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Assessing the impact of shareholder primacy and value extraction: Performance and financial resilience in the FTSE350

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Image created by Kat Sloan via Canva based on Authors data. 

A new report by Professors Adam Leaver and Richard Murphy of Sheffield University Management School and Prof Colin Haslam and Dr Nick Tsitsianis of Queen Mary, University of London, examines the investment and productivity performance of large UK listed firms who make outsized distributions to their shareholders. This report builds on their earlier work (Baker et al 2020) which found a significant minority of large US based corporations made shareholder distributions in excess of their declared income earned over a ten year period.

Their project examines accounting information from 182 companies who were members of the FTSE 350 index in every year between 2009 to 2019. Those companies were ranked according to the ratio of paid out dividends and share buybacks to their declared net income attributable to shareholders over that period. They were then grouped into quintiles and the investment and productivity performance of those quintiles were then analysed.

The results show that the quintile with the highest distributions to net income ratio paid out on average 178 per cent of their net earnings over the decade reviewed. The next quintile distributed 88 per cent of their earnings, on average. Together these two quintiles represented 60 percent of the market value of the sample of 182 companies. In contrast, the lowest quintile distributed just 37 per cent of their earnings, on average, and represented 7 per cent of the sample by market value (Table 1).

   Source: Thomson Refintiv database

Zooming in on the highest distributing quintile, the project team sought to establish how those high distributors performed in terms of investment measured by capital expenditure per employee and productivity measured by sales and value added per employee. The research found that the highest distributors performed worst on real capex per employee growth and worst on sales and value added per employee growth.

Broadly similar trends were found over a number of other indicators. For example, average margins and average return on capital employed ratios were also lower for the highest distributing firms over the decade

At the same time the researchers note that those companies that distribute most or all of their earnings might also carry greater balance sheet risk. Gearing is a measure of the long-term debt of the company as a ratio to the shareholders’ funds invested in the entity. The more debt there is, the higher the risk in the company. In 2019 these ratios for the 182 companies surveyed were as follows, ranked by the same quintile groups:

It is generally accepted that the higher a company’s gearing ratio the risker its balance sheet is. This risk from borrowing is exacerbated if the funds that are borrowed support assets which are more speculative in nature. Goodwill is arguably the most significant speculative asset on many balance sheets because it is arguably more prone to impairments. Goodwill arises when one company takes over another and pays more for that company than the book value of their identifiable assets. The excess sum paid – or goodwill – represents the value of the exceptional cashflows that the acquiring group expects to make as a result of buying the enterprise. Impairment happens when it is decided that the valuation of goodwill can no longer be justified because the acquired company isn’t making the anticipated profits. The research undertaken shows that the highest distributing companies also have the highest amount of goodwill relative to shareholder equity, leaving them more exposed to impairment risks:

The consequence is that the companies with the highest dividend distributions are also those with the greatest risk of goodwill impairments. In 2019 the potential impact of goodwill impairments on net earnings and equity reserves in FTSE182 were as followed, using the same quintile rankings as in all other analysis:

35.7% of all companies in the sample face serious impairment risk and 15.4% of companies, would face the entire loss of their shareholder equity if their goodwill was to be written off as a result of impairment provisions. Both ratios are, as noted, much higher amongst the top group of distributing companies, suggesting that there is much greater risk in this group than the others surveyed.

The report then explores the variable performance of the top 20% of highest distributing firms more granularly, noting sectoral variations. It identifies particular weaknesses in large outsourcing firms, who distribute aggressively, have low levels of productivity growth, invest little, generate thin margins yet carry a lot of debt and goodwill.

A number of implications follow from the report. First, there is a sizeable minority of large UK firms who distribute more to shareholders than they generate in net income. This suggests a more financialized corporate world where financial engineering and creative accounting play an enlarged role. Second, there is a growing dislocation between the ‘firm identity’ of a company i.e. its social and technological activities and relations, and its ‘corporate identity’ i.e. its reporting and legal personality, with the latter being prioritised by some Boards to pay rewards in excess of those that the underlying entity appears capable of supporting . Third, if shareholder returns can be met from financial engineering and creative accounting practices, as this implies, this may divert corporate efforts towards representational rather than operational concerns, crowding out investment-led productivity-enhancing strategies. Fourth a closer examination of the outsourcing sector may be necessary to explore the extent of these practices and its relation to the UK’s productivity malaise, particularly when public procurement is estimated to account for 12-13% of UK GDP. And fifth, those seeking long term value in stock markets may need to be aware of these structural and behavioural differences which the research shows can exist between firms and sectors.

Read the full report here
Download the Interactive Index here

Financing productivity in the UK: Do sources of finance and geographical location matter?

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Image created by Kat Sloan via Canva.
By Sandra Lancheros,  Josh Cave, Chau Chu, Gladys Huaccha, Effie Kesidou, Annina Kaltenbrunner, Daniel Perez, Joel Rabinovich. (University of Leeds)

The long-standing poor productivity performance of the UK compared to other major economies, as well as the disproportionally wider productivity disparities across regions and nations within the UK, has placed productivity as a top priority in the UK government agenda in recent years. Such policy priority has been reflected in the 2017 Industrial Strategy and in the more recent 2021 Build Back Better plan for growth, which acknowledged that “productivity gains are the fundamental source of improvements in prosperity”.

A fundamental piece of the puzzle to boosting productivity at the local, regional, and national levels is to encourage private firms to undertake long-term productivity enhancing investments, such as research and development; innovations in new products and processes; staff training; digital capabilities, etc.  From a business-level perspective, accessing appropriate external sources of finance has proved to be essential to materialize such productivity-enhancing opportunities. However, UK companies, especially those of smaller size, still struggle to access to the type of finance they need to fund their productivity improvements. Moreover, with the increasing concentration of finance in central areas of the UK, there is evidence of important regional disparities in business access to finance, which is likely to explain part of the observed imbalances in productivity across regions in the UK.

To test this conjecture, in our Project we examined how different sources of finance shape the productivity of UK companies and evaluated whether the uneven spatial distribution of the UK financial system influences the finance-productivity link.  Using a combination of quantitative and qualitative methods, we found that UK companies, particularly small and medium enterprises (SMEs) located in peripheral areas, rely heavily on internal sources (e.g. cashflow) of finance to fund their productivity enhancements; whereas the role of external finance (e.g. bank lending and equity finance) is extremely limited to support these investments, particularly in the peripheral areas of the UK.  Taken together, our results indicate that the uneven distribution of the UK financial system has important implications for firm’s productivity and that unless firms are already profitable and capable to generate internal resources, productive innovations are more likely to be discouraged in peripheral than central areas.

From a public policy perspective, the results of our project point to the need to seriously address the geographical imbalances in business ability to access external finance in order to effectively achieve the government’s ambition of levelling up the UK economy and building an environmentally friendly, and socially just recovery from the Covid-19 pandemic.  While providing direct regional public  support is an important step towards reducing the existing regional financial gaps to support firms’ productivity, it is also critical that the UK private financial system is aligned with the government’s agenda.

In this blog post we present a summary of the main results from our quantitative and qualitative analyses, and provide policy recommendation to rebalance the access to finance by business across all regions and nations in the UK.

Our quantitative analysis:

In our quantitative analysis we evaluate how financial factors shape the productivity of UK companies, and assess whether the geographical distance of the firm to a large financial center matters. Our investigation, based on over 15,000 UK companies during the period 2001-2018, shows that UK firms heavily rely on internal sources of finance to fund their productive investments, and that the dependence on internal finance is stronger the further away the firm is from the core financial centers of the UK. Moreover, this strong dependence is particularly acute for SMEs in the peripheral areas.

