Why the MPC is just an economic sideshow

The British economy will not prosper unless Labour's policies on social exclusion work
THERE IS little the dozen people with their hands on the controls can do to influence the course of the British economy for the next year or so. The monetary experts at the Bank of England, voting once a month on the level of interest rates, and the Chancellor of the Exchequer and his closest advisers who set tax and government spending, are urged by the pundits in the press and the City to do something different.

If only their own favourite patent economic medicine had been applied, the pound would be weaker, or consumers would not be spending so gleefully, and the outlook would be hunky dory.

This is nonsense, of course. The main lesson from the mistakes made in macroeconomic policy during the past 20 years is that the only freedom is the freedom to make mistakes.

As Hamish McRae pointed out last week, the best the policy-makers can do is be humble about what they can achieve when they are administering medicinal changes in interest rates or spending plans.

Yet, although short-term miracle cures for our addiction to boom and bust are pure quackery, the Government is not powerless. It could make a huge difference to Britain's long-term economic prospects.

Like the US, although lagging behind it, we stand on the verge of a sustained improvement in productivity and prosperity thanks to the diffusion since the mid-1970s of new technologies to every last dark corner of the economy.

The key to realising this potential lies in microeconomic, not macroeconomic policies - often labelled "supply side", although it is a bit more subtle than that. Successful market economies depend on the context in which the market has to operate, on the institutions, the character of the workforce, the degree of entrepreneurship, and all sorts of other intangible features. If stability and caution are the watchwords in macroeconomic policy, Britain needs some radicalism and imagination at the micro level.

For example, this kind of micro success will depend on making Britain's cities work. The new economy is quintessentially urban, and our cities could be in for the kind of renaissance they enjoyed at the turn of the last century.

But this will only happen if the Government can tackle successfully the underside of city life, the homelessness and poverty, violence and filth spreading like weeds that threaten to choke the healthy economic growth. The recent announcement by the Social Exclusion Unit of new plans to reduce homelessness is more important for the British economy than anything the Bank of England's Monetary Policy Committee does.

New theories have revived insights dating back nearly a century to explain why the widespread use of new information and communications technologies means more clustering of national economic activity in cities than ever before.

The notion that telecommunications will disperse us all to work from home in rural bliss misses the mark completely. For if there are no technical obstacles to being in one place rather than another, business activity will concentrate where it is already.

The reason is that the advanced economies are becoming heavily dependent on their knowledge-intensive businesses. Face-to-face interaction between people is more important, not less, as the ideas that need to be exchanged become more complex and creative.

A good example is the dominance of London in financial services. Even though most of this activity takes place in cyberspace, the cheapness of the phone calls needed to move money around the globe means that banks are able to concentrate all their trading in one place because it costs almost nothing to ship an electronic financial transaction to the right computer.

Yet right alongside their thriving clusters of people industries such as financial services, multimedia, even retailing and tourism, British cities display extraordinary clusters of social deprivation. They are increasingly polarised between those who can create value and will benefit from the economic potential of human creativity, and those who are devalued and left behind.

The evidence for this increasing polarisation is overwhelming. And it is worse in some dimensions in the UK than the US, according to OECD research.

The economic isolation of the poor in our cities has become embedded. Those who can move out have done so. Those who remain and, crucially, their children, are unable to improve their lot. The lack of role models, the presence of crime and drugs, the absence of the social and economic norms of the wider society, mean that within less than a generation a deprived area can turn into a ghetto surrounded by invisible walls.

The fact that ethnic minorities and immigrant groups tend to concentrate in inner city areas only cements their isolation. The inhabitants are unable to develop the skills and capacities needed to thrive in the information society. Even if they can get on the bus each morning, they still won't plug in to the new economy.

The downward spiral of decline imposes costs on the rest of the economy. Apart from the costs of crime prevention, policing and higher social spending, the city's ability to thrive is hindered as much by perceptions of poverty, crime and unemployment as by pollution and congestion. And, critically, social exclusion wastes human resources in an economy which depends increasingly on people.

Policy towards the inner cities has, for two decades, consisted of pouring in small amounts of money from a great height, such as the provision of funds through Single Regeneration Budget (pounds 1.3bn in 1997/98).

Yet the impact on the poorest areas has been scant. Conservative economic policies of deregulation and privatisation successfully set the scene for businesses to take advantage of all that the new technologies can offer.

But the British economy will not prosper unless Labour's policies intended to tackle the nitty gritty of social exclusion work too. As for our obsession with interest rates and spending reviews, it is just a sideshow to the real action in the economy.

A new pamphlet by Diane Coyle, `Britain's urban boom' - one of a series on cities - is published by Comedia in association with Demos, pounds 7.50 from ECO Distribution, tel: 01509 890068.