The extent of regional imbalance in economic growth in the United Kingdom|A Case of North East and London

In the context of growing regional imbalance which exists both in developing and developed countries, the primary goal of this study is to examine the causes of regional imbalance between south and North England. The empirical evidence proves that there is a regional imbalance between these two regions in the United Kingdom which has impacted the economic growth of the country. Within the UK the regional disparities have s various key features among which include inequalities in employment, prosperity and industrial restructuring which has happened over years. Considerably, the United Kingdom has been considered as the most extreme in a regional imbalance in the EU context.  This paper will review regional disparities in the United Kingdom and how the current government policies are being formulated to reduce the level of regional imbalance in the United Kingdom.

Economic growth and regional imbalance

The regional imbalance has been widely spread among countries in the world which have then impeded the regional development (Eucken, 2012). Widely observed regional imbalance among different countries within the same region has led to impacts on economic growth. The regional imbalance is considered as the disparity in the social and economic development of two regions/ city or area. Regions tend to develop differently due to investments which are made of service sectors, educational institutions, industries, and healthcare facilities. Regional disparities and imbalances mean that there is a wide difference in per capita income, levels of industrialization, education and health services between two different regions.

On the other hand, economic growth is considered as the rate at which a country’s wealth increases. The regional imbalance has been brought about by three main mismatches which include the economic outline of the region, resources for one region as compared to the other and the population distribution within the country regions. Organized regional growth is an important goal for the national government to not only narrow the income gap but also to equalize the public service and spatial balance of the resources, economy, and environment.

Economic growth theory

Different theories and model on economic growth have been used in stressing the various alternative causes of economic growth. Ideally, economic growth is considered as the rise in services and goods manufactured within an economy over certain period (Gillespie, 2014). Relatively, economic growth is the increase in inflation through adjustment in the value of services and goods that have been manufactured in an economy over time. Ideally, economic growth is measured through the percentage rate of change of the real GDP. Gross domestic product is considered as the value of all final services and goods produced in a nation or economy (Sloman et al., 2016).

The classical economic theory is one of the economic growth theories that have been studied before. This theory argues that every economy has to have a stable state of the Gross domestic product and any deviance of that balanced state of the Gross domestic product is temporary and will eventually return (Gillespie, 2016). The theory entails growth and production theories whereby the theory is a variable proportion whereby increasing either capital or labor (factors of production) while holding other factors will increase the output. With reference to the classical model, LRAS and business cycle are some of the types of economic growth

The LRAS is considered as the capability of the economy to manufacture services and goods to meet demand of quality and availability factors and technology (Higgins, 2017). The LRAS is evaluated by the efficiency of the input factors such as land, labor and capital and the country’s stock resources. Some of the cause of growth in LRAS is Growth in labor supply, high productivity of capital and labor, improvements in efficiency and productivity and the increase in the stock of capital and labor resources, an increase the productive capital size of a country such as the infrastructure investments.

The Business cycle entails the Boom and bust cycles that reveal economic growth through recessions and peaks. This is the downward and upward movement of the GDP in the level of economic activities (Mankiw and Taylor, 2011). For instance, after there is a peak on the economy, a downturn follows to lessen the amount of inflation and increase unemployment thus lowering the economic productivity. Economic growth through the business cycle is caused by fluctuations that occur through consumer spending. Ideally, as the economy tends to recover from the recession, there is increased consumer confidence thus boosting spending thus raising the income of both businesses and individual.

Economic growth has also attracted attention due to the positive and negative impacts it has on society. Some of the positive effects include improved living standards, reduction in poverty, improved education, infrastructure, health, and technology. However, it also has its limitations which include increased income inequality, negative environmental consequences (pollution and natural disasters) and damage of social welfare due to increased consumption thus increased in industrial and household waste.

North East and London regional imbalance

North and south divide are terms that are used to refer to the economic and cultural differences that exist in the United Kingdom. The North-south divide has been used to frequently depict the economic dynamism of England. The GDP has increased by 1.4% in 2018 as compared to the previous year which shows increased economic growth in the country. Economic divergence between the North East and London continues to grow interns of the GVA per head (Döpke et al., 2016). The GVA per head measures the increase in the value of the economy as a result of the production of services and goods.  The gaps between the two regions have been growing relation to social outcomes such as health and education with improvements in London while in North East they lag behind. The Gross value added is considered as an important measure of regional disparities since it measures the value of services and goods within a region in an economy.