Although external sources of finance also contribute to boost the productivity of UK firms, the effect is significantly smaller than that the impact of internally generated financial sources.  For example, an increase in the cashflow of the firm by 1 percentage point increases its productivity by 0.5 percent; whereas a similar increase in debt enhances productivity by only 0.07 percent (i.e. seven times less).  These results suggest that external finance is still limited in its ability to provide effective funding for productivity-enhancing investments amongst UK companies.  Moreover, our results show that the effects of external finance on firms’ productivity decrease with the distance of the firm to its nearest financial center.  A potential explanation for this result is that in spatially-centralized financial systems, like the UK, firms in close proximity to financial centers have more opportunities to provide financial institutions with more complete soft information about their projects than firms in the peripheral areas.

Indeed, a body of work in the field of financial geography has suggested that with the development of financial technologies, the funding decisions made by financial institutions are now based on “hard information about the actual performance of the firm” rather than on soft information about the potential of the project to achieve growth, which was traditionally obtained by close communication between the firm and its potential funder located in their local areas (Alessandrini et. al. 2009. 2010). These technological developments coupled with the increased concentration of financial decisions in central areas, has left peripheral firms with less opportunities to disclose the full information about the potential of their projects to the funders.

Our qualitative analysis

To deepen our understanding of the link between finance and productivity, and the role of the UK geography of finance in shaping this relationship, we conducted a series of interviews with business leaders of Micro, Small, and Medium enterprises (MSMEs) in the Leeds City Region.  The findings from our interviews were in line with our quantitative analysis and indicated that firms in the Leeds City Region frequently rely on internal sources of finance or personal income to fund their productivity enhancements.

When looking at the use of external sources of finance to fund productivity-enhancing investments, we found that, ahead of the Covid-19 pandemic, accessing bank lending was extremely difficult due to the preference of banks to provide loans collateralized with high-quality business assets (such as real estate property) or with the use of personal guarantees, exposing the entrepreneurs’ own wealth to risk.  As such, much of the bank lending was suitable for the acquisition of physical capital, or to support low risk investments, whereas riskier and more productive investments such as long-term innovative activities, as well as new ventures and start-ups were not supported by banks.

Our interviewees made it clear that the difficulty in accessing bank lending has worsened with the move from relationship banking to automated and standardized loan provision in the recent decades. Indeed, whereas in relationship banking, bank managers assessed the risk of business lending based on long-standing contacts and knowledge of the business, these sources of “soft” information have disappeared in the age of digitalized and standardized credit assessment.

Overall, the perception of our interviewees about the limited role of bank lending to fund productive projects is accurately mirrored by the aggregate distribution of bank credit in the UK, which indicates that only 8.5% of the loans provided by banks are directed towards non-financial business and an astonishingly small fraction of such business bank loans (2%-5%) are directed towards the smallest firms. Moreover, there is ample evidence that bank lending has been largely concentrated in the central areas of the UK (Lee and Brown, 2017).

Due to the difficulty in accessing bank lending, some business leaders in the Leeds City Region have actively sought for diverse types of equity capital (such as individual investors, crowdfunding, business angels, mezzanine finance, and venture capital) to fund their innovative activities. In doing so, some of our interviewees indicated that the government’s tax relief schemes, such as the Seeds Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS), have proved to be useful tools to raise funds from private investors.  However, aggregate statistics show a bleak picture of the potential of peripheral firms to access equity finance under such schemes.  According to official figures,  the year prior to the Covid-19 pandemic, 65% and 71% of the funds raised by firms under EIS and SEIS respectively were concentrated in in London and the South East.

In addition to the uneven geographical distribution of equity finance, our interviewees indicated that accessing this source of finance not only requires a strong business plan, but also confident and well-connected owners and managers, willing to devote a great deal of their time and energy toward fund raising. As pointed by one of our interviewees, the difficulty and stress associated with fundraising has a disproportionally negative effect on business with low social connections and/or time to raise money.

To overcome the barriers to accessing private sources of finance to fund their innovative activities, business in the Leeds City Region have also applied to National and local government grants and loans.  The general perception of our interviewees about government support is that before the Covid-19 pandemic accessing public funds was a rather time consuming and complicated process in its different stages: from the application for funding all the way through the execution of the project.  Moreover, grant funding, which is received on a reimbursement basis, was deemed unsuitable for firms with a lower cash base. Our interviewees, however, acknowledged, that the recent package of financial support (both grants and loans) provided by the Government during current pandemic crisis has been “the most efficient, easiest, quickest, and friendly they have ever had”.

Interestingly, aggregated statistics provided by British Business Bank also show that the Government support via its coronavirus debt guarantee schemes, which has been irrigated through the financial system, has been evenly spread across the UK geography.  While some firms have been using these loans to address their immediate liquidity needs, others have maintained a significant proportion of this facility unspent, waiting for potential productivity-enhancing opportunities during the recovery phase.  Some of our interviewees mentioned that the government backed loans constitute an ideal source of finance to fund productivity enhancements and expansions: not only have these credits come with favourable terms and conditions, but they also offer great flexibility to be used according to the business’s needs and opportunities.

Conclusions and policy recommendations

The results of our project suggests that part of the regional productivity puzzle in the UK can be explained by the uneven geographical distribution of the business finance provided by the private financial system. In order to address the regional financial gap in funding of productivity-enhancing investments and to contribute toward the challenge of leveling up the UK economy and building back economic growth, direct public support of SME’s as well as the repurposing of the UK financial system are necessary.  Two key policy recommendations that emerge from our analysis are:

  1. Simplify the processes of accessing all forms of government support and ensure that public funding reaches the less advantageous geographical areas of the UK.

 

Given the high barriers to access private external sources of finance, government grants and loans are a suitable alternative source of finance for business to fund their productive-enhancing investments. Our interviews evidenced that accessing public funding helps firms to access private finance, so government support has a multiplier effect in the ability of firms to raise funding.  It is important to simplify not only the application process, but also streamline the monitoring procedures during the execution of the project. The disbursements of the projects should also be flexible according to the firm’s needs. The Covid-19 crisis has proven that government support can be provided in a timely, advantageous, and flexible way. It is therefore important to adapt and maintain these supporting mechanisms beyond the pandemic, ensuring that funds are spread across the less advantaged geographies of the UK.

 

  1. Supporting and establishing regional and local banks to fill regional and local financial gaps.

 

Our results showed that a highly concentrated financial system disadvantages peripheral firms and could lead to a further concentration of productive activities in a small number of over-represented regions of the country, with the consequence of increased spatial inequality. Supporting and establishing regional and local banks is therefore important to cater to less advantageous regions. Specifically, in relation to the recent emergence of UK challenger banks and the governments “leveling up” agenda, we propose a close collaboration between the existing regional government agencies (e.g. the Local Enterprise Partnerships LEPs-) and regional challenger banks – such as Birmingham Bank – as a means of addressing the current misallocation of funds. It is our opinion that small to medium size financial intermediaries are pivotal in addressing the shortage of available funds for SME’s since not only are these institutions regional in nature, but also have mission statements and objectives aligned towards local development.

