Forward thinking

Forward thinking

David Bailey is one of the top business and industry academics in the West Midlands. Steve Dyson quizzes him on the recession, signs of recovery and what the region needs to do next.
Q. It’s been the worst recession in a lifetime – with cuts, unemployment and austerity for all. Who’s to blame for this mess – the government, bankers or  big businesses?

A. It was the banks’ excessive risk-taking and failure which ultimately led to a huge state bailout (the cost of which we’re all still picking up), the credit crunch and associated recession, and collapse in tax revenues. Putting all our economic eggs in one deregulated financial services basket clearly didn’t work. We still need to learn important lessons from that.

But we’ve also seen the slowest pace of ‘recovery’ on record. I hope things are now finally picking up, but we should recognise that what Chancellor George Osborne did – a very sharp fiscal tightening in the context of strong economic headwinds – weighed heavily on growth, making it harder for the government to meet its own fiscal targets. Osborne’s whole narrative – that ultra-tight spending cuts were needed to avert a Greek-style bond market strike – was fiction. Rather, long-term interest rates remain low, and are really a reflection of ongoing economic weakness.

Q. The UK’s coalition Government says they’re only dealing with what they inherited. But is their dual policy of public sector cutbacks and long-term infrastructure investment going to work?

A. There’s no sustainable growth strategy from my point of view. Forget genuine rebalancing towards making things rather than consumer spending. What the government has done is to go back to the old strategy of stimulating a house price boom in the hope of boosting confidence and spending. That’s what helped get us into this mess, and isn’t going to lay a basis for sustainable growth, sadly.

In particular, that rebalancing isn’t going to happen automatically – we need a more active industrial strategy to push things along and actively support exporters. For example, small firms in some sectors could potentially access overseas markets but can’t gear up to do so because of banking system weaknesses (hence the need for a new state-backed business bank and more support for exporters).

Q. Regional development agencies like Advantage West Midlands (AWM) were axed by the coalition, with the vision that Local Enterprise Partnerships could do much better. What are the LEPs
in the Black Country, Coventry and Birmingham getting right and wrong?

A. What we actually saw with the abolition of RDAs was both a major cut in funding for regional development outside of London and a substantial recentralisation of powers to London – despite the language of ‘localism’.  What’s on offer London (which kept its development agency) isn’t available elsewhere in England.

We effectively have two regions – London, and the rest. In different ways, both Birmingham and the Black Country LEPs are trying hard both to revitalise the advanced manufacturing base and to diversify the local economy. But this is one local economy and having two LEPs locally makes no sense at all. We’ve been left with a fragmented patchwork of LEPs, with insufficient powers and resources. Some will work, some won’t. At the very least, there’s a role for an ‘intermediate’ tier to join up the work of LEPs in areas like intelligence-gathering, cluster policy, innovation policy and accessing EU funding.

Q. Baron Heseltine excited many LEPs – especially Greater Birmingham and Solihull – about the possibility of a £70bn ‘single pot’ of devolved government funding. But only a fraction was offered
by the Chancellor. Is this enough to  spark growth? And if not, what should happen next?

A. The ‘single pot’ that Osborne announced for 2015-16 was peanuts – just £2bn. This won’t make them the economic powerhouses we’d hoped for. Oddly, it might be a future Labour government that could be keener on implementing Heseltine’s ideas than a future Conservative one. Labour in particular is trying to figure out what to do with LEPs, recognising that it couldn’t – if elected – scrap them as the current government did with RDAs, as that would cause yet more chaos and alienate businesses which have put considerable time and effort into making a go of LEPs.

Vince Cable had warned that LEPs don’t have the capacity to handle big amounts of money. Yet this argument over a lack of democratic accountability shouldn’t be used to forestall broader devolution, especially to English cities – Birmingham and the Black Country included.

Look north and some interesting developments are emerging in the form of new ‘combined authorities’ built of cooperating councils, which have the legal footing to receive large amounts of public cash and which have some public accountability. It’s this model which could offer the potential for channelling public money down to a local level. That’s something West Midland councils could usefully look at.

