Editors' note: This column first appeared as a chapter in the VoxEU ebook, Brexit Beckons: Thinking ahead by leading economists, available to download free of charge here. You can listen to Diane Coyle discuss the EU referendum in a Vox Talk here.
Globalisation, far from making the world flat, has thrown into sharper relief economic inequalities. It has made the geography of economic activity more rather than less salient.
There is a good case for arguing that the UK's "Leave" vote was a vote against globalisation rather than a vote specifically against the EU. The campaign slogan, "Let's take back control", seems to have been particularly resonant for many voters. It speaks to the frustration of the millions of Britons (and indeed citizens of other OECD countries) at their lack of agency when it comes to their standard of living and life prospects.
A majority of households in these countries have seen no real income growth since at least 2005, with young and less well-educated people having no hope of being better off than their parents (Dobbs et al. 2016). In his recent work, Branko Milanovic has pointed out the absence of gain for the lower half of the income distribution in 'old rich' countries since 1988 (Milanovic 2016). At the same time, labour market conditions have deteriorated in various ways, manifested as high youth unemployment, zero-hour contracts, or the growth of the contingent ëgigí economy.
Populist revolts in OECD nations
The present 'populist revolt' around the OECD therefore has long roots. The UK has been deindustrialising since around 1970, a phenomenon accelerated by the recessions of the early 1980s and early 1990s. Many millions of manufacturing workers lost well-paid and secure jobs, and never regained similar job market status. As many of the affected industries were geographically concentrated in the Midlands and North of England, the impact was both concentrated in space and sustained through the next generation, and the next, as those communities went into a downward spiral. The 28 towns and cities with the largest percentage of deprived areas were in the north or midlands of England (ONS 2016).
Figure 1 Proportion of local areas in the most deprived 20% nationally for towns and cities in England by region
The digital revolution has exacerbated these economic and spatial divisions. The new technologies have a strong skill bias, so people with higher academic qualifications have enjoyed a rising demand for labour and growth in real incomes. The complementarity between digital and face-to-face communication has increased the agglomeration economies big cities have always enjoyed. The global cities - only London in the UK - have been doing particularly well in terms of growth. Despite paying a price for economic growth in the form of housing shortages and crowded roads, people in the largest urban centres have been thriving. Here, a majority voted Remain. In smaller cities, satellite towns and rural areas, a majority voted Leave.
The role of immigration, the bête noire of some Brexit campaigners, in the referendum outcome is less clear. There was a negative correlation between the stock of immigrants in a given area and the proportion of its population who voted Leave, but a positive correlation between the recent increase in the number of immigrants and the Leave share (Clarke and Whittaker 2016). In the UK context, the evidence suggests immigration has had some adverse labour market impacts on low-skilled workers, particularly in the post-2008 downturn and particularly on earlier immigrants, although the average effects on wages and employment levels are small (Ruhs and Vargas-Silva 2015).
The distributional consequences of globalisation, driven by the new technologies and manifested in flows of goods and services, capital and people, have long been foreseen (Coyle 1997). Unfortunately, it has taken a generation for any policy response to get under way. It is clear that all the attempts around the OECD to respond to the deindustrialisation under way since the 1980s, and its consequences for particular groups of people and communities, simply failed.
For the UK there is a chronic absence of data at a sufficiently fine-grained geographic scale to build the necessary evidence base for policy interventions, and this is just beginning to be addressed since Sir Charles Bean's review of economic statistics (Bean 2015, 2016). Given the potential damaging impact of the Brexit vote on trade, it will also be important to understand the supply chain links serving British exporters, which are likely to be geographically concentrated. Again, we lack the UK data to do so until the statistical reforms are implemented.
The need for worker training
However, policies for the Brexit voters do not need to wait for this, and must not. Given the skill bias of technological change, ensuring everybody has appropriate skills to work with machines and not be made redundant by them is a priority everywhere.
The city devolution agenda in the UK, introduced by the 2010-2015 coalition government, has begun to respond to the economy's extraordinary geographical economic imbalance. It has to go much further in giving local authorities the decision-making and financial power to address local needs. There is a need to redistribute public spending to the affected geographies by providing them with more and better public services (especially education and health), transport links to urban centres, and infrastructure and natural capital in general. UK public expenditure overwhelmingly tilts in favour of London and the south east. Recent public expenditure cuts have hit hardest the poorest areas of the north of England, south west and Wales, so policy has gone backwards in this regard since 2010.
The now-sacked (and pro-Remain) Chancellor of the Exchequer, George Osborne, drove the very recent policy emphasis on economic growth outside global London and its hinterland. It would be bitter medicine if the new Conservative administration, swept in by the Brexit vote, were to abandon the only policy agenda in two generations to start to take seriously the economic stagnation of Britain's Brexit regions.
Bean, C. (2015), "The challenge of maintaining high quality and relevant economic statistics", VoxEU.org, 22 December.
Bean, C. (2016), Independent review of UK economic statistics.
Clarke, S. and M. Whittaker (2016), "The Importance of Place: explaining the characteristics underpinning the Brexit vote across different parts of the UK", Resolution Foundation.
Coyle, D. (1997), The Weightless World.
Dobbs, R. A. Madgavkar, J. Manyika, J. Woetzel, J. Bughin, E. Labaye and P. Kashyap (2016), Poorer than their parents? A new perspective on income inequality, McKinsey&Company.
Milanovic, B. (2016), "The greatest reshuffle of individual incomes since the Industrial Revolution", VoxEU.org, 1 July.
Office for National Statistics (ONS) (2016), "Towns and cities analysis, England and Wales, March 2016".
Ruhs, M. and C. Vargas-Silva (2015), "The Labour Market Effects of Immigration", Migration Observatory Briefing.