 

Accordingly, the possible collaboration between regional authorities and regional financial institutions can be made to encourage local community development and mutually beneficial local lending strategies, whereby local authorities can i) assist in the alleviation of poor information dissemination by providing funding information to local business (for example, through programs such as the Investment Readiness Program provided by the Leeds City Region Enterprise Partnership) and ii) by further sharing part of the lending risk burden via a potential government-backed lending scheme similar to that witnessed in the recent pandemic.

 

References

 

Alessandrini, P., Presbitero, A.F. and Zazzaro, A., 2009. Banks, distances and firms’ financing constraints. Review of Finance13(2), pp.261-307.

Alessandrini, P., Presbitero, A.F. and Zazzaro, A., 2010. Bank size or distance: what hampers innovation adoption by SMEs?. Journal of Economic Geography10(6), pp.845-881.

Lee, N. and Brown, R., 2017. Innovation, SMEs and the liability of distance: the demand and supply of bank funding in UK peripheral regions. Journal of Economic Geography, 17(1), pp.233-260.

Read the full report here

Management Practices and Productivity in SMEs

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Featured Image: by Andrew Neel on Unsplash  

By Professor Alan Hughes and Professor Martin Spring
Lancaster University

The project

Our exploratory project used qualitative interviews and a pilot survey to investigate management practices and productivity in service and manufacturing in SMEs in North West England

The context of the project 

The stagnation in UK aggregate productivity growth in the past decade and a half has coincided with the growth of a new literature measuring “structured” management practices.

The former has led to much ink being spilt over what productivity is, how it should be measured and whether and how businesses understand it, or should measure it.

“It is a terrible word, as it leaves most people dazed and confused. Few are those who can define it and fewer still those who can measure it” Andy Haldane  Chief Economist Bank of England.[1]

Most discussions of the productivity slowdown, however, begin from a well-developed and widely understood definition of productivity. This is based on national accounting data. It divides  output measured as gross value added (GVA) by a measure of labour inputs (either numbers of employees or employee hours) (see e.g. Barnett et.al.(2014).[2] We consider whether this approach makes sense to, or can be used by, company management.

Quantifying structured management practices also raises definitional and measurement issues.  The current dominant approach is to use surveys to develop company level scales. These scales focus primarily on the extent to which a business has a consistent and integrated set of practices covering the recruitment, incentivization, review, promotion and dismissal of staff (see e.g. Bloom et al 2017).

This approach also measures the number of key performance indicators used and argues that the more indicators used the better the quality of management practices.

Much has been made of the possibility of improving aggregate productivity growth by increasing the diffusion of structured management best practice across a hypothesised long tail of low productivity firms, and of low productivity small and medium sized family businesses in particular (ONS 2017).

We were concerned that the management practice insights gained from studies of management in larger firms, in the manufacturing sector, had rather too readily been used to draw conclusions about desirable management practices in smaller firms, in both service and manufacturing sectors.

We were also concerned that, while productivity is understood to be a desirable outcome and measurable at an aggregate level in policy circles, it may not be treated as a critical objective on which owner-directors of smaller firms base their business decisions nor be measured by them. In part, this is another manifestation of the lack of explicit emphasis on productivity, formally defined, among managers in general (see MacBryde et al PIN Report), and a belief that it cannot be readily measured in terms comparable with conventional national accounting practices. In the context of smaller firms, this is compounded by the wider set of motivations and aims that owner-directors have, compared to managers and directors in larger firms with more distributed ownership and formal systems of accountability

We therefore sought to ask whether or not companies are aware of their productivity underperformance and more generally whether they do, can, or should use productivity as a key performance indicator. We were also concerned to approach this question without using the word productivity itself given the contested nature of this term.

Company Accounts: Exploring productivity in SMEs without using the word productivity

The national accounts approach to productivity has a straightforward interpretation in company accounting terms. Labour productivity can be approximated from standard profit and loss and balance sheet items and has been used in research based on company accounts data (see e.g. Faggio et.al. 2010)

Figure 1 provides a simplified presentation of how the GVA numerator in the productivity calculation relates to standard accounting concepts. GVA is sales minus the cost of intermediate purchases.  GVA is in turn the sum labour costs and gross profits (profits before deduction of interest taxation and depreciation). Profits after deduction of interest taxation and depreciation is then available for distribution as dividends or retentions.

With this in mind we asked in our interviews and surveys whether managers used wages plus profits as a key performance indicator, thus avoiding the potentially confusing or “terrible” term “productivity”.

The disaggregation shown in Figure 1 also illustrates the limitations of using profits as a performance indicator. It is a partial measure of the efficiency of the company and is subject to distributional factors affecting labours share.

We would advocate the wider dissemination of knowledge, through for example company accountants, about using company accounts to approximate “productivity” measures at company level.

What we found out

The qualitative research showed that turnover is the most common business indicator used to guide business decision-making, but that others, such as year-on-year growth, are also used. Wages plus profits is almost never used as a measure. Particularly in very small firms offering advisory services, a combination of service offerings that are difficult to specify and measure, and business models based on extensive use of external associates and subcontractors, make the conceptualisation, measurement and management of productivity in these terms still more challenging. Structured management practices were not a prominent feature of the owner-directors’ approaches.

The pilot survey sample showed that the proxy for productivity – profits plus wages, divided by the number of employees or hours worked –  was rarely used as a key performance indicator and was even less likely to be rated as an important one. This is consistent with the qualitative findings. The pilot survey also showed considerable variation across companies in the use of particular indicators and in the total numbers of management practices used. Both of these were affected systematically by contingent factors. The number of practices used was strongly positively related to employment size and strongly negatively related to firm age in Services but there was no relationship in Manufacturing.

[1] “The UK’s Productivity Problem: Hub No Spokes” Speech given by Andrew G Haldane, Chief Economist, Bank of England Academy of Social Sciences Annual Lecture, London 28 June 2018 p.2.

[2] The numerator, GVA, is the value of output minus the value of intermediate consumption and measures the contribution to GDP made by a sector or business. There are many possible refinements to the denominator in this approach e.g. adjusting for labour quality or adding capital inputs to the denominator to generate “total factor productivity” but the core GVA concept is the same (see e.g. APO/OECD 2021)

References

APO/OECD (2021), Towards Improved and Comparable Productivity Statistics: A Set of Recommendations for Statistical Policy, OECD Publishing, Paris, https://doi.org/10.1787/1ae0ec74-en

Barnett, A., Batten, S., Chiu, A., Franklin, J. and Sebastiá-Barriel, M 2014. “The UK productivity puzzle.” Bank of England Quarterly Bulletin Quarter 2 pp. 114-128

Bloom, N., Brynjolsson, E., Foster, L., Jarmin, R.S., Patnaik, M., Saporta-Eksen, I. and Van Reenen, J.V.  2017 What Drives Differences in Management. NBER WP 23300

Faggio, G., Salvanes, K.G. and Van Reenen, J.(2010) “The evolution of inequality in productivity and wages: panel data evidence” Industrial and Corporate Change, Volume 19, Number 6, pp. 1919–1951

McBryde, J., Mullen, H., Ball, P., Clegg, B., Smart, P., Despoudi, S. and Masi, D. 2019 Unpacking the productivity narrative in manufacturing organisations, https://productivityinsightsnetwork.co.uk/app/uploads/2019/07/Pioneer-Project_Manufacturing-Narrative.pdf

Office for National Statistics (ONS) (2017) Understanding firms in the bottom 10% of the labour productivity distribution in Great Britain: ‘the laggards’, 2003 to 2015 https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/articles/understandingfirmsinthebottom10ofthelabourproductivitydistributioningreatbritain/jantomar2017

The Standards, Productivity and Innovation Board 2011 A Guide to Productivity Measurement. SPRING. Singapore

Low interest rates and the productivity puzzle

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Featured image as per the original post by Common Wealth

Read the latest blog by Common Wealth;
What does a very low-interest rate environment mean for firm financing and investment strategies? And what are the implications for issues of workplace governance?

