pay capital, but the problem of low pay affects the vast majority of cities in the Midlands and the North of Britain. It is well known that country’s economy is skewed towards London and the South East but the chart below emphasises this. Gross hourly pay was 36 per cent higher in inner London compared to the UK average between 2012 and 2016, whereas it was 13 per cent below the average in the Sheffield City Region.



Note: Difference in gross hourly pay is calculated as an average of the years 2012-2016 using data from the Labour Force Survey. Multiple years were rolled together to provide enough observations to estimate the differential in a regression model. East Anglia and South West contain the devolved areas of Bristol and Bath and Cambridge and Peterborough. 

What accounts for the pay penalty experienced by Sheffield and other areas outside of the South East? Partly it reflects the fact that these areas tend to have a greater proportion of employees who are paid less (part-time workers, those on Zero Hours Contracts, etc) and a greater share of firms that pay less (those in the retail and hospitality sectors for instance). However it is also true that like-for-like workers earn less in these areas than in the rest of the country. In essence there is both a compositional and a productivity problem.

To estimate how important each of these factors are we ran a series of regression models in which we estimate the difference in gross hourly pay between workers in these areas and those in the rest of the UK controlling for a range of job, workplace and personal characteristics. We find that in all the areas above pay gaps remain even when we compare like-for-like workers. This ‘residual’ reflects differences in productivity and other factors that we cannot directly measure. The relative importance of the two factors is given for each region in the chart below.



Note: Analysis carried out using the Labour Force Survey, full details of models can be found in Annex 3 of our paper, available here

In all areas compositional and residual factors play a part, however there are differences in the relative importance of the two. Outer London does have more high paying firms and higher paid employees, but higher productivity seems to play a bigger role in this area. In Sheffield, compositional differences and lower productivity each play an equal part.

Productivity is particularly low in the Sheffield City Region. In fact it is the lowest of any major city. The chart below shows how much each sector in the Sheffield City Region contributes to this productivity deficit:



The retail, manufacturing and office admin sectors are all large employers in the region and correspondingly all significantly contribute to the region’s productivity deficit. Education is the only sector that meaningfully raises the productivity of the region compared to the rest of England.

The scale of the challenge facing the South Yorkshire region is clear. This challenge is just as much a task for national politicians as it is one for local leaders. Nevertheless devolution would have bolstered the chances of local leaders starting to get to grips with it. Despite the limited powers on offer, devolution does provide greater control over how the scarce resources available for economic support are spent. An effective mayor also provides a figurehead who can convene large employers and key businesses. Changes to transport and housing can make an area more attractive to firms and high skilled workers.

It remains to be seen if the six regions that are going to the polls this May will use these new powers effectively. What is certain is that South Yorkshire will not – yet – get the chance to.