Economics: North-south divide not yet history

THERE are many worthwhile uses to which the Government could put our hard-earned taxes, but bribing disaffected southern voters back into the Tory fold is surely not among them.

Yet it appears to have been an important influence on the redrawing of Britain's regional aid map, unveiled by the Department of Trade and Industry on Friday. The Government is reallocating financial help to the Tory heartlands of the South-east and the south coast of England, at the expense of the North, Scotland and South Wales. At stake are government grants for companies opening factories and creating new jobs.

Bradford, Corby, Shotton, Darlington and Scunthorpe all conform to the popular image of communities that suffered in the recession of the early 1980s and have struggled to recover through the rest of the decade. But they have all lost their assisted area status. Their replacements include Hastings, Dover, Clacton, the Isle of Wight and Great Yarmouth.

At first glance this shift seems perfectly defensible, as the South has borne the brunt of the recent recession. Output of goods and services in the South-east has fallen by about 6.5 per cent in the past two years, nearly twice as deep a recession as that suffered by the country as a whole. The South-east has also suffered the biggest rise in unemployment: while the national jobless total doubled between the trough in March 1990 and the peak in January this year, it trebled in the South-east.

Indeed, many of the new assisted areas face considerable difficulties, with unemployment well above both the national and regional average. Unemployment in Clacton, for example, is half as high again as the national average at 15.4 per cent.

But is it wise to give long-term help to these South-east blackspots by redrawing the regional aid map? In effect, the Government is signalling that it believes the 'north-south divide', which was such a contentious symbol of the Thatcher era, to be largely a thing of the past. But its demise has been much exaggerated, and there are already signs that it is starting to widen again.

The main evidence cited for the disappearance of the north-south divide is the narrowing gap between rates of unemployment in different parts of the country, as shown in the graphic below. When unemployment was at its low in spring 1990, it was 136 per cent higher in the North than in the South-east. By January, the gap had fallen to only 19 per cent.

This narrowing would have to be long-lasting to justify redrawing the regional aid map, but much may be reversed. In theory, the map could be redrawn again in three years, but the last survived for nearly a decade.

Since unemployment began to fall again in January, the reductions have been concentrated where the jobless total was lowest to start with. The fall has been twice as great in regions where unemployment is below the national average than where it is above the national average. And which region has seen the biggest percentage fall? The South-east.

It should come as no surprise if unemployment rates diverge again as the economy recovers. This has been a consistent feature of economic cycles for the past 20 years. In each period of rising unemployment - 1974-77, 1979-86 and 1990-92 - the share of national unemployment accounted for by southern regions has risen, while the share of northern regions has fallen. Conversely, when the jobless total drops, the southern share falls as the northern share rises.

Cambridge economists Nick Mansley and John Rhodes believe this cyclical effect accounts for a third to a half of the convergence in regional unemployment between 1990 and 1992. Consequently, they expect the north-south divide to widen again as a natural side-effect of recovery, sufficient to restore the disparities of the late 1970s (Prospects for the Regions in the 1990s - North/South Divided?, Cambridge Economic Review 1992.)

But what explains the rest of the recent narrowing in unemployment rates, and will it too be reversed? The main factor is the unusually severe degree to which the South has suffered in this recession, as the table below shows. Both North and South have lost about 430,000 factory jobs since 1990. But the South has lost 470,000 more jobs than the North in distribution, hotels and catering, and banking and finance. The boom from 1986 to 1989 was much stronger in the South than the North. The banking and distribution sectors grew extremely rapidly, partly because demand was high and partly because it was expected to continue growing in spectacular fashion, fuelled by consumer debt and mortgage lending.

This was reflected in different regional rates of house price growth. Prices rose 170 per cent in the South-east between 1983 and 1989, but only 70 per cent in the North. High mortgage debt and interest rates finally stopped the housing market dead in its tracks in 1989, hitting consumer spending. The very sectors that had expanded most quickly in the 1980s then fared worse in the downturn.

So what of the recovery? Since Black Wednesday, the upturn in the economy has been driven principally by a lower pound - boosting exports and helping to ward off imports - and lower interest rates. The lower pound is of greatest help to manufacturers, who are most exposed to international competition. As more manufacturers are based in the North than the South, so the North benefits most. The National Institute for Economic and Social Research recently estimated that a falling pound was 50 per cent more effective in cutting unemployment in the North than in the South after two years. (Has the North/South Divide come to an End?, NIER Review 1992.)

In contrast, falls in interest rates are of more help to the South than the North, because individuals and companies in the South have bigger debts. The fall in mortgage rates from their 1990 peak has saved the average new house buyer in the South-east nearly pounds 280 a month in payments, roughly twice the saving in the North. The NIESR calculated that base rate cuts were 50 per cent more effective in cutting southern unemployment than northern unemployment after two years.

The boost from the lower pound has fed through more quickly than that of lower interest rates, not least because improved cash flow has been used to pay off debts rather than to spend. But when the base rate cuts have finally fed through fully and house prices have picked up, the South-east will lead the way.

The recession has also left many of the South's structural advantages intact, such as its flexible workforce and relatively high rate of new business formation. The South is also best placed to benefit from the single European market, especially when the Channel tunnel is completed.

The north-south divide was last dismissed as a thing of the past in the mid-1950s. Regional unemployment disparities narrowed sharply, and the Government abandoned its regional policy. But by 1958, the policies had been readopted and by 1963, the disparities were as wide as they had ever been. We should not be surprised if history repeats itself.

(Graph omitted)