Wednesday, December 14, 2016

Toward A Rust Belt Powerhouse

By Jim O'Neill
Project Syndicate
December 14, 2016

A few days ago, US President-elect Donald Trump took to Twitter – his medium of choice – to declare that he did not need China’s permission to contact Taiwan, because China didn’t ask for permission to devalue its currency. At that moment, my hope that the Trump shake-up would be economically beneficial for the United States diminished.

I believe that the developed economies need a jolt to escape their post-2008 malaise and their excessive reliance on easy monetary policy. Given Trump’s propensity for shaking things up, he seemed a good candidate for the job. But if the Trump disruption were actually going to help the US, it would need to focus on economic essentials, rather than simplistic – and often false – populist memes.

Judging by his accusations against China, it seems that Trump is simply stirring the pot and riling up his supporters – not advancing any kind of constructive agenda. After all, any reasonable observer of China – including some of Trump’s own advisers, with whom I have worked in the past – knows that the country has not devalued its currency for some time.

Yes, the Chinese renminbi has declined recently against the dollar, but not as much as the Japanese yen, the euro, or the British pound – and those declines have been driven by relative confidence in the US economy. In any case, the Chinese have a trade-weighted exchange-rate policy, not one based on keeping the renminbi at some targeted level relative to the dollar.

Instead of accusing China of undermining US companies’ competitiveness, Trump should be focused on a genuine pro-growth strategy. Such a strategy could follow the British “northern powerhouse” model – which I helped to create as a member of the government – focused on revitalizing the economies of the former heartland of British manufacturing.

London is the only city in the United Kingdom that ranks in the world’s top 50. That is a big deal in a world where, for the last 20 years, cities have accounted for more than 60% of economic growth, wealth expansion, and gains in living standards. Individually, the far smaller cities in England’s north cannot really compete with that.

But, by linking together major cities – including Manchester, Sheffield, Leeds, and Liverpool – the north could become far more unified, with seven million people acting as a single regional economy, thereby providing many of the agglomeration benefits of major global cities. And, indeed, the distances between Manchester, Leeds, Liverpool, and Sheffield are smaller than the distances covered by the Central, District, and Piccadilly lines in the London Underground. With affordable state-of-the-art transport systems, therefore, it seems clear that these cities could take advantage of urban agglomeration benefits.

Of course, the cities of England’s north are proud of their unique histories and eager to maintain their individual sense of identity. None of this would be taken away from them. While it is understandable that some have viewed the northern powerhouse strategy as a platform for emphasizing their own superiority, this is unhelpful, not least because it causes some decision-makers in the central government to doubt the project’s relevance. Why invest so much in these cities, when so many other areas of the country are also struggling? The only answer is precisely the opportunity to reap the benefits of integration.

Fortunately, despite some doubts, the UK government has announced efforts to kick-start some of the necessary transport links, with the goal of shortening the Leeds-Manchester train journey to 30 minutes. But other elements of the northern powerhouse plan are just as important, especially the devolution of significant decision-making powers – and some spending and revenue powers – to the city level, in exchange for electing mayors (something the UK can learn from the US). After all, England is probably the most politically centralized economy in the OECD – a reality that probably contributes to its deep regional imbalances.

Beyond devolution and transport, England’s north needs to improve dramatically the education and skills of its labor force, in order to attract and retain cutting-edge companies. Plans to replicate some of the remarkable improvements in London and southeast England’s educational attainment of the last 20 years are ambitious but achievable.

The reality is that, with greater decision-making authority and more linkages and skills, England’s northern cities could become far more dynamic, potentially reversing decades of relative economic decline. In fact, I would venture to predict that the northern powerhouse project, which has already attracted the attention of local and foreign investors, will be one of the UK’s most important structural economic policies for many years to come. That is why it is critical that UK leaders continue to advance it.

The northern powerhouse strategy provides valuable lessons for other countries. Already, China is pursuing a similar regional development strategy, aimed at revitalizing its old northern industrial belt, thereby taking some of the pressure off its ultra-dynamic coastal cities. The US should follow suit, with a plan to revitalize the so-called Rust Belt that was integral to Trump’s victory.

As an added benefit, such an approach could spur “competitive envy” in other sluggish regions. That is what has happened in the UK, with progress in England’s north spurring some to argue for, say, a “Midlands engine,” covering the other major urban-based UK area outside of London, with many cities in close proximity to one another.

Of course, the US is much larger than England, and its old industrial cities are much farther apart. But some of the ideas that have animated the northern powerhouse could enrich Trump’s economic plans considerably. Given that infrastructure investment is a key element of his agenda, and that devolution of powers to the states is popular among US Republicans, there certainly seems to be space for such an approach.


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