Q. Despite the global recession, Jaguar Land Rover has helped to revive  the Midlands automotive industry. How have they done it? And for how long can this continue?

A. Ultimately, it’s about making beautiful cars that people want to own and drive. What’s so positive about JLR’s recent bumper sales and profits is that the firm has done well in core markets like the Europe and US while expanding rapidly in emerging markets like China, now its biggest market, driven by its Range Rover and Land Rover brands. Jaguar, meanwhile, is doing much better than it was but still has key gaps in its range even after the launch of the fabulous F-type. It urgently needs a ‘baby Jag’ to compete head on with the BMW 3 series, for example. The hope is that this can become sustainable growth over the medium to long-term. It needs to be, as the firm faces significant, albeit manageable, challenges over the next few years. Firstly, the firm is small compared to key premium rivals such as BMW (which sells four or five times as many cars). Over the medium term JLR needs much bigger volumes to generate cash for new model development.

On this the firm’s going in the right direction, and has ambitious expansion plans. Secondly, under Tata ownership JLR has so far been able to ride on the back of huge investment by Ford in new platforms. The XF, XJ and Evoque were all basically built on Ford investment. From the F-Type onwards, JLR and Tata are effectively on their own. The strategy has to be built on big investment in new technologies and models, funded by big profits and continued growth. On this, prospects look good, barring another major economic and financial downturn, which tends to hit the premium sector hard. JLR can continue to grow the business significantly over the next decade, if it gets the cars right.

Q. What other business sectors are making a difference in the region? And which sectors are you
most worried about?

A. From serious games and creative industries, through tourism and business services, to advanced manufacturing, aerospace, biotech and green technologies, we have a much more diversified local economy. The low carbon technologies being developed here are being applied in different sectors and we see spill-overs between different sectors. Yet despite some recently positive signals, figures on manufacturing (key for exports) and the trade deficit both suggest that the much-hoped for rebalancing (to making things and exporting things) simply isn’t happening on any significant scale, and that this is impacting locally. In part it’s because manufacturing has been in the doldrums. The recent pick-up in the Manufacturing PMI suggests this sector may at last be pulling out of recession and could stop being a drag on growth. But leaving aside the recent – and remarkable – export successes of the automotive sector, what’s left of our wider manufacturing base simply doesn’t have the capacity to export out of trouble.

Q. What is the likely impact of the new high speed rail links for the Midlands?

A. The economic case for HS2 between London and Birmingham has been over-stated, as recent reports rightly indicate. But there is a good case for the long-distance London to the North high-speed line and, as it goes past Birmingham, we clearly want to be connected to it. So I’m in favour – but not necessarily for the reasons that the business community here put up about boosting local business.

I think the real benefit will come via linking to the airport and boosting the airport’s connectivity in the UK, while a longer runway boosts international connectivity.But HS2 is not enough if our creaking local infrastructure means it still takes an hour and half to get to Coventry from where I live, or a gruelling bus journey into Birmingham city centre. Our local infrastructure is holding things back. HS2 should be seen as part of a more general upgrading of our infrastructure – but also we need to make sure that local connectivity is improved.

Q. Can the Airports Commission be persuaded to make the West Midlands integral to the UK’s plans for coping with aviation growth? Or is a second runway for Birmingham Airport
a lost cause?

A. There’s a strong case to be made here and business leaders and politicians need to get behind it, given the links between the West Midlands and India and the Far East. Think of Tata with JLR and Shanghai Automotive with MG Motors, the extensive links between our local universities and those in China and the Far East. If we really want to export of way out of trouble we need to give local businesses a world-class infrastructure.

Q. What other major investment plans in the West Midlands should big businesses be focusing on?

A. This shift in economic growth and power to the emerging economies is the definitive economic trend of this century. We need to capitalise on it; if British-based firms don’t sell their goods and services there then firms from rival trading nations will do, as will rapidly-developing domestic firms in the likes of China and India keen to adopt western technologies and snap up Western brands. So we should be doing everything possible to encourage our firms to export.