The West Midlands economy: why we need an inclusive economic strategy

This was the subject of Birmingham Trades Union Council’s conference on Saturday 10 March. The speakers were Richard Hatcher [1], Jonathan Payne on ‘The Question of Skills’ [2], and David Etherington on ‘What we can learn from Manchester’, and 27 people took part in a very useful discussion. We will be publishing David’s paper shortly and a link to Jonathan’s in the near future. We begin with Richard Hatcher’s introduction.

The West Midlands economy: why we need a strategy for inclusive growth

For many years, certainly since the Conservative government came to power in 2010, the trade union and labour movement in Birmingham and the West Midlands has largely focused on defensive campaigns against cuts and privatisation in public services. We have had little to say about the economy of Birmingham and the West Midlands. But now a new period has opened up where the issue of the local economy has come to the fore. There are three reasons:

  1. The possibility of a Corbyn-led Labour government, promising the end of austerity and a new economic strategy. What could this mean for the West Midlands?
  2. The debate about the local impact of Brexit on business and jobs, especially the car industry.
  3. The creation of the West Midlands Combined Authority. While local councils have little to say about local economic policies beyond the question of skills and training, the primary purpose of the WMCA is economic growth for private profit and everything else – public services, housing, transport, etc – is geared to that.

This new period means a new challenge for the unions and the left:

  • we need to develop our collective understanding of the West Midlands economy;
  • we need to develop our critique of the economic strategies of the WMCA, local big business and local councils;
  • and we need to develop a set of alternative economic policies. Corbyn and McDonnell are developing a national framework – we need to discuss how to translate it into concrete policies at the local level.

We need to discuss how we can build support now for the policies of the future Labour government and also how we can campaign for the practical steps that can be taken now, even under the Tory government, that begin to take policy in a different direction.

This is why we need an inclusive economic policy

Let me begin with some facts that demonstrate why we need an inclusive economic strategy in the West Midlands.

  • Just under 600,000 people are income deprived
  • Three in ten children are growing up in poverty
  • The employment rate (65%) is below the English average (74%)
  • One in five working families rely on in-work tax credits to top up their low pay, substantially higher than the average for England of one in seven
  • Gross Weekly Pay for male full-time workers is £558.3, for female full-time workers it’s £440.5.
  • Employment among people from ethnic minority backgrounds is 54%, compared to 64% in England

But if you look at the key policy documents of the WMCA such as the Strategic Economic Plan and the Mayor’s manifesto, these issues of inequality are absent or at best marginal. The SEP for example doesn’t even mention of issues of gender or race at all. So the WMCA has no inclusive economic strategy to tackle inequality. The reason is that the WMCA is dominated by business interests, its overriding aim is economic growth through higher productivity, and policy is decided by an alliance of local business leaders and elite local politicians, with no democratic participation in policy-making.

A change of policy by the WMCA, or just sugar-coating the neoliberal agenda?

At the WMCA Board meeting on January 12 this year a new policy document was launched, ‘The Cohesion and Integration Portfolio’. [3] This for the first time does recognise the deep inequalities in the West Midlands. “Evidence shows stark differences between the ability of different groups to benefit from the economic performance of the region” and tackling this, it says, is a priority for the WMCA to address. This new WMCA document doesn’t contain a strategic plan for inclusive growth. That is to be developed by a new Inclusive Growth Unit and the commissioning of a “blueprint” for “sharing economic growth”.

The question is, will this mark a radical change of policy by the WMCA or simply result in a rhetorical promise of inclusion and some superficial policy add-ons that leave intact its fundamental neoliberal agenda? But for us what ‘The Cohesion and Integration Portfolio’ policy does do is to provide another opportunity to argue for inclusive policies. It’s an opportunity for Labour councillors to do so too, and we should do all we can to urge them to take it.

Measure economic performance by social value, not just GVA

An inclusive economic policy would require the WMCA to change how it measures economic performance. At present it is largely through two measures, GVA – Gross Value Added – and jobs. The dominant one is GVA, which measures income generated in relation to costs. In short, it’s a measure of profitability. That’s what drives investment decisions, which means focusing on where the short-term profits are and neglecting large areas of the economy where profitability is low or relies on cheap labour rather than investment.

We need to measure economic performance on the basis of the social value it produces, not just GVA. Central is the impact on inequalities.

