A NEW ECONOMICS FOR NEGLECTED PLACES / PROJECT SYNDICATE

A New Economics for Neglected Places

In rich and poor countries alike, when left-behind regions are hit by an adverse shock, they will spiral down unless the shock is mitigated by supportive and timely finance guided by local contextual knowledge. That is the clear lesson from successful cases of economic renewal over the past half-century.

Paul Collier

OXFORD – The world needs a new economics for neglected places – for those who have fallen behind others in the same country, whether it be a rich one or a poor one. 

The place in question might be a community, a town, or a region: Muslims in France, Rotherham in Northern England, or Colombia’s Atlantic-Caribbean coastal region.

In my last book, Left Behind, I show why such places, once hit by an adverse shock, spiral down unless the shock is mitigated by supportive and timely finance guided by local contextual knowledge. 

Those in the United Kingdom may recognize this as a critique of the highly centralized, short-horizon, economic micromanagement exemplified by the Treasury; but the consequences should serve as a warning to other countries, too. 

Through detailed analyses of instances of renewal, I hope to show how both local leadership and bottom-up social movements can be effective in transforming broken places.

The problem, contrary to what Milton Friedman argued (and what the UK’s Treasury assumes), is that financial markets reallocate capital from shock-hit places to those that are unaffected. 

The smartest money flees from adversity toward success, and it is soon followed by other investors. 

Hence, the principle that “the market knows best” – which implies that the spatial allocation of public investment should simply follow private investment – has doomed my country to a polarizing divergence between provincial regions and London and its hinterland.

New research finds that since the 2008 global financial crisis, private investment has skewed even more heavily toward London. 

A 300-basis-point gap has emerged between the required return on investment in London, which is judged a low-risk place, and capital directed toward regional cities, many of which are now seen as so risky as to warrant junk-bond status. 

This regional gap in credit ratings is exceptional – as wide as the disparity between British and Romanian government debt.

Such gaps have bred a despairing sense of neglect: Brexit – as much an anti-London mutiny as an anger-fueled act of self-harm – was fully endorsed by all of the UK’s left-behind regions. 

Similarly, recent riots in the most socially deprived English provincial towns are signs of hopelessness analogous to the “deaths of despair” that have ravaged neglected American communities. 

Inevitably, they attract provocateur outsiders and political entrepreneurs who show no compunction about coarsening public discourse and sowing divisions in society.

The Anatomy of Renewal

Such outcomes could be countered by offsetting public finance, but only if the power to spend it is devolved to a range of local institutions – some public, some private. 

The deeper the decline, the longer the financial commitment must be sustained.

Take the example of Germany. 

By the time of German reunification in 1990, its eastern regions had suffered 41 years of communist destruction, which saw productivity reduced to a mere 20% of the western German level. 

Yet thanks to a 30-year, cross-party program of massive financial transfers, productivity in the former East Germany had risen to 85% of the rest of the country by 2022. 

This success was due not just to big money, but also to its sound management, which was decentralized by means of an alliance between local banks and KfW, a public development bank.

For the gap to be fully closed, Germany would have needed to sustain this offsetting finance for another decade; but even before the program prematurely ended in 2022, Germany’s priorities had shifted. 

The sudden influx of asylum-seekers in 2015 called for large injections of public money, leaving Germans in the East susceptible to the right-wing Alternative für Deutschland’s anti-immigrant messaging. 

Rather than feeling grateful for 30 years of generosity, many were persuaded that they were being treated like second-class citizens.

A variety of local institutions can help drive renewal in neglected places. 

In provincial England, for example, universities could be a key asset. 

Some are highly respected internationally for their medical, engineering, or computing research, and such departments are well-suited to commercial spin-offs. 

Yet while there is some financing for British startups, resources for the more important stage of commercialization – scaling up – are typically either unavailable or sourced from America or East Asia.

London may be home to a huge cluster of private equity, but the industry makes its money by channeling UK private savings abroad. 

Whereas half of British private savings were once invested in British firms, now this figure has dropped to a mere 6%. 

