BU's Emeritus Professor Nigel Jump writes the next in a series of economic blogs looking at the impact of covid-19 on the economy.
CURRENT SITUATION
Short term indicators are still positive, but momentum is dropping. Q3 output will have finished well up on Q2’s level but still well down on Q1. A lopsided W-shaped pattern of economic activity now seems in train with a danger that Q4 is softer than Q3 as producers and consumers react to the recent rise in uncertainty about the pandemic and the re-tightening of social measures.
Policies to protect businesses and jobs make sense after a catastrophic shock, such as the Covid19 pandemic and its lockdowns. Recently, the Chancellor has announced a German-style job support scheme that helps to fund full-time wages for part-time work through the winter. (It replaces the furlough regime that is now in its final month.) He also allowed an extension of government loan repayment terms and the low VAT rate for hospitality/tourism. In doing so, he recognised the danger that the public sector picks the wrong ‘horses’ to back with taxpayers’ funds and regulations i.e. it protects the inefficient and the unsustainable. Delaying the inevitable demise of ‘zombie’ companies and jobs consumes valuable resources whilst skewing the market against more resilient and competitive options. This can damage future living standards.
In recovery, rather than direct intervention, it is usually better to encourage private capital and labour to evolve through a process of “creative destruction”. Allowing inefficient and ineffective activities to wane, and dynamic and productive ones to wax, builds up the economy’s underlying resilience. Reallocating scarce resources through externality-adjusted, market-led incentives to cleaner, greener and yet more productive uses, creates forward momentum whilst jettisoning non-viable alternatives.
The adjustment will be painful for some. Positive change needs to be based on the residual, potential and local skill base in order to attract investment into new business models, technologies and products. Governments tend to favour a quick move back to full employment growth: almost ‘any job will do’. Long-term development may be better served by allowing markets to separate the “wheat from the chaff”. This is especially so in a period of rapid change in business, consumer and market processes, including such trends as home working, on-line sales and ‘just in case’ rather than ‘just in time’ purchasing.
The lockdown recession and its aftermath are a spur to such changes in production, service and delivery. A recovery with some healthy ‘creative destruction’ will prove more sustainable than one that shores up ‘zombies’. The surviving innovators will be supporting balance sheets, inventing new procedures and attacking new markets. In the short-term, this may be disruptive in an economics sense: some actors will prosper, and some will fail. The state needs to enable, but not push, that process towards a net positive adaptation.
CURRENT PROSPECTS
Beyond the near term, the local economy needs a clear strategy, an action plan and a delivery mechanism.
First, it needs agreement on what to value.
What kind of Dorset do we want for the 2030s (and beyond) and how radically different is it from what we have now?
Having listened to local residents, businesses and institutional agents of development in many different forums over the years, a number of local targets for a ‘value-driven’ economy suggest themselves:
- vibrant rural communities and a modern coastal city delivering employment and output growth above population growth and, thereby, supporting social cohesion;
- less congestion and more environmental sustainability;
- better infrastructure and more productive firms and jobs;
- profitable and growing businesses that are part of innovative and competitive supply chains and engaged in dynamic markets; and
- improved schools, HE/FE and training providing new technology skills.
It is easy to concoct such a list – the proverbial ‘motherhood and apple pie’. It is less easy to define exactly what to invest in and to incentivise. It can be difficult to manage and choose between some of the aims and desires that, without agreement on value, may appear to conflict, such as growth versus sustainability, rural versus urban, new infrastructure versus preservation.
So, second, agreement on the economic aim is desirable.
How is the value agreed going to manifest itself?
- Is there a marketable brand or image that Dorset wants to portray?
- What kind of investment will bring Dorset the ‘right’ kind of employment and output? - can offsetting claims be resolved?
- What priority jobs/sectors can Dorset specialise in/be competitive at? Are there distinctive employment, output and productivity targets to pursue?
- What level/pace of economic progress is desirable in absolute/relative terms?
- Is it reasonable to seek to close the growth/wealth gap with neighbours and who are the appropriate comparators at home (e.g. SW v SE characteristics) and abroad?
Again, it can be easy to specify these broad parameters: productivity-led sources of future living standards and well-being. It is less easy to be specific as to what plans should be given active support. Only by expanding the margin between what is put in and what is got out can economic security and value be improved. That brings us back to value: productivity needs to be higher and increase faster but to what ends? Surely, not just more of the same. Where are the new sources of wealth and happiness going to be found? What ‘futures’ can be predicted and aimed for?
In blog 6, I identified three broad areas for innovative investment to achieve regional development by boosting competitiveness and levelling up income distribution:
- closing skills gaps – removing deficiencies and improving potential;
- preserving environmental capital and sustaining ‘green’ services; and
- raising productivity in future-orientated sectors.
In blog 4, I explained a possible strategic approach to these ends:
- defining sectors and activities by their role in the economy as performance anchors and catalysts of positive change; and
- identifying where capacity and capability is strong now and where future strengths can be built.
Given the above, where would Dorset benefit from increased understanding, deeper analysis, and stronger incentives for investment? It is important that relevant Dorset agencies, businesses and communities reach a strong, practical, local consensus that can be promoted nationally and internationally. Dorset might usefully identify a case that says, “this is our goal, this is our capital base, and this is our path to development. Come and invest here”.
Dorset does not have (or necessarily want) the economic scale, scope and spatial characteristics of some places. But, its location, natural qualities and human potential suggests it can be a ‘test bed’ for new activity and performance. If intervention works here, it can be applied more widely.
Therefore, Dorset can send a strong message if it is open and united around a clear strategy for agreed aims and values. This means:
- an agreed balance between conservation and change;
- investment in people and place that is market led with clear priorities on sector, product or service, and technology and skills; and
- a focus on supply side capacities and capabilities for the medium/long term.
Luckily, most of the core intelligence for these is already available and understood from previous research and analysis, and innate knowledge. Perhaps, after the ‘lock-down-turn’, a (virtual?) “Dorset Economy Summit” to bring values and aims together would be useful: one that defines incentives and investments for robust policy and delivery.
Offering a practical and cohesive strategy for private and public investors is key. Given Dorset’s current and likely expertise and targets, this is probably going to incorporate:
- specific tools or factors for productivity-based competitiveness – component and supply chain innovation through robust entrepreneurship;
- specialisation in certain digital and service skills – flexible labour and delivery options through state-of-the-art practices and innovation;
- investment in infrastructure and environmental resources – sustainable capital levels and service flows; and
- innovation in advanced engineering, green technologies, business and financial services, and, perhaps, the visitor economy – coherence about current and future sector competitiveness.
Perhaps, local partners can specify exact areas and messages for attention within these broad categories.