The TUC report Can devolution generate inclusive growth in the West Midlands? (2017) calls for a “Quality GVA” metric for social value, including job quality (e.g security, types of contracts); how skills are used – they are often under-used; and worker voice (e.g. collective bargaining coverage, worker representation on boards). We also need to add measures of environmental sustainability and the green economy – which may require de-growth in some areas, for example the use of fossil fuels or creation of pollution.

The WMCA’s economic strategy focuses only on high-tech priorities

What is the WMCA’s economic strategy at present? What are its priorities? It is based on seven “Transformational Sectors”:

  • Advanced manufacturing and engineering;
  • Business, professional and financial services;
  • Construction (building technologies);
  • Digital and creative;
  • Lifesciences and health care;
  • Logistics and transport technologies (including automotive industries)
  • Low carbon and environmental technologies

This is in line with the Government’s Industrial Strategy white paper published in November 2017. This focuses on investment in research and development in advanced technology. The problem is that the WMCA’s priority sectors only employ a minority of the workers in the WM. Here are the latest figures, from The Resolution Foundation report Midlands engine trouble: The challenges facing the West Midlands Combined Authority, published in December 2016. (These are more recent figures than the WMCA uses, though the categories are different.)

Public admin, education & health 30.7%
Distribution, hotels & restaurants 18.1%
Banking, finance and insurance 14.3%
Manufacturing 13.0%
Transport & comms 8.7%
Other services 6.4%
Construction 6.4%

 

Larger shares of the WMCA’s workforce are employed in public administration, education and health (31 per cent), distribution, hotels and restaurants (18 per cent) and banking, finance and insurance (14 per cent) than in manufacturing (13%). ‘Public admin, education & health’ and ‘Distribution, hotels & restaurants’ together account for almost half – 48.8% – of jobs in the West Midlands, and nearly four times as many as ‘Manufacturing’ (13%). The WMCA claims that by 2030 over four times as many jobs will be created in ‘Retail’ (83,000) as in ‘Advanced Manufacturing and Engineering’ (20,000).

Note also that many of the jobs in the sectors which are not regarded as “Transformational” and not a priority for the WMCA – sectors such as ‘Public admin, education & health’ and ‘Distribution, hotels & restaurants’, including retail –  are relatively low-paid, often – though not always – low-skill, and predominantly female. Take for example, adult social care. In the West Midlands in 2015/16:

  • 165,000 care workers in WM (compared to 184,000 in Advanced Manufacturing and Engineering in 2013)
  • 77% are employed by the independent sector; 7.5% directly by local authorities; 7% in the NHS, and 8% through ‘direct payment.’
  • The West Midlands will need an extra 25,000 workers by 2025

(Social care as a local economic solution for the West Midlands, Localise West Midlands, New Economics Foundation, August 2017)

Of course there are plenty of low-paid low-skill jobs in manufacturing too. For example, according to the latest WMCA figures, in the manufacturing sector (excluding automotive) ‘The majority of high GVA businesses are Food Producers’. The top company by GVA is Boparan Holdings. Its 2 Sisters Food Group, based in West Bromwich, is the second largest food business by turnover in the UK, employing 23,000 workers, most on minimum wages. Its factories – one is in West Bromwich – produce a third of all poultry products eaten in the UK. The 2 Sisters Food Group reported annual revenues of £3.1bn in 2016. Boparan is currently under investigation by the Food Standards Agency after an undercover investigation revealed fraudulent working practices.

So we need an economic policy for the West Midlands which is inclusive – which is a policy for all workers, not just the minority employed in the high-technology sectors.

The problem isn’t a shortage of skills, it’s a low-skill low-pay economy

 The principal explanation given by the WMCA, and by Birmingham City Council’s Economy, Skills and Transport Scrutiny Committee, for low productivity is a shortage of skills, and the solution is more and better education and training. (This supply-side argument was challenged expertly by Jonathan Payne. His paper isn’t available yet so I have added the following points).

Skills shortages certainly affect some specialised sectors but they do not apply to the majority of the UK economy.  This is the analysis of Growth Through People: Evidence and Analysis, the report of the employer-led UK Commission for Employment and Skills (UKCES, 2015). According to the OECD “The low-skill low-cost economy means Britain has the highest proportion of low-skilled jobs in the OECD countries after Spain. Twenty-two percent of UK jobs require no more than primary education, compared with less than five percent in countries like Germany and Sweden.” Further and more recent evidence is provided by the UKCES report Employer Skills Survey 2015, published in January 2016 and based on data from employers themselves.