Public policy could induce the financial industry to localize, so that each region has a cluster of firms that thrive by acquiring local knowledge of promising opportunities.

The basic problem is similar in Colombia. 

Government and business are highly centralized in the capital, Bogotá, while provincial regions such as the Atlantic-Caribbean have languished. 

In this case, the regional advantage is not a university but cultural assets: the regional capital, Barranquilla, hosts the second-largest festival in the world, its annual Carnival, and is the home of one of the world’s most famous pop singers, Shakira. 

Moreover, Colombia (unlike England) has an excellent public financial institution that is learning to adopt a more devolved model analogous to KfW, and the current mayor of Bogotá is calling on the government to foster growth in the regions, rightly fearing mounting congestion without it.

There can be no economic renewal without local initiative. 

A critical mass of influential people within a community must come together to face the grim reality of decline without succumbing to nostalgia or pessimism. 

They must find within themselves the energy and courage to envision a new, viable future.

Pittsburgh went through this painful process following the collapse of its steel industry, initially losing half its population. 

Thanks to America’s highly devolved governance system and Pittsburgh’s strong local political leadership, highly rated universities, and supportive business and financial communities, it was able to reinvent itself and emerge as one of the country’s most prosperous big cities.

Into the Unknown

Back here in the UK, Scunthorpe, the last English steel-producing town, recently learned that the Chinese owner of its remaining factory would cease operations within a week, with all jobs lost. 

The news was so brutal that it made national headlines and forced political action. 

Prime Minister Keir Starmer recalled Parliament, drafted new legislation, and arrived in Scunthorpe the next day to announce that money would be found to nationalize the firm and keep it running it for the next five years.

But realizing that this was merely a stay of execution, the local mayor, Carol Ross, and the MP for Scunthorpe, Sir Nicholas Dakin, promptly organized a series of meetings and asked me to help. 

Upon arriving, I was impressed that none of the local leadership had indulged in nostalgia or pessimism. 

They earnestly began working in small teams to explore the potential of various suggestions, and they invited me back to comment on what has been proposed.

Will they succeed in renewing Scunthorpe? 

The outlook is uncertain, because Britain’s overcentralized system of governance makes the process unnecessarily difficult.

Scunthorpe offers a broader lesson for economic development. 

All places that are left behind or fearful of becoming so need to pose questions that lack known answers. 

In the language of economics, they face radical uncertainty. 

The appropriate response to such unknowability is rapid learning, by running parallel experiments, by trial and error, and by taking lessons from elsewhere. 

While Britain currently lacks the political architecture to facilitate this process, other societies that were once highly centralized have shown what success looks like.

Consider what Deng Xiaoping achieved in transforming the disastrous system he inherited from Mao Zedong in 1982, by which time China was the epicenter of global poverty. 

Deng’s first move was to travel around East Asia to learn from others (he was apparently greatly impressed by Singapore and Japan). 

He then built on China’s own distinctive history of competitive examinations for entry to its prestigious civil service, which in turn was reinvented. 

Out went knowledge of Confucius, in came knowledge of science and mathematics.

From millions of hopefuls aged 25-35, Deng selected the top candidates to serve as governors of China’s regions for the next five years. 

He and the Politburo then gave these regional governments daunting economic and social targets that they themselves did not know how to achieve. 

This triggered experiments and competitions between the regions and within them, creating a sprawling laboratory for economic development. 

Combined with learning from China’s neighbors, this system, maintained for the next 40 years, ushered in the most spectacular decline in poverty the world has ever seen.

Complacency and negligence have produced the socioeconomic divergence between London and provincial regions, providing a warning to other societies where many places are being left behind. 

The remedy is devolved governance combined with large and sustained fiscal transfers that encourage once-demoralized communities to face the future and learn as they go. 

It should not have taken riots to trigger Britain’s government to follow such a path, but perhaps the unrest will hasten acceptance of the need to do so.

Paul Collier is Professor of Economics and Public Policy at the Blavatnik School of Government at the University of Oxford and the author, most recently, of Left Behind: A New Economics for Neglected Places (Penguin, 2024).