The policy agenda has
shifted significantly since the general election with a consensus emerging
across all the main Parties on the need to devolve power to localities and to
give citizens the tools to play a more active role in civil and civic life. And
whilst there are differences over how best to address the immediate fiscal
challenges in the short term, the direction of travel appears to be generally
If we are now witnessing a
more ambitious attempt to place power in the hands of citizens, then it is
critical to ensure that communities are given the appropriate opportunities to
determine what happens in their area. Big Society and Localism - or more
significantly, the principles that underpin them, if those particular labels
are not universally supported – focus predominately on social and political
reform. We have seen moves to reform public services and stimulate social
action which are welcome. However to truly empower localities you also need to
devolve economic control to communities. Wealth retention and creation, poverty
and income inequality, asset building and resilience are central to the
challenges that local areas face and intrinsically linked to the ambitions of
localism. In many instances (and particularly in more deprived communities)
these are stubborn, complex and deep-rooted issues that have not been
successfully addressed despite waves of regeneration and renewal programmes
from successive governments.
If we are to realise the
ambitions of the political consensus on community empowerment and devolution,
we need a new model of economic localism to support political and social
case for economic reform
To date, none of the main
political parties have provided a clear and compelling narrative on economic
reform. There are signs that the government have dipped their toes in to the
waters of economic localism, with the establishment of Local Enterprise Partnerships
and the Regional Growth Fund, but these are fairly limited when set against the
ambition of broader social and political reform. We may yet see further
progress being made with the review of local government finance but even this
is too limited in its scope to transform our macro-economic architecture.
Economic reform must be the focus of the next phase of localism if the ambition
to transform the relationship between citizen and state is to be realised.
If we aspire to give local
areas – and communities – more control over what happens in their areas, then
we must ensure they have the proper levers to do so. Social and political
reforms are wholly interrelated and mutually-dependent on economics. If our
economic architecture is designed for an older, more centralised, way of doing
things, then our efforts to build locally-determined solutions will at best, be
inhibited and at worst completely stymied by a lack of control over our local
Economic localism is not,
however, solely a means of achieving other political objectives. It is an
essential response to the shockwaves that have swept through our communities as
a result of events like the global banking crisis and environmental disaster.
If we are to avoid the huge pressures that these shocks create on local areas,
it is increasingly important to ensure our communities are more resilient and
better able to withstand external shocks.
capital to place
A good example of how a
centralised economic architecture causes problems is the contraction in access
to capital, and financial service provision more generally. The fallout from
the global banking crisis is well documented, but one of its lasting effects is
the tightening of access to capital, particularly for SMEs. Since the financial
crisis, government, business and civil society have almost constantly been
bemoaning the problems of access to capital to support enterprise. Part of the
problem with our banking system is the consolidation we have seen over recent
years, with banks becoming ever larger global institutions. The risks of these
institutions deemed by some to be ‘too big to fail’ have become more or less
unmanageable and they have also become ever more distant from local areas.
Banks have become ever more
reliant on formulaic risk
process to take decisions about loans that are frankly unable to take account
of subtleties that people understand (at least until we develop genuine
artificial intelligence). Once upon a time a local bank manager would have
known the person applying for a loan, understood the market and have made a
pretty good assessment of someone’s ability to repay. Risk-based loan pricing
creates a perverse incentive for banks to make riskier loans – since they
attract higher rates of return and therefore greater profits.
A more localised banking
system – which is common in other countries but we don’t have in the UK –
provides a way to connect surplus capital with productive purpose (for the
mutual benefit of savers/investors and borrowers). That’s what banks were set
up to do. How many of us that have private pensions really know where our money
is invested? Even if you take care to choose the funds you wish your savings to
be invested in, in broad terms, you’re unlikely to know which companies or areas
you're putting your money into. Perhaps, if there were stronger links between
capital and places, it might even encourage people to save for their retirement
– if it were to change the way we look at pension funds as more than ‘something
for when I’m old’ and be seen as an opportunity to invest our surplus capital
to deliver economic localism
It’s important to
distinguish between specific programmes or policies that can be locally
implemented in order to support local economies, with the economic
infrastructure, or architecture, that governs the way our economy is organised.
Progress is being made in some policy areas where local authorities and their
partners can support the local economy. Local energy production is one example,
with plans to reform feed-in tariffs and reduce some of the obstacles to
community-based microgeneration. And there are also a number of small providers
of financial services – credit unions and community development finance
institutions – who are successfully linking capital and place. However these
examples happen in spite of the current economic architecture, not because of
If we are to respond to
climate change, peak oil and global financial crises, as well as the
opportunities for localism then we need a system that encourages, rather than
hinders, this type of provision. It is the need for radical systemic economic
reform that is most lacking at present in our political discourse and which is
my focus here, rather than wide range of activity we can undertake to
strengthen local economies.
The idea of devolving
control of local economies is not new and the UK has a long tradition of
economic localism, despite its current absence.