The majority of establishments reported that they had a fully proficient workforce: 86 per cent felt that all their staff were fully proficient at their job. However around one in seven employers (14 per cent) experienced skills gaps within their establishment. This equates to approximately 1.4 million staff who were not fully proficient (five per cent of the UK workforce) (UKCES, 2016, p 55).

Only a relatively small proportion of employers – 14% – reported a skills deficit. But the survey also makes the crucial point that a significant minority of employers report staff having under-utilised skills and qualifications. Using the UKCES data, Centre for Cities (2016) has provided the figures for each city. Here are the figures for Birmingham, based on employers’ data:

% of employers with staff not fully proficient 15.95%
% of workers who are not fully proficient 5.1%
% of employers with hard to fill vacancies 8.48%
% of employers with hard to fill vacancies due to skills shortages 7.23%
% of employers with staff whose skills are not fully utilised 30.23%

 

Over four times as many Birmingham employers said they had staff with under-utilised skills as reported hard to fill vacancies due to skills shortages.

The 2016 UKCES survey report offers this explanation of the cause of the under-utilisation of skills: “too many businesses seem in a ‘low skill equilibrium’, limiting their ambitions by organising work around a low level of skill. These businesses use the minimum necessary skill from their employees, rather than seeking to fully utilise their talents, or develop them further, to drive the business forward.”

The solution requires a shift from a supply-side to a demand-side approach: a radical reshaping of the whole relationship between education and training, including re-training and upskilling, and the work process, based on creating ‘good work’ – skilled and well-paid quality jobs.

There are steps towards a more inclusive economic policy in the West Midlands which can be taken right now

Of course an inclusive economic policy would require a radically different government economic policy, and Corbyn and McDonnell have developed some of the framework. But there are steps towards a more inclusive economic policy which local councils in the West Midlands and the WMCA itself could take right now, even under the Conservative government, if they had the political will. Steps which the trade union and labour movement should be campaigning for. Let me give one simple example.

Low pay is rife in the West Midlands. The real Living Wage of £8.75 an hour should be the condition of all the WMCA’s contracts and partnerships with external bodies, including their supply chains. They should also reject zero hours contracts and recognise trade unions. But Andy Street’s mayoral manifesto is silent on the whole issue, and he deliberately excludes the Living Wage from his 229 pledges.

Contrast this with the Liverpool City Region CA, whose mayor is Steve Rotheram, a supporter of Jeremy Corbyn. In August 2017 he announced that he was “Creating a Fairness and Social Justice Advisory Board to ensure securing inclusive growth becomes a connecting thread across all aspects of policy, including a commitment to support the adoption of a Real Living Wage by public and [private] sector employers across the region.” The board would, Rotheram said, be “permanently holding our feet to the fire on a core commitment”. Lynn Collins, NWTUC Regional Secretary, has been appointed chair. If Liverpool can do it why can’t the West Midlands?

The Preston model

I want to end by talking about Preston. On February 8 this year I attended a conference organised by Preston City Council with John McDonnell the Shadow Chancellor as the main speaker. The conference was titled “Community Wealth-Building and Alternative Economic Strategies in Preston”. John McDonnell visited Preston previously in January 2016 and he said then: “I think the council here has provided a model of how an innovative local Labour administration can start to think and act creatively to secure sustainable economic growth. This kind of radicalism is exactly what we need across the whole country.“  Preston has also been praised by Jeremy Corbyn.

I want to talk about what we can learn from Preston, and what I think we shouldn’t. [4]

The core of the Preston model is its use of procurement. Councils spend billions of pounds on procurement – buying goods and services. Many councils use procurement to leverage social value. For example, Birmingham City Council introduced its Public Procurement Framework for Jobs and Skills in 2010. The Framework requires that all contracts worth more than £200k per annum include employment and training opportunities. This has been implemented across a number of large-scale projects, including the Library of Birmingham and Grand Central at New St station. But the concessions granted by employers in these massive projects were quite limited. The Preston model of procurement goes much further.

