The focus on abstract economic stats during the EU vote fed a sense that the Remain camp was out of touch. We need a rethink.

A few months before Britain voted to leave the European Union, a debate took place in Newcastle. A professor from King’s College London had travelled to the area to discuss the economic impact of the vote to leave the EU.

He began to discuss estimates of the likely falls in gross domestic product (GDP), were the UK to leave the EU, when (as we have already heard) a woman stood up in the crowd and yelled ‘that’s your bloody GDP, not ours’.

And she had a point. The UK is now the most regionally unequal country in Europe, measured according to economic output. Aggregate metrics like GDP disguise this variety and paint a portrait of uniform growth across the country. But this couldn’t be further from the truth.

In the period since the financial crisis, London’s economy has grown at a rate of around 3% per year, while the north east has grown by less than 1% per year. All the UK’s other regions have been growing at a rate of between 1% and 2%, so the gap between London and the regions is continuously widening. Unemployment currently stands at 4.3% in the north east, compared with just 3.7% in the south east, and people in the north east are paid £150 less per week than those in London.

None of these figures are visible when one focuses on GDP, yet we continue to discuss the impact of Brexit in terms of the effect it is expected to have on aggregate economic growth.

It’s about geography

The tyranny of averages doesn’t just prevent us from understanding the effects of the vote to leave the EU, it also prevents us from coming to terms with the underlying drivers.

The vote to leave the EU was heavily influenced by geography. The Remain vote was strongest in London, where 60% people voted Remain: in areas such as Lambeth, the figure was as high as 80%. Greater Manchester also voted Remain. But all the other English regions voted Leave: in the north east, the west Midlands, and Yorkshire and the Humber almost 60% people voted Leave.

The mainstream narrative on the geographic pattern of voting is that the ‘cosmopolitan’ cities voted for openness, tolerance and diversity, while the more traditional, ‘backward’ towns and rural areas voted for xenophobia and nationalism. These sociological explanations cannot be dismissed – England’s cities are far younger and more diverse than its towns and rural areas, so social attitudes differ strongly between them.

But the economic differences between different parts of the country, and the sense of disenfranchisement that this engenders, is arguably more important.

Left behind

Ever since the Second World War, the UK’s regions have been left behind as the UK’s financial centre has torn away from the rest of the economy. Between 1951 and 1971, the gap in economic output between London and the south east on the one hand, and the north on the other, almost doubled.

More recently, between 1998 and 2007, economic output in England’s regions grew around 2–3% per year, while output in London grew at a rate of over 4% per year. These differential growth rates compounded year on year to make the UK the most regionally unequal country in Europe.

Some argue that this disparity in growth is an inevitable outcome of globalisation. The UK’s comparative advantage has shifted over the past century from mining to heavy industry, light industry and now services – particularly financial services.

As the UK has become more integrated into the global economy, those regions which host industries in which the UK has a comparative advantage have grown, while traditional industries have been outcompeted by competition from abroad. The natural result has been a shift of economic activity away from the UK’s regions and towards its cities.

But this narrative takes as given factors that are the outcome of political decisions. Globalisation is not an inevitable, natural transformation, but a political process heavily influenced by policy decisions made by the powerful.

There is nothing ‘natural’ about this geographical pattern of economic success. Other countries and regions have responded to changes in the global economy and seen very different results.

Finance dominates

The reason that the UK has developed such a severe regional problem is that policy makers in Westminster have consistently privileged the interests of finance and related services in London and the south east, over those of troublesome, unionised sectors in the regions.

In the 1950s and 1960s, sterling was pegged to the dollar at an unsustainably high rate, damaging our exporters even as global trade increased dramatically. In the 1980s, when the system of exchange rate pegging had collapsed, controls on capital mobility were removed entirely and our financial system heavily deregulated.

The ‘financialisation’ of the British growth model since then has led to the emergence of a financial ‘Dutch disease’, in which capital inflows sustain an overvalued currency that negatively impacts other economic sectors, and therefore regions where finance is less significant.

Between 1970 and 2008, finance and business services grew from 16% to 32%, while manufacturing shrunk from 32% to 12%. As finance has grown, so has the share of financial activity taking place in London. In 1971, the south of the UK had 56% of the share of financial and business services output; by 2008, this figure had reached almost 70%.

What ‘rebalancing’ should look like

The net result has been a widely shared sense that economic growth in the UK no longer benefits everyone: people in the north east are perfectly justified in saying to those in London ‘that’s your bloody GDP, not ours’. Dealing with the unbalanced nature of economic growth in the UK should be a national priority.

The Labour Party’s recent commitment to support the UK’s manufacturers through a green industrial strategy is a step in the right direction. But it will also be important to take steps to curb the power of finance.

As I recently argued in a paper for the Institute for Public Policy Research (IPPR), this will require implementing measures to reduce capital mobility, increasing taxes on the finance industry, and improving regulation.

As the UK leaves the EU we have a choice as to what kind of economy we want to build; de-financialising the British growth model is the only way to create a sustainable, prosperous and equal economy in the UK.

Grace Blakeley is a research fellow at the Institute for Public Policy Research. This piece is taken from Compass’ new report “The Causes and Cures of Brexit.” Read it here.

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