Explore more from the PIN funded Research by Dr Craig Berry, Dr John Evemy and  Dr Ed Yates.

https://www.common-wealth.co.uk/reports/low-interest-rates-and-the-productivity-puzzle

Rebuilding a Resilient Britain

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Professor Leaza McSorley, University of Sunderland and Co-Investigator of the Productivity Insights Network writes about her experience of working on the Rebuilding a Resilient Britain programme organised by the Government Office for Science.

The Rebuilding a Resilient Britain programme was established during the Covid-19 pandemic to address aspects of Britain’s recovery from the pandemic over the medium to long term.  The project convened groups of academics, policy makers and funders to focus on Areas of Research Interest to support Britain’s evidence-based recovery from the social and economic challenges facing the country.  Areas of Research Interest are the research priorities of government departments which inform their research strategies, wider strategy and policy development.

The Covid-19 pandemic resulted in a mobilisation of academic research and engagement with government.  Most of this activity needed to focus on the urgent matters at hand. Relying on academic research, data and analysis to protect lives (and livelihoods).

However, the Rebuilding a Resilient Britain project had the challenge of attempting to develop research priorities for government, funders and academics looking to the (very different and uncertain) medium and long term. The challenge was: what will we need to know in 3-5 years time, and what research do we need to do now to find that out?

As many of the research priorities identified are cross-departmental plenary meetings were chaired the Government Chief Scientific Adviser Sir Patrick Vallance and Professor Jennifer Ruben, Executive Chair of the Economic and Social Research Council.

The process was expertly led by ESRC/GO-Science ARI Policy Fellows, Professors Annette Boaz and Kathryn Oliver who have written about the project here, and facilitated by The Universities Policy Engagement Network (UPEN).  An objective of UPEN is to ensure diverse contributions in academic-policy engagement. This approach to supporting diverse voices at the table is particularly required when it comes to the topic of productivity. Given the Government’s commitment to ‘Levelling up’ and addressing regional inequalities it is important to listen to a more diverse range of expertise and experience.  I was asked to Chair the subgroup on “Productivity, Business and National Economy” and was pleased to represent the University of Sunderland and the Productivity Insights Network. The final report is available here: “Rebuilding a Resilient Britain: Local and National Growth”

The project ran from July to October, with the final reports being produced in January.  The groups produced 9 reports, totalling 528 pages and over 200,000 words. The scale and scope of the outputs give an indication of the volume of the inputs and resultant intensive process over the 6 month period. All nine reports can be read here at https://www.upen.ac.uk/go_science/

The objectives of each sub-group were to i) collate existing evidence, ii) synthesise existing evidence and identify key messages for policy and practice and iii) identify evidence gaps and future priority areas of research interest and investment.

Productivity: key messages for research, policy and practice

The majority of academic research on productivity is in the domains of – competition, enterprise, skills, investment and innovation.  These five drivers remain an important part of the productivity puzzle. However, this is the paradoxical challenge of evidence-based policy making.  The weight of evidence does not necessarily reflect the weight of need. The fact that most evidence relating to productivity is within these five (mainly microeconomic) domains may be one reason why the UK has failed to tackle its relatively poor productivity performance. Productivity research has suffered from the street light effect, looking to find solutions in areas that are most illuminated through prior research.

The most recent data (January 2021) from the ONS show we are now witnessing the paradoxical situation where the technical/statistical measures of productivity outputs are actually improving due to a significant contraction in the hours worked in the economy and the closure of less productive (and high employment) sectors of our economy such as hospitality, leisure and retail.

The pressure to boost productivity can lead to improving productivity in the wrong way – a technical statistical fix, which shows up in the official statistic as increased productivity, and simultaneously reduces the productive capacity and total output of our economy through underutilisation of labour and capital (and reduced innovation and investment). This risks taking us back to regressive discussions of supposed trade-offs between employment and productivity and investment in ‘low productivity’ sector versus the frontier high GVA sectors. The productivity debate has moved on from viewing productivity as a technical measure of output (Labour productivity and Total Factor Productivity) to its role in driving growth, wages and wider economic and societal benefits.

Since the financial crisis in 2008 to date the OBR has revised its productivity forecast 40 times.  This downward revision in its productivity forecasts reflects the main conclusion from the report:  there is a widening gap between the theory, data, policy and practice when it comes to UK productivity.

From the report key evidence gaps and future areas of research interest related to productivity are identified as:

  • Micro: Research evidence at a micro (firm/industry level) on policy and practice that prioritises/delivers both productivity and employment improvements
  • Meso: Regional and structural inequalities and policy. Research that further develops regional-macro-economic linkages. Structural issues focused on labour markets and institutions
  • Macro: Structural causes and drivers of low productivity and economic growth.
  • Environmental sustainability and productivity and growth
  • International best practice/comparative research
  • Theoretical underpinnings of productivity

To support the objectives of the Rebuilding a Resilient Britain programme, the report recommends the following areas of research interest be prioritised now to support evidence-based policy making and delivery of plans for productivity growth in the medium to longer term:

a) Regional policy and regional inequalities: further research on how to solve the regional productivity puzzle and delivering ‘levelling up’. To simultaneously increase UK aggregate productivity and growth and deliver balanced and sustainable regional growth. i) Regional economic to macroeconomic transitions. Better understanding (theoretical) of how regional economies contribute to macroeconomic outcomes, and how macroeconomic policy can more effectively address/benefit from regional economic issues.
b) Structural causes and drivers of low productivity and economic growth: this should include: i) Labour market: creating the demand for skills and education; quality of work, pay and productivity; demographic change; inequality and inclusivity, particularly gender equality:  ii) Institutions: what role do institutions national, regional and local play in supporting productivity and growth? Role of public sector (including education and health), NGOs, civic, voluntary, community.

Begin with the end in mind – why do we want to improve productivity? Mirroring the debates we have had over GDP growth now is the time to re-focus on the potential benefits of productivity growth.  As with GDP too much attention – policy and research – has focused on the growth of productivity (the percentage change) and insufficient attention given to the i) the level of productivity ii) the distribution of productivity.  If we consider productivity as the given level of output to a given level of inputs it is then possible to reconcile both lowering inputs in a positive (socially and economically desirable) manner (such as the 4 day working week or reduced/balanced working hours, reducing the level of unstainable inputs – such as energy, materials) and achieving higher levels of outputs through improving innovation processes (improved management practices, good work, investment and diffusion of R&D, balanced regional growth) to deliver higher levels of output (sustainable GVA, foundational and tradeable goods and services).  To Rebuild a Resilient Britain productivity research must now provide new solutions to new and different productivity challenges.

From novel research methods, the green economy, inclusive practice and responding to a global pandemic: Highlights from 2020

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If you were to draw up a shortlist of words commonly used to describe 2020, challenging would almost certainly be on it. Despite the numerous challenges that we have all faced, thanks to the commitment and support of our tremendous Co-Investigators and wider network, we have been able to continue producing insightful and quality research into the UK’s Productivity Puzzle. To this end, we thought that for our final blog of the year we would identify 10 top themes that our network has contributed too (though not an exhaustive list). Keep reading to see how!