Regional Stock Exchanges – one idea that would offer significant support
to reconnect capital and place – were in existence in the UK up until 1973,
when they were absorbed into the London Stock Exchange. In fact the Liverpool
stock exchange operated up until 1991. At their height, in 1914, there were 22
stock exchanges across the UK in places such as Bristol, Halifax and Cardiff.
The idea, which was a Liberal Democrat manifesto pledge at the last general
election, would help improve the supply of affordable capital from local
investors to SMEs. Given the huge variation between regional economies, it is
surely no longer appropriate to think that a single entity can effectively
reflect markets and serve needs.
Local areas also need to be
given wide-ranging power over taxation, in particular Income Tax, where local
needs and capacity are very different and ought to be reflected in practice. By
giving local areas greater control over revenue raising and taxation, they will
be far better equipped to reflect differing local needs (not just between local
authorities, but also at a neighbourhood level). With this power local areas
would be able to use tax incentives more effectively to stimulate enterprise in
deprived areas and reward local economic benefit.
Other ideas to support
economic localism that might be woven into our economic architecture include
Local Enterprise Funds and Bonds, internalis
environmental costs of activity (in procurement and in taxation)
and reframing competition laws
favour the development of local economies.
The introduction of a locally determined Land Value Tax to replace Council Tax
and Business Rates, like that proposed by the Green Party,
would also benefit local economies and reflect their differences. This would
have the added advantage of creating a deterrent against speculative
development and land-banking, which stifles regeneration. The introduction of a
general power of competence for local authorities may mean that councils will
be able to take this agenda forward, but this route risks being too piecemeal
and inconsistent. And I do not accept the argument that localism is inherently
inconsistent, as central government sets the framework for localism to operate
within, which should establish consistent expectations and standards.
banking into a driver of economic localism
A key barrier to economic
localism at present is the state of our banking sector. Whilst more localised
stock exchanges will help connect capital to places outside London, we also
need to see far greater appetite for radical reform of financial services regulation.
Aside from the small, though potentially significant, community banking sector,
we have hardly any local banks in this country - unlike in the past. Most of
our Building Societies have de-mutualised and a succession of mergers and
acquisitions has seen our retail banking sector consolidated into an oligopoly.
The barriers to entrance for new banks are so high that despite repeated calls
from successful governments (and Parties) for ‘more competition’ within the
banking sector, little progress has been made.
Local financial institutions
offer (like other local businesses) considerable benefit to the area – as the
well evidenced LM³ methodology
has shown. They recycle a significantly higher proportion of capital and retain
more wealth within an area than national or multi-national institutions. Banks,
with their very specific role as brokers of capital, have an even greater
significance on local economies and it is crucial that we create the necessary
regulatory framework and infrastructure for this to flourish.
There is huge potential to
grow the currently small and immature community banking sector – credit unions,
community development finance institutions and microfinance providers. Credit
Unions and CDFIs account for only a tiny proportion of the financial services
sector as a whole. In 2007 the value of the entire CDFI sector was less than
10% of Royal Bank of Scotland’s profits in the same year.
We should also be careful not underestimate the time and investment needed to
get close to universal coverage of community-based financial service provision.
One of the most effective
ways to stimulate the growth of local community-based finance provision – as
evidenced by the US experience – would be to introduce legislation along the
lines of the US Community Reinvestment Act (CRA). In addition to encouraging
more socially responsible banking, the CRA has led, albeit indirectly, to
substantial private sector investment in community lending. The US Treasury’s
research estimates that for every $1 of public investment into CDFIs, $27 of
private finance has been leveraged.
The growth of the community
finance sector was a positive but wholly unintended consequence of the CRA.
Despite widespread misconception, all the CRA does within the US banking
regulatory system is require banks to report on how they are serving local
communities. These reports are then rated by the regulators, with an excellent
rating affording banks certain permissions or privileges. The consequence of
this has been to create a commercial incentive for banks to improve their
performance in serving deprived communities, as the benefits that come with the
top rating are greater than the costs of achieving that mark.
The reason this has
indirectly led to substantial investment in local community finance
institutions is because the banks have deemed it easier and more efficient to
support these institutions than to serve that community directly. So, rather
than have the expense of setting up a branch in a community, they put their
money into local provision. This approach could easily be adapted to the UK -
taking account of the very different context, but retaining the underlying
latent resources within communities
The ambition that underpins
the localism agenda – for communities to have control over what happens in
their areas – provides real opportunities to address deep-rooted social
problems. However without redesigning the fundamentals upon which our economy
is based we will continue to undermine the efforts of civil society, local
authorities, private sector and communities to deliver local benefit and
improved outcomes. The future of localism must focus far more on economic
reform and provide local people with the levers to take advantage of emerging
This a chapter from ResPublica's collection of essays, entitled "Changing the Debate: The Ideas Redefining Britain".
ResPublica is publishing chapters from the collection on The Disraeli Room blog, encouraging other thinkers, politicians and members of the public to join the debate and contribute to the development of ideas.
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CRA After Financial Modernization: A Baseline Report, US Treasury (2001)