Shifting decision-making to communities is essential in order to reverse our growing regional inequality as it gives councils and local leaders the tools and incentives to invest in regional economic development. Countries that are decentralised tend to be wealthier and have less regional disparity.
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In early 2012, facing a recession and rising unemployment, David Cameron, the then UK Prime Minister, asked Lord Heseltine, a former Conservative Cabinet Minister, to review his Government’s economic development strategy and give the Government his bold ideas on how to bring government and industry together. Heseltine reported to the Government in October 2013 and his report had one over-arching message, that increasing centralism is bad for business.
His prescription for the UK economy included a more explicit role for local authorities and he explicitly expressed concern at the dominance of Whitehall and the relegation of local government to the role of a service provider, which had reduced the involvement of local business people and deprived cities and towns from the benefits of their innovation and energy. In his view the loss of local economic leadership was exacerbated by:
- the general failure of governments to be informed about the different circumstances of communities when making decisions; and
- the tendency of governments to operate in a siloed manner which inhibits their ability to take a holistic approach and deal with the total range of issues affecting an area.
Heseltine argued that since barriers to growth are multi-faceted the traditional ‘one size fits all’ approach of the state is seldom appropriate for all places. In his view local leaders are best placed to understand not only the opportunities to growth in their own communities but also the obstacles.
How does localism increase economic growth?
One of the values of decentralisation is the incentives on local governments created by the proximity to decision-makers, local accountability and better information, to tailor services so that they better meet the needs and preferences of users and consumers, especially in comparison to the incentives that higher level governments have. Based on their examination of cities in the United Kingdom (a country nearly as centralised as New Zealand) they found that centralisation was hindering the delivery of local services that support economic growth. They concluded that:
the incentives and rewards for supporting growth need to be rebalanced with more of the benefits of growth passed on to local areas where the costs of investment are borne and where reinvesting the proceeds of growth is likely to generate cumulative benefits to the economy” (Centre of Cities blog January 17 2014).
In addition to the constraints on councils they also found that central government budget and service silos hindered the design and delivery of efficient and joined up services. As a result cities found it difficult to meet place specific demands such as matching skill training with the needs of the local jobs market.
Their recommendations highlighted the need for central government offer powers and structures that empower local authorities and their partners in cities to work across silos, coordinate strategic investments and recoup the costs of investment in the local economy or society.
Comparative data reinforces the conclusions that both Heseltine and the Centre for Cities’ arrived at with centralised countries having lower GDP per capita than decentralised countries, see figure 5.
Figure 5: Relationship between fiscal decentralisation and GDP
Figure 5 shows a strong relationship between a country’s GDP per capita and its level of fiscal decentralisation, in short the more decentralised a country is the higher its per capita GDP.
Impact on growth
Recent research also suggests a positive correlation between decentralisation and gross domestic product (GDP) per capita growth (Blochliger 2013).
Local government systems which have high levels of tax and revenue assignment and tax autonomy, appear to have a stronger impact on economic activity with a 10% increase in the level of decentralisation being associated with a 3% higher GDP per capita on average (ibid).
This is most pronounced in situations where strongly centralised countries are decentralising. The effect is less pronounced in those countries which are already partly decentralised indicating that the relationship between growth and decentralisation is not hump shaped, i.e. there is not an optimal degree of decentralisation (ibid p.4).
Blochliger (2013) notes that the economic effects of decentralisation are similar to the effects of a reduction in the tax burden: a reduction in tax of 1% has a similar effect on GDP as an increase of 1% in the decentralisation ratio.
It is no surprise that the strongly decentralised countries, such as Iceland, Sweden and Switzerland are more prosperous and more equal. In each country communities, through their local governments and civic organisations, have the authority and the incentive to drive change. Incentivising councils to make local investments by, for example, assigning them some form of buoyant tax (income or transaction) can address the problem of inequality, especially where inequality has a spatial or regional dimension.
Decentralisation is also associated with less regional inequality
Centralised states, such as New Zealand and the United Kingdom, tend to have higher levels of inequality than decentralised states. For example, the GDP per capita of the three poorest regions in New Zealand averages $41,000 in contrast to the average GDP per capita of the three most prosperous regions of $67,500. The difference is significant and, combined with the fact that the poorest regions also have the lowest rates of educational achievement, the highest rates of young people not in employment, education or training, and have the highest rates of Maori unemployment, represents a serious failure of our centralised decision-making model.
Where power and authority are centralised regions and communities lack the ability themselves to significantly change their own circumstances and are at risk of being left behind and creating a geography of social and economic disadvantage. Centralised decision-makers lack the same incentives to respond and address local issues when compared to their local counterparts.
A recent international example where local action has led to economic growth, despite failure at the national level, is the city of Cluj in Romania. Cluj is one of only two cities in Romania not suffering from declining population - a situation the city attributes to the adoption of a municipal strategy that gave priority to universities over factories. Today the city is home to 1,350 IT companies and “an estimated 20,000 developers, up from 12,000 in 2014” (Economist December 22, 2018).
As noted above poverty in New Zealand poverty has a notable spatial dimension with some communities and regions falling behind. These regions and sub-regions have lost investment, lost jobs and have poorer educational opportunities for their children. The social and economic divide between these communities and the rest of New Zealand appears directly related to our centralised governance model and the failure of decision-makers in the centre to share power. Figure 6 shows a small correlation between centralisation and inequality which, arguably, reflects the increased risk of spatial inequality in centralised states.
Figure 6: Localism and inequality
Sources OECD UCLG
To address New Zealand’s regional inequality we need to give communities the necessary decision-making authority and access to funding that will both incentivize and enable them to adopt policies and programmes, and make the appropriate investments to address the constraints holding back their social and economic development.
Blochliger (2013) Decentralisation and Economic Growth - Part 1: How Fiscal Federalism Affects Long-Term Development, OECD Working Papers on Fiscal Federalism, No. 14, OECD Publishing, Paris. http://dx.doi.org/10.1787/5k4559gx1q8r-en
Centre for Cities blog (2017) accessed from https://www.centreforcities.org/blog/
Heseltine, M (2013) No Stone Unturned: in pursuit of growth, accessed from https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/34648/12-1213-no-stone-unturned-in-pursuit-of-growth.pdf
Katz, B and Novak, J (2017) The New Localism: How cities can thrive in the age of populism, Brookings Institute Press, Washington.