  • Novel methods to rethinking Productivity
  • Responses to COVID19 
  • Going Green: Productivity and the Green Agenda
  • A More Inclusive Approach to Productivity
  • Pioneering Practice in Productivity
  • Furthering the Conversation
  • Influencing Policy
  • High Profile Speakers Join Us in the Debate
  • Early Career Researchers Leading the Way
  • Hot off the Press (new for 2021)

1. Novel methods to rethinking Productivity

The following projects stand out in terms of a novel approach taken.

Clive Reynolds’ (Strategic Capability Ltd) – Productivity: A view from the workforce

Hadi Arbabi (Sheffield) – Engineering Productivity.

Homogenous deployment of mixed-used planning across the city is beneficial; Learn more about what Dr Arbabi and his research team learnt about Sheffield by reading the report in full.

2. Responses to COVID19 

Our Co-Investigators and Project leads were quick to respond to the challenges of C19. We presented a number of webinars and actively engaged with relevant organisations in order to address some of the impacts of the pandemic.

Watch the webinars again via our YouTube Channel playlist.

3. Going Green: Productivity and the Green Agenda

Although not a theme with a dedicated lead, the Network recognised the importance of the Green Agenda and were thrilled to received applications for projects by Dr Robyn Owen and the team at CEEDR and Prof Kerrie Unsworth and the team at the University of Leeds on their projects, Redefining Productivity Measurements and Sustainable and Productive?!!, respectively, which focus on the issues of Sustainability, Green Growth, Net-Zero and Low-Carbon Economies

The Impact Strategy Process taken from Dr Owen’s report on redefining productivity measures and assessment for a low carbon economy.

Based on the key informant interviews regarding selection and evaluation criteria for cleantech investments, and the insights case study businesses provided, Dr Owen and the research team developed the above model. The process is iterative and should be used to realign goals, strategy and actions regularly. The three dimensions, in which indicators are presented aim to mitigate a focus on either strategy or operational issues. More crucially, the sections environmental and commercial impact together can provide a nuanced understanding of productivity in the respective cleantech sectors. Learn more by reading the full report.

4. A More Inclusive Approach to Productivity

How can hubs best promote inclusivity in entrepreneurship and better support women and BAME?
Building on the exploration of inclusion and innovation, Dr Lara Pecis discussed how innovation can be used as a resource for productivity and inclusive economic development. Why not also read the blog from Lara’s project?

The research outcomes from the Pioneer project on the gender pay gap by Dr Emma Duchini‘s has enabled the team to pursue opportunities for additional research, alongside Prof Mirko Draca (Warwick) and Dr Arthur Turrell (Bank of England), the team have gone on to produce a Policy Brief which will be released in the New Year.

5. Pioneering Practice in productivity 

Prof Karina Nielsen‘s Round 1 funded project on Returning to Work and Thriving at Work has been making significant impacts in various industries. The IGLOO framework output from their project has been adopted by HR teams within a range of industries including UK Rail.
The work, with Dr Jo Yarker (Affinity Health at Work), was also recently nominated a Vocational Rehabilitation award for VRA 2020 Innovation Research and Education Award.
We are delighted to report that their IGLOO framework won the Innovation Research and Innovation Award. An excellent example of how project funding makes a difference in the workplace.
Find out more about Affinity Health at Work here: http://affinityhealthatwork.co.uk/our-research.

6. Furthering the Conversation

Prof Adam Leaver’s PIN project on financialization, and the Hollow Firms report that he contributed too, had interesting findings that were picked up by the Financial Times, Spectator and BBC. Adam and his collaborators at the Corporate Accountability Network (CAN) are continuing to explore this with PIN support to find out whether excessive distributors are a) underinvesting and b) have a weak productivity profile.

Clive Reynolds‘ project on relating productivity in an organisational context has gained inter3est from a number of interested parties and we are thrilled that Clive is presenting with the Productivity and the Futures of Work team (Warwick) in January. Further details here.

7. Influencing Policy

Prof Duncan Maclennan (Glasgow) received PIN Pioneer funding in Round 1. The outcome of his research contributed to the UK 2070 Commission, in an independent inquiry into city and regional inequalities in the UK and is chaired by Lord Kerslake. The Commission was set up to conduct a review of the policy and spatial issues related to the UK’s long-term city and regional development. Read the PIN report here.Co-Directors Profs McCann and Vorley alongside a number of our co-investigators were acknowledged as contributors to the UK Regional Productivity Disparities report produced by the Industrial Strategy Council. The report, written by Robert Zymek and Ben Jones provides a comprehensive review of the evidence on both the causes of regional disparities and the effectiveness of policies to address them. For the full report is available here.

8. High Profile speakers join us in the debate

In April 2020, PINs Second Annual Conference went online! In early February to move the conference to an online format and were thrilled that most of our original lineup were able to join us for one of the first online conferences of the year.

Reframing the Debate addressed various aspects of the productivity puzzle and went on to comment on the implications of the pandemic.

We were joined by Lord Jim O’Neil, Robert Atkinson, Andy Haldane, Tera Allas, Chris Giles and Ashwin Kumar for the event.

A recording of the conference is available to view online here.

9. Early Career Researchers leading the way

Our Early Career Researcher (ECR) Network have been producing some outstanding work with outstanding impacts.

Early Career Researcher Dr Katy Jones from the Decent Work and Productivity Research Centre at Manchester Metropolitan University was awarded a PIN Small Project Fund in the second funding round.
The research gathered insights from employers about the potential impact of (and their likely response to) the extension of conditionality to working Universal Credit claimants. Whilst only a small-scale pilot study, it highlights a number of important issues which policymakers in the Department for Work and Pensions should consider as their ‘in-work offer’ is developed. Katy has since gone on to present her research to the House of Lords.

Daniel Kopasker‘s also joined the Network as an ECR and gained Seed Corn funding that enabled him to be awarded a further small funded project on mental health and well-being in the workplace. Daniel presented a C19 responsive webinar, with Katy as chair and both have also contributed to the Second PIN Book.

Hadi Arbabi joined the Network as an ECR and was funded in the Round 3 Funded projects. Hadi’s research, a novel and interdisciplinary approach to productivity offers a fresh take on productivity measures.

10. Hot off the Press

Our second book has just gone to print THIS WEEK!  Productivity and the Pandemic will be released in January 2021; with 21 chapters by a combined total of 46 authors from across the Network, our responsive commentary on the impacts of C19 is the MUST read of 2021.

Building Back Better: Why Early Stage Cleantech Financing is Critical for a Sustainable Productive Economy

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Featured image: as per the original post. 

By Theresia Harrer  & Dr Robyn Owen, Centre for Enterprise and Economic Development Research (CEEDR), Middlesex University 

Following the publication of their new report from the ESRC/PIN funded project, led by Dr Robyn Owen, Centre for the Understanding of Sustainable Prosperity (CUSP) researcher at Middlesex University’s Centre for Enterprise and Economic Development Research (CEEDR), and in collaboration with SQW Ltd.  Thersia Harrer and Robyn have provided a blog outlining their findings.