The Gross value added is important while measuring economic growth since it measures the contribution of an individual or a region to an economy. Gross added value is used in the calculation of the GDP which is a significant indicator of the nation’s economic state (Begg et al., 2014). For instance, in this case, it will show the contribution of the North East and London to the economic growth of England. The Gross added value will indicate the economic growth and output within the regions as well as the annual growth between the regions.

Data analysis

Figure 1: Average annual GVA growth %; source, (Gal and Egeland, 2018).

The table above shows the latest regional overall economic output and growth measured through Gross value added. In 2016, it is evident that London’s GVA has contributed to 23% the UK while Northeast contributed 2.9%. London has seen the highest annual growth rate of 3.0% compared to the North East which has the slowest growth rate of 1.0% (World Bank, 2018).

Figure 2: Regional Cumulative Percentage Point Differential Growth Gaps in Employment; source,(Martin et al., 2015)

The main causes of regional imbalance in the two regions is the unemployment rate. In the North East the level of the unemployment rate is higher as compared to London. The table above shows the point of differential growth gaps in employment. This table reveals that the North East has a high level of unemployment as compared to London thus contributing to regional disparities. The highest unemployment rate in the United Kingdom for 2018 October to December was North East at 5.4%. ideally, with the increased rate of unemployment, it is clear that individuals will be unable to purchase as many goods thus leading to lower output and reduced spending. Unemployment is a source of poverty and low production as well as low living standards.

The process of tertiarisation, lack of entrepreneurship and technological innovation which have contributed to the major regional imbalances between the North East and London (Gal and Egeland, 2018). For the last few decades, there has been a shift from the primary and secondary sectors within the UK mainly the manufacturing sectors which has impacted the regional growth. Considerably, the service sector in the growth of the service sector in London has had drastic changes as compared to the North East. The fall of the manufacturing sector has led to an imbalance in the economic structure thus leading to regional disparities.

Lack of entrepreneurship and technological innovation in the North East due to the attractiveness of the region to business has greatly influenced the growth of the region compared to London. Considerably, London has great attractiveness for business thus leading to increased entrepreneurship and technological innovations that have led to the growth of the region.

Current Government policies

Supply-side policies in the UK have been implemented by the Government in an attempt to increase productivity thus shifting the aggregate supply to the right. Shifting the AS to the right will lead to lowering the price level and reduce the cost-push inflation. On the other hand, this will contribute to lower frictional, structural and reduce real wage unemployment. Innovation policy has covered the updates from the government which includes industrial digitalization and industrial strategy. The industrial strategy will increase productivity and growth among the lagging regions thus increasing the investment rate within the regions.

Enterprise is one of the drivers of both employment and productivity growth within the economy (Amin and Goddard, 2018). Enterprise policy has been implemented to benefit both large and small firms within the regions. This policy has been effective in the creation of enterprise culture. This will contribute to the creation of jobs and support new business in the regions thus contributing to regional balance. Innovation policy has covered the updates from the government which includes industrial digitalization and industrial strategy. The industrial strategy will increase productivity and growth among the lagging regions thus increasing the investment rate within the regions.

Conclusion

The regional imbalance problem in the United Kingdom has become increasingly difficult to categorize due to the complex social-economic change within the regions. The conception of the North-south divide has led to the increased regional disparity. With references to the paper, North East and London regions in the UK have suggested that there a regional imbalance between different regions in the country. This has been contributed by social-economic differences such as the rate of unemployment, innovation, and technology, entrepreneurship and attractiveness of the region as compared to others. In responding to these challenges it is important for the government to consider responsibilities in economic development and promote new approaches to regional policies. Some of the policies states above include supply-side policies, enterprise policies, and innovation policies. All these are important steps towards ensuring a more region-specific approach and coherent to economic development and in support for all regions.

References

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