Improving the social efficiencies of local markets is not protectionism

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Over the course of the last ten years, the Centre for Local Economic Strategies (CLES) has undertaken work around, what we call, ‘Local Wealth Building’. This work has sought to challenge the orthodoxy of the UK’s approach to economic development.  In recent weeks, this work has been portrayed by national media as a core cog in reinvigorating our local economies and places. It has come with some critique, the more pertinent of which this piece seeks to address.

What is Local Wealth Building?

Local Wealth Building is a growing movement in Europe and the USA, and the ideas and practice of local wealth building are coming to the fore as a reaction against a liberal economic approach to ideas, and the extractive nature of return on local inward investment. The orthodox assumption that economic benefits will ‘trickle-down’ to the local economy and will benefit communities is being challenged, like never before.

Local Wealth Building offers a different approach to this orthodoxy. At its core stands a recognition that places already have rivers of wealth at their disposal, due to the financial, physical and social assets of local institutions and people. The work and skill is in analysing this wealth, and harnessing it for deeper economic, social and environmental benefit.

There are a range of levers that places can use for Local Wealth Building. Of key importance are local anchor institutions (large local public, social and commercial organisations) and the role that their purchasing (procurement) power has in supporting the supply chain, including local business and other local enterprises. They can create local benefits in the form of local employment, developing skills of local workforce, and generally enhancing the sustainability of business. Aside from procurement and this anchor role, Local Wealth Building includes innovations such as complementary currencies, community banks, local pension funds, community land trusts and cooperatives  as a means of locking in wealth, ensuring local investment, and building a more inclusive economy.

Recent national media interest has honed in on one aspect of CLES’ work – Community, or Local, Wealth Building in Preston. As part of a wider programme of Local Wealth Building within Preston, CLES has analysed the procurement spend of six anchor institutions, and the resultant impact of behaviour change around procurement is clear. The proportion of procurement spend, in Preston, of the six anchor institutions has increased from 5% to 18% over the last five financial years, with £74M more now spent with Preston organisations. The proportion of procurement spend in wider Lancashire has increased from 39% to 79%, with £199M more now spent with Lancashire based organisations.

This evidence clearly portrays local economic benefits for Preston and Lancashire as a result of adopting a more progressive approach.

The critique

As regards the critique, commentators have asked a number of pertinent questions:

  1. Is this not a ‘zero-sum’ game – simply transferring money from one place to another?
  2. Doesn’t this ignore the challenge of productivity?
  3. Is this not a form of local protectionism?
  4. Doesn’t this ignore the national economy?
  5. Is this not just a ‘Northern’ and party political thing?

The answer to all these questions is a resounding NO and here is why.

CLES ‘ rebuttal

Local Wealth Building is NOT zero sum.

The singularity of the economic angle is not the only way to appreciate the power of procurement. Shifting the geography of spend is about bringing jobs to where they are needed most. It’s rationale is socio-spatial as well as economic. The value of an additional unit of jobs is higher in a deprived area than it is in a non-deprived area.

In our work, an analysis of spend takes in a robust assessment of ‘leakage’, ‘gaps’, and ‘influenceable’ spend. In this we only identify scope for local spending where there is a potential market is evidenced and where there is opportunity for spend to contribute towards clear outcomes.

Progressive procurement is about bringing economic activity where it produces the highest social return without reducing the productivity of the economy. In short, it is about increasing the social efficiency of economic activity. This work is an example of Pareto improvement – whereby for the same productivity we get more social and environmental benefits.  A crucial achievement in times of massive socio-spatial inequalities and austerity.

LWB will raise productivity and living standards.

National and international scale competition is not the only way to increase the productivity of businesses. Smart homegrown strategies can also deliver this objective. We should see Local Wealth Building as a long-term strategy of increasing the productivity of businesses through reducing information asymmetries (where one party in an economic transaction holds more information than the other), opening markets to SMEs and engaging with suppliers. These activities make the market more competitive, not less, as they enable access to more local SMEs and not just to few big corporations. LWB is business development policy. This is crucial in areas where the economy has been hollowed out through years of neglect and under-investment.

LWB is about the national economy.

Progressive procurement is not just about increasing the extent to which anchor institutions spend in a defined local geographical area; it is also about shifting the behaviour of supply chain organisations (regardless of where they are based) so that they contribute to wider economic, social and environmental challenges. This is relevant for the national economy. Developing local businesses, with more jobs, reduces spend on out of work benefits and other national public services and it increases the skills and competitiveness of UK business, generally.

In addition, there are national and international environmental benefits to progressive procurement in that it can shorten the supply chain and enable firms to produce wider environmental value. Again, this highlights the integrity of the approach. We get higher environmental sustainability – and shorter supply chain – by keeping the same productivity levels or increasing it in the medium to long term. It optimises the system for environmental efficiency and at the same time, it does not decrease economic performance. It is a win-win approach.

Experience means we should avoid framing LWB as free market vs. protectionism.

Markets are socially regulated entities that always favour certain types of firms over others. Currently, procurement markets are undergoing deep regulatory changes. Through the Public Services (Social Value) Act, public authorities can embed social value into the design of services, into decision-making criteria and weighting, and into delivery. As a result, the whole nature of procurement is changing: it is no longer just about cost and efficiencies, but also about considerations of quality and social value. As evidenced, particularly in CLES’ work in Preston, this opens up the opportunity to utilize public procurement strategically, as a lever to address the challenges places face and promote a different type of market. This market would not dominated by large corporate multinationals, but informed by greater worker ownership, social responsibility and affinity to place.

LWB is for all administrations regardless of political persuasion.

Many shades of political thought across the UK and Europe have an interest and are advancing Local Wealth Building activities. Given the structural and spatial inequalities of the UK, the spatial benefit is central in proving the need for progressive procurement in the UK context. As such, an area with significant disadvantage would be ill-advised to ignore this on any perceived ideological grounds.

In conclusion

The Local Wealth Building and progressive procurement approach may be uncomfortable for commentators and think tanks who have been fed a diet of liberal economics, and the economic development policies that have grown from it. However, these approaches have been falling woefully short, in local and national economic, social and environmental terms.

There is no doubt that some city centres and economic ‘hotspots’  have experienced growth, but what about other locations? We must get better at thinking about wealth in a different way – it can no longer be extractive, but instead must be utilised in a way that local economic, social and environmental benefits are at the forefront.

As such, Local Wealth Building is and will continue to advance. It makes economic, environmental and social sense.

This was written by Luca Calafati, Matthew Jackson and Neil McInroy of the Centre for Local Economic Strategies (CLES)