View the blog in full via the link below:

Redefining SME productivity measurement for a low carbon economy | Blog by Theresia Harrer and Robyn Owen

 

Matching People to Jobs and Hours: Drivers and Productivity Impacts of Under-employment

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Featured Image: As per the original post by PrOPEL Hub

By Colin Lindsay
Strathclyde Business School

Professor Colin Lindsay, Project lead for the PIN Funded Pioneer Project ‘Matching People to Jobs and Hours: Drivers and Productivity Impacts of Under-employment‘ with Donald Houston (University of Portsmouth), George Byrne (Research Consultant, georgebyrne.org), and Robert Stewart (Strathclyde Business School), has provided a blog, of the same title, which comments on some of the key elements of the ESRC-funded research. Read the blog in full via the PrOPEL Hub webpages.

Matching people hours and jobs: building back without under-employment

 

You can also view the recent PrOPEL Hub Webinar on the sa,me topic here: https://youtu.be/myWh6t6CDDM

Is Household Outsourcing Driving Down Productivity?

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Featured Image: Photo by Ross Sneddon on Unsplash

By  Colin Mason
Adam Smith Business School, University of Glasgow.
colin.mason@glasgow.ac.uk

Economic activity occurs in both the formal economy which produces paid-for products and services and in the household economy which produces goods and services for their own consumption and hence fall outside the GDP boundary. These boundaries are constantly changing. The baby boomer generation will have grown up in households in which cooking and sewing were common. Indeed, the Singer Sewing Machine was a common domestic appliance. Now, of course, most of the food and clothes that are consumed by households is purchased from the formal economy.  An ONS commentary earlier this year on Productivity Measurement raised the possibility that some activity that used to be counted towards GDP has moved to the household sector and so now falls outside the ‘productive boundary’.[1]  Do such ‘production boundary’ shifts contribute to explaining the UK’s ‘productivity puzzle’?

Diane Coyle has suggested that this trend has accelerated with the expansion of online access enabling households to perform DIY digital intermediation tasks that were formerly purchased in the market economy.[2] One example is holiday bookings that were once booked in person in high street travel agents but now are booked by the traveller via the internet with little or no involvement with a travel agent.  Another activity that households now perform is online banking. The production of digital products by the household replaces market-intermediated services, removing them from GDP. Coyle notes that unlike the production of goods by households which are included in GDP, the production of services by households for their own consumption are excluded.

However, boundary shifts also occur in the other direction. It is apparent that low productivity service activities that were formerly undertaken informally the household economy and are now being outsourced to the formal economy and purchased by households and therefore now contribute to GDP. One example would be personal grooming (e.g. beauticians, ‘Turkish barbers’). Another is lifestyle activities (e.g. fitness, coaching). A third is food – particularly take-ways and coffee shops. Moreover, whereas in the past the consumer would perform the collection of the food themselves, increasingly the delivery is also outsourced. Similarly, online shopping involves the transfer of both the product selection activity and the delivery of the purchases to the market. This could also drive down productivity.

The scale of these changes is very apparent in every high street and local shopping centre across the country. For example, Sauchiehall Street, one of Glasgow’s major retail thoroughfares is now dominated by food outlets – bars, restaurants and take-aways. Very few retail units remain.  The increase in online shopping during COVID-19 has accelerated the shift of household-performed services to the market economy. For example, the Financial Times reports that Just East’s transactions have increased by 20% in recent weeks while Amazon spending jumped 82% in lockdown with average transactions up 18%.[3] No one is expecting online activity to return to pre-lockdown levels.

Two questions arise. First, what is the contribution of these substitutions across the production boundary to the observed slowdown in the UK’s productivity growth?  And second, are these changes more apparent in the UK than in other countries and hence able to explain the UK’s poorer productivity compared with its international competitors?

References

[1]https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/articles/productivitymeasurementhowtounderstandthedataaroundtheuksbiggesteconomicissue/2020-03-13

[2] file:///C:/Users/cm252t/Downloads/ESCoE-DP-2017-01.pdf

[3] Make the most of your saving in the time of pandemic, FT Money (Financial Times) 12th September 2020.

What value can Universities add to Economic Recovery planning?

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Featured Image: Photo by Alex Blăjan on Unsplash

Some baseline considerations in the design of a Universities-coordinated West Yorkshire Economic Recovery Plan

By Andrew Brown and Gary Dymski [1],
Economics Division, Leeds University Business School, University of Leeds 

For the second time in 13 years, the United Kingdom has experienced a ‘black swan’ (or tail-risk) event that has ruptured economic relations and threatened the collapse of the cash-flows and asset values on which the reproduction of everyday capitalism depends. [2] The 2007-08 financial crisis has been followed by the 2020 Coronavirus pandemic. The latter has both resulted in significant loss of life and necessitated an extended lockdown that fully halted most aspects of both aggregate supply and demand to a halt for an extended period.

A challenge has been presented to the University of Leeds and other universities in West Yorkshire: to develop a plan for the post-lockdown economic recovery in West Yorkshire. Growth strategies are routinely developed by units of government, often relying on advice provided by professional-service firms (consultancies) optimized for this purpose. So what value can a university add? Government plans reflect political judgements and values (‘inclusive growth’, for example), while consultancies specialize in producing, at speed, analysis of the latest empirical measures of the drivers of economic activity. Universities’ core consists of their academic faculties, whose members’ research plugs into reservoirs of accumulated and emerging knowledge across academic disciplines.

These faculty members’ value added is their capacity to combine core theoretical insights and available evidence – quantitative, institutional, and historical – into proposals for new concepts, processes, products, programs, or institutions. This is their unique value in policy deliberations – the capacity to show how policy choices can break new ground. Yet, at the same time, academics’ ideas about policy can often derided as ‘blue sky’.

Avoiding the perception of academic research is always to be dismissed as ‘blue sky’ and unusable depends on both sides to the policy discussion – both the engaged academics and the public policy-makers – being tolerant and flexible in communicating with one another. These qualities are always important in good policy-relevant work, but the unique ‘multi-dimensional’ circumstances of the current scenario make them especially crucial in these exchanges. The multiple dimensions in question involve both time and space. We elaborate these before proceeding.

A ‘black swan’ strategic response in a country with a multi-level governance structure  

An economic strategy to achieve a given goal in any regional or national socio-economy must bring together three distinct components: the substantive issues to be addressed; the policy structures in place that can implement whatever actions are decided upon (and which determine which actions can and cannot be taken); and the relationships between those charged with policy implementation, those charged with  initiating or expanding economic activity (employment and business creation), and the communities of academic and policy experts available to provide guidance.

Assembling a useful West Yorkshire economic recovery plan must then involve these three components. But there are several special features about the challenge involved that require special attention. First, the pandemic has occurred at a global scale; it is not just a local problem or deficit requiring attention. As such, the lockdown required by the pandemic has shocked, and even halted, the global economy.

This leads to the second unique feature: the grinding halt of economic activity – and the quickly mounting costs of subsidizing workers’ incomes and firms’ lifeline expenses – has pushed forward the priority of restoring normality. The usual goal-seeking aspect of economic strategies – ‘inclusive growth’ or ‘sustainability’ – is replaced now by the need to ‘build back better’.

This gives us the third feature: huge expenditures of government financing have been needed to avoid collapse to this point, and much more will be needed. Normally, financing at this scale would be associated with grand investment plans for new industries or new housing estates, etc.

However, lurking behind both of these unique features is that the Yorkshire region – indeed, the UK, and the world as a whole – had already fixed on the need to prioritize new investments to meet two global challenges – stopping climate change and meeting the sustainable development goals (SDGs). In the G20’s June 2018 ‘blended finance’ plan for SDGs, national governments would finance the measures needed to attain these targets, with underwriting provided by multi-lateral development banks and the World Bank. The Covid-19 crisis has laid waste to that plan, as national governments around the globe have had to use whatever policy space they can find to sustain their residents in safety.  So does this mean that SDGs and climate change are off the agenda? Not if the issue of recovery can be melded together with these longer-term priorities.