Creating community wealth in the local circular economy

Its principle is Community Wealth Building. The strategy is to buy from and employ local companies and so keep the money within the local community, funding local jobs. The argument is that this generates more purchasing power within the community, much of which can then be spent within the local community. The argument is that this creates community wealth in the local circular economy.

Furthermore, the council has persuaded other big local public institutions – “anchor institutions” – to adopt the same policy. They include a large cooperative Housing Association, Further Education colleges, the police, the University of Central Lancashire, and Lancashire County Council, and they are now negotiating with Lancashire Teaching Hospitals. Matthew Brown, Preston’s Cabinet Member for Social Justice, Inclusion and Policy, says “So far we have shifted at least £4m-£5m in public contracts back to the local economy.” In 2012 anchor institutions spent 5% in Preston, now it’s 18%.

This policy finds support from the TUC in its 2017 publication Great jobs in great places, which says “Regional public sector bodies should use public procurement and commissioning tools to support the development of the circular economy”. The main driving force behind Community Wealth Building through keeping spending within the local community as a national economic strategy is the Centre for Local Economic Strategies, CLES, which has been working with Preston since 2013. CLES is increasingly influential in many areas, applying the same strategy, including working with the council in Manchester and now in Birmingham. And McDonnell is setting up a Community Wealth Building Unit, advised by CLES.

Creating community wealth in the local circular economy is a zero-sum game

The problem is this strategy is largely a zero-sum game. For example, if we implement it in Birmingham it would mean more money spent locally by Birmingham council and by anchor institutions in Birmingham, but less money spent by Birmingham in Coventry and Wolverhampton. And vice versa if Coventry and Wolverhampton adopt it in return. It’s a strategy where no-one gains, or if they do it’s at the expense of other local communities.

It’s an illusion that ‘community wealth building’ can undermine capitalism from the bottom up

There is another problem with CLES and the Preston model – the exaggerated claim that they are building a new economy from the bottom up. Matthew Brown says: “We want to create a new economic system within Preston and Lancashire.” “…we’ve got to move to a different system, bit by bit. I think we’ve got to move beyond capitalism to a new system.”. CLES (in What Needs To Be Done: The Manifesto For Local Economies) speaks of creating “a progressive and socially just market”, as though capitalism can ever be that. What this avoids confronting, ideologically and politically, is the power of big capital and the power of the capitalist state to block policies when they start to threaten the profits of big business.

What we can learn from Preston, and what I think we shouldn’t

I think the lesson we should take from Preston is that councils and the WMCA should take their procurement policies much further. They should develop much more ambitious procurement strategies, including jointly with each other across the West Midlands where possible, and they should form alliances with anchor institutions to use their collective procurement powers to the full to gain the maximum social value from suppliers, wherever they are located.

But we shouldn’t buy into the circular economy argument, it is based on beggar-my-neighbour local protectionism. We should procure goods and services from wherever provides the greatest economic and social value, on just the same basis as other external councils and institutions should buy from providers in Birmingham and the West Midlands.

Having said that, there are a number of other ideas we can learn from Preston (as well as from other cities in Europe and beyond).

Local Government Pension Funds

One idea concerns Local Government Pension Funds. According to Matthew Brown, in Preston

“The local government pension fund is already investing in the local economy, in student flats and other developments – about, I think, £50m, which instead of going to outside shareholders is going to Preston. We want to look further at things like housing and potentially also at renewable energy, as a member of the Lancashire County Pension Fund, which is a huge amount of wealth consisting of £5.5 billion across Lancashire with the unions interested in investing in affordable housing which would benefit many of their members.”

Where are Local Government Pension Funds in the West Midlands investing our money? What voice do local government workers have in deciding? And how much are we paying agents, the asset management industry, which may be top-slicing as much as 35%? This needs urgent investigation by the trade union movement.

Expanding Council owned public services

We have got used to Council services being cut and privatised. But there are opportunities to extend Council owned public services. Matthew Brown mentioned renewable energy. When John McDonnell spoke in Preston in 2016 he said “Community ownership of energy, which Jeremy Corbyn and our shadow energy secretary, Lisa Nandy have highlighted as a priority, has boomed in the last five years. Turnover has risen by 1,400%, as local communities realise the value of community ownership in both providing a revenue stream, and helping us move towards a low-carbon future.” The TUC report Great jobs in great places, published in November 2017, calls for “community and publicly owned energy projects with genuine local benefit”.