This leads to the next defining feature for this strategic problem. What it means to ‘address’ the issues at hand is itself problematic: policy solutions can range from ‘fixes’ to permanent shifts toward sustainable ‘steady-states’.[3] A ‘fix’ only restores a baseline that was already inadequate from an SDG and climate-change perspective. The material issues behind the Black Lives Matter movement have highlighted that the concentration of BAME residents in certain neighborhoods has led to systematic violations of some of the SDG categories, along racial and ethnic lines. To finance recovery with money that was never intended for ‘staying in place’ purposes will only feed populist anger and resentment, on all sides.

And this leads in turn to the next unique aspect that has to be baked into a recovery strategy: while appropriate and accessible solutions to the ‘black swan’ coronavirus event have proven elusive to date, the same can be said for SDG and climate-change targets. The problem of assuring adequate nutrition for all residents of the UK is not solved; nor is the problem of providing adequate and safe housing for all in the UK has not be solved; nor of access to education and health for all; and so on. And on top of these unknown paths lie the barely explored routes to climate sustainability. We have no maps for how to journey along these pathways. So it means that possibly deep disagreements will occur about what roads to follow, and why. Even the experts are guessing. It must not be forgotten for those engaging in this exercise that policy solutions at scale are expected, even demanded, by political leadership, not successful partial demonstrations. The experts relied on to think about the issues involved have to take this on board and be tolerant and flexible in their mutual discussions.

The sixth defining feature of the Covid-19 regional recovery challenge is that it will unfold in a multi-level fiscal structure, in which only a few of the controls over the resources needed to establish local policy are accessible to sub-national policy-makers. Coordination amongst the various levels of public expenditures and revenues is crucial. But the rules and fiscal purse-strings for governance have been held centrally in the UK since time immemorial. The ‘devolution’ effort to localize structures of governance and public accountability has been unfolding at an uncertain pace for nearly a decade, but is very far from complete.

And this brings us to the final defining feature: the UK government has, since 2009, been committed to austerity fiscal (macroeconomic) policy. So the NHS, social welfare expenditures, school spending, and so on, have been at levels that have left many residents and regions in personal or economic deficit. This has been picked up in reports done by the UK2070 Commission, the Commission on a Gender Equal Economy, and the Runnymede and Joseph Roundtree Foundations. The fact that fiscal rules have been suspended in the immediate wake of the Covid-19 lockdown does not mean that austerity is behind us: to the contrary, many political front-benchers have been insisting that fiscal discipline must be restored as soon as lockdown ends. But since the levels of human need and economic hardship have increased dramatically since March, a return to normal levels of fiscal commitment will lead to further unanticipated human deprivation.

What not to do: the pandemic and the US’s multi-level structure of governance

In the spirit of Monty Python’s ‘how not to be seen’ sketch, it might be useful to consider how the policy response has gone wrong in another country with a multi-level structure of governance. The country in question is, of course, the United States. While newspaper accounts set out the specifics of the policy car-crash unfolding there in real-time detail, author Michael Lewis already identified the problem in a book based on his research in the year after the current US President took office.

In The Fifth Risk, Lewis describes the collision between the immensely complicated federal departments of the US government – focusing on the Department of Energy, which manages all aspects of nuclear strategy and supports or houses much of the US ‘Big Science’ establishment – and the incoming Trump Administration. As Lewis tells the story, the Trump Administration’s appointees are few and far between, and those put in place have typically been ideologues uninterested in the substantive issues handled on an ongoing basis by federal agencies. His ‘fifth risk’ is ‘project management’ – by which he means the oversight and guidance of longer-term programs such as nuclear-waste management, pandemic prevention and response, wildfire control, and so on.

The outstanding example of a policy failure due to this widespread indifference is the Coronavirus pandemic. The Trump Administration did not name a director for the Centers for Disease Control for months after the February 2017 inauguration, did not name replacements for the many appointees whose term of office concluded with the departure of the Obama Administration, and so on. Subsequently, the CDC has had its budget slashed and is now being blamed (among others) for the severity and duration of the crisis. President Trump has made it clear that the federal government no longer is responsible for further responses for testing and control of this pandemic in the US: it is now the responsibility of the 50 governors of the individual states of the Union.

Bottom-up, top-down, and ‘levelling up’? The UK’s unsolved multi-level governance challenge

The challenge of multi-level governance is evident in this US case study. The problems there involve unresolved questions over the structure of government: how resources (even medical equipment) are to be shared out between the federal government and the states; the ability of local authorities to refuse participation in national programs (notably, at the moment, the Affordable Care Act passed into law during the Obama Administration); the expanding power of the Executive Branch in decreeing national policy without recourse to Congressional law-making processes. The chaotic policy response to Covid-19 in the US has led to more and more finger-pointing, and most recently to protests and violence on a scale not seen since the 1960s.

The political relationships of national government with local authorities, and of political parties to political power, is quite different in the UK than in the US. Nonetheless, when the Covid-19 lockdown hit, the country had many unresolved issues involving core political economic issues: the locus of public budget control, the country’s surplus-transfer mechanisms (from wealthier to poorer regions and districts), the relationship of the nation to its trading partners in Europe and in the rest of the world, and the future of immigration and of migrant workers, to name several. These unresolved issues were already heading for a collision. The adverse GDP shock anticipated from Brexit was already on course to capsize or stall the completion of plans for the ‘devolution’ of governmental policy controls before the lockdown. Plans to reduce the public footprint of nation-defining institutions such as the NHS and BBC have been pulled back in the emergency; but no political declarations of restorative public support beyond the lockdown have been made.

This uncertainty, worsened in the past four years by Brexit, has undercut investment generally, and flatlined UK productivity. Infrastructural and green-economy investments would be ‘smart responses’ to the Covid crisis; but these must work together with restoring the resilience and financial ‘health’ of both household and business sectors across the country. This has not been done.

Instead, the Covid-19 crisis has exposed many ‘holes’ in the planning, accountability, and delivery architectures in the UK, as it has in the US. Multi-level governmental structures, such as that of the UK and US, can carry on in normal times without the pressure points or unresolved linkages in those structures coming to light. In the UK, local authorities’ staff capacity and resources for analyzing, planning, and implementing socio-economic policies on behalf of their regions have been squeezed by years of macro austerity policy.

As long as promised human services have been provided to a minimal standard, and as long as educational, employment, and entrepreneurial processes have produced cash-flows sufficient for social reproduction (‘provisioning’), the ‘holes’ that this has left in local authorities’ capacity has been relatively invisible. The gap has been made up, in part, by fee-for-services offered to these authorities by consultancies. This is where a key difference emerges between the US and UK multi-level governance structures. The 50 states of the United States, together with local units of government (counties, cities, districts, others), account for approximately 50% of all revenues collected annually in the United States. Most public services are provided with intermixed state and federal funding. Some states with higher income levels – including California, Washington, New York, and Massachusetts – have adopted relatively high, progressive state income taxes so as to securely fund those services. And these are states that typically transfer a portion of their net taxes collected to lower-income states.

Scale-appropriate, flexible ‘blue sky’ thinking: how universities can help local authorities

Of course, the local authorities in the UK have nothing like this sort of fiscal autonomy. And the UK lacks the scale and resources to permit the emergence of adversarial politics as bitter and unresolvable as those that have gripped the US at least since the 1980s – if not since the 1964 passage of the Civil Rights Act. Severe societal crises require responses at scale and at speed by those responsible for societal governance. Multi-level structures of governance must, to avoid political ruptures, transmit policy responses and resources smoothly from central to local levels. There is a desperate need in the UK in the current moment of pandemic-driven crisis for policies that respond to local needs.

This is likely to require structural governance reforms. It is likely that UK economic policy approach must make a clearer distinction between meeting human and social needs (indeed, the SDG goals), on one hand, and encouraging innovation, inclusive growth, and competitiveness, on the other. This will likely require a real rebalancing of fiscal policy responsibilities and revenues between national and local levels, along with a clearer delineation of the rules under which surplus recycling amongst regions should occur.

These sorts of fundamental changes may or may not require a wholesale turnover of the national government. What is crucial is that these sorts of questions about economic policy-formation processes and structures not become political footballs between contending rivals. A structure strong enough to sustain changes of government is in order if the UK is to have the stability to steer its own economic course once the invisible backbone provided by its EU membership has been removed from the body politic.

Current events are vividly making this point. The limits on what is acceptable to the current government have already been tested and stretched by the pandemic. The period of recovery from the pandemic, which will be accompanied by an adverse-macro-shock Brexit, will test those limits further. The question is whether the further policy shifts made to avoid national economic depression during the long period of recovery will reflect local needs and political consensus.

This is the context in which University advice for local and combined authorities – in the case of the University of Leeds, for West Yorkshire Combined Authority – must take place. The entire unfolding scenario of fundamental policy debate needs a fair and impartial space for debating the issues; and it needs access to a fairly-mediated evidence base, and it needs well-umpired debates amongst those with different theoretical points of view. The local authorities are too thinly staffed to hire and retain the experts who can provide that space. The university sector, alone among UK institutions, can provide this space. It has survived the turn to fee-based support without surrendering its broader public mission.[4]

The universities can play this role not by turning within, and seeking the advice of their most elite and renowned voices, but by opening up. On one hand, universities should open more fully to what might be termed ‘everyday impact’ – encouraging academic and research staff to come forth with policy ideas, especially those rooted in expressed needs of the people of surrounding communities. And on the other hand, multiple channels to surrounding communities must be opened even wider. The tentative steps toward the ‘anchor institution’ role of universities, and toward encouraging ‘impact’, move in the right direction. Impact in the context of the national REF exercise has too often been interpreted in the context of product invention or of knowledge transfer (from gown to town). Impact activities must also include engagement with communities – dialogues, investments in local initiatives, encouragement of community-building, work with the young.

This ‘opening’ to the communities around universities will expand the space for policy-related discussions that break through current barriers of imagination or customary activities. The time is right for widening circles of possibility. Many of the ongoing debates inside the academy – degrowth versus renewed economic growth, competitiveness through participation in global supply chains versus renationalization of production, post-petroleum individualized transit versus large-scale collective transport, and so on – are unresolvable so long as they remain inside the ‘ivory towers’. And while national efforts to establish national economic strategies around key industries are admirable, there is no substitute for creating local community-university platforms for social-policy, sustainability, and economic-competitiveness experimentation.[5]

This turn to community-linked universities is not a call to restrict debate within the university; to the contrary, a broad array of ideas in every field is needed to push thinking and human possibility forward. It does mean that academics engaging with communities and with local authorities must make themselves aware not just of future-perfect scenarios but of current resource constraints. That said, the more new ideas see the light, the better. What constitutes ‘blue sky’ – that is, impossible – thinking about policy alternatives is not clear in the current environment: as noted, ecological futures are a work in progress, and innovative solutions to educational, healthcare, and housing deficits are still being worked out. Political voices at all levels have to be heard and validated. Diverse community representation is a must – the people have a right and a need to speak. And universities can provide a critical role in making the people’s voices heard.

The post-Covid moment: policy memoranda, position papers, and strategic syntheses

While imagining how the broader university-community relationship can evolve, the needs of the current moment must be kept uppermost in mind. At present, local and combined authorities with uncertain resources at their disposal, faced with imminent budget crises, need advice. There is a need for policy memorandums – which convey objective, evidence-based analysis with action steps that respond directly to the problems identified in the analysis. Position papers that clearly identify the ‘entry point’ of the author(s) are also helpful, as they clarify the author’s underlying assumptions. There is a key role, too, for in-depth reimagining of how economy and society could be organized, which, we would argue, is most valuable when developed and synthesised in a context and region specific way.

An example might help clarify what we mean by ‘context and region specific’. Consider recent efforts in California, aided by the University of California, to design public policies responding to the dangers of wildfire incidence and losses in that state. The ideas that emerged in these efforts were scaled to what the state could mandate: for example, require the clear-cutting of small brush in perimeters around woodland housing, regulate materials used for roofing in woodland/outlying housing, etc. The definition of the problem could of course be scaled ‘up’. For example, two other factors in ‘global warming’ are the drying out of the state through reduced precipitation, cutting the snowpacks in the Sierras; and groundwater depletion throughout the state due to overpopulation. However, taking on these deeper causes would lead to solutions more radical than are feasible or even thinkable for the California policymaker community. Addressing these wider issues would require national scale analysis and policy, informed by regional scale context. At a national scale, a solution would be to ban people from building their wilderness palaces in remote, fire-risk areas just because they didn’t want to be near other people; but that would not be enforceable regionally. Thus, there is always a balancing aspect that invisibly lies behind effective local and regional policy interventions, and those that must be interlinked with policies at national and indeed global scales.

References

[1] Emails: G.Dymski@leeds.ac.uk; andrew@lubs.leeds.ac.uk.

[2] Nassib Nicholas Taleb, introduced this term into contemporary discourse with The Black Swan: The Impact of the Highly Improbable. New York: Random House, 2007). Chapter 1 defines it as follows: ‘First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme ‘impact’. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. … [that is, a ‘black swan’ event involves] the triplet: rarity, extreme ‘impact’, and retrospective (though not prospective) predictability.’

[3] These terms are worth unpacking. A ‘fix’ in everyday parlance refers to an informal or temporary solution. This term was adapted by David Harvey (he introduced it initially in his The Limits to Capital. Baltimore: Johns Hopkins University Press, 1982) and was subsequently came into common use in human geography (see, for example, Erica Schoenberger, ‘The Spatial Fix Revisited,’ Antipode 36(3) June 2004: 427-33). Harvey portrays capitalism, using a broad Marxian crisis framework, as beset by several crisis tendencies, among which is over-accumulation (under-consumption) – a condition in which productive capacity outpaces consumption and/or investment outlets. When this happens, continued accumulation requires further an expanded number of consumption/investment hubs. The expansion of business service offices or supermarkets can be seen as examples of spatial fixes. A spatial fix is at once necessary but, at the same time, temporary – the value invested in any location only retains its value if another is found. The notion of a ‘steady state’, in macroeconomic theory, refers to a configuration of demand and supply forces that can be reproduced or smoothly expanded through time.

[4] There is more to be done to retain or earn the public trust – for example, by insuring that all Britons have access to all universities at all levels, regardless of income or racial/minority status. But this is an item readily added to the universities’ agendas, especially in the era of social-policy rethinking spurred by the BLM movement.

[5] This, of course, will have implications for what is valued in academics’ efforts to meet performance expectations of university supervisors, and for any national efforts – should they remain necessary – to evaluate excellence in academic work.