An existing example is Robin Hood Energy, launched by Nottingham City Council in 2015. It operates on a not-for-profit basis and has no private shareholders or bonus schemes. This model allows the company to use its profits to create affordable, competitive tariffs. Only two months after the launch of Robin Hood Energy, the East Midlands climbed eight places to become the cheapest region in the country for dual fuel tariffs out of 14 regions. This caused its larger competitors to realign their tariffs to compete, benefiting the region’s energy users overall.

Robin Hood Energy is now supporting other local authorities who want to launch their own energy companies, including Leeds, Liverpool and Derby. Why not us in Birmingham and the West Midlands? And we could go further – municipal renewal energy companies using wind turbines. The city of Munich owns part of one big offshore wind farm in the North Sea. And how about a municipal broadband company, undercutting commercial rates?

Community and Regional Banks

Labour policy is for a National Investment Bank to address Britain’s chronic investment shortage. Preston is planning for a Community Bank for Lancashire. We need a Regional Bank for Birmingham and the West Midlands, and we need to start publicising the case for it now.

What forms of ownership?

Finally, Preston raises some important questions about forms of ownership. I’ve talked about municipal ownership, but Preston is also promoting co-operatives and worker-owned businesses. Matthew Brown says “We’ve got an employee-owned transport consultancy, that employs about thirty people.”  There is a Preston Co-op Development Network, and Co-Tech – a network of digital co-ops, using council premises at a peppercorn rent.

Here in the West Midlands do we see our aim just as bringing as much as possible of the West Midlands economy into state ownership, whether the national state or local councils?  Or do we also advocate other forms of ownership as well, by workers, by the users of services, and by community organisations? And if so, how are they to be held democratically accountable to the whole community? [5]

I will give one example: the adult social care industry that I referred to earlier, running care homes. The annual gross expenditure on adult social care in the West Midlands is £2 billion, representing 35% of local authority spending. It is a market dominated by a number of big companies, mainly owned by big investors. In the West Midlands we also have a large family owned business, Sevacare, founded in Walsall in 1994 and now the UK’s fourth biggest home care provider. According to CorporateWatch in 2015, it has 54 branches, 9,600 clients and 5,200 employees. Its annual revenue is £66 million, with pay-outs to the family owners in the last five years of £4.9 million.

At present these care businesses are funded by local authorities which are legally obliged to spend 85% of their spending on social care with the private sector. A Labour government should abolish this regulation. What people want is smaller-scale provision offering personalised care. Should we then call for care homes to be owned and run by local councils? Or do we think there is a role for small private providers, social enterprises and co-operatives, funded by the council?

We know there are dangers with mutuals and co-ops as providers of public services, including as stepping stones to privatisation (see the Unison report Mutual Benefits?). It is no accident that they are promoted by the Conservative government and that Andy Street favours council services being handed over to mutuals. But are there also advantages, provided they are under sufficient public control and accountability? And if so, what forms should that public accountability take? It’s a discussion we need to have.

Notes

  1. https://birminghamagainstthecuts.wordpress.com/2017/03/01/the-west-midlands-combined-authority-business-dominance-against-local-democracy/ 1 March 2017. See also https://birminghamagainstthecuts.wordpress.com/2017/10/20/the-west-midlands-combined-authority-has-turned-its-back-on-inclusive-economic-growth-to-tackle-inequality/ 20 October 2017.
  2. Jonathan Payne’s new book with Caroline Lloyd is Skills in the Age of Over-Qualification: Comparing Service Sector Work in Europe, Oxford University Press.
  3. https://birminghamagainstthecuts.wordpress.com/2018/02/02/the-wmcas-new-cohesion-and-integration-portfolio-community-cohesion-and-inclusive-economic-development/ 2 February 2018.
  4. See ‘The Road to Socialism is the A59: The Preston Model’, Renewal 24: 2, 2017. http://www.renewal.org.uk/articles/the-road-to-socialism-is-the-a59-the-preston-model. And Alternative Models of Ownership, Labour Party report, October 2017. http://labour.org.uk/wp-content/uploads/2017/10/Alternative-Models-of-Ownership.pdf
  5. See Alternative Models of Ownership.

 

 

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