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Growth made easy? We need policy which allocates the inputs

I was in Tallinn, Estonia recently, facilitating the British Council’s Creative Hotspots event on the creative economy.  The event was full of gaming, music and new media entrepreneurs, and was a fun and exciting crowd for an economic policy geek like me to be amongst!

Inevitably, I started to have a few conversations about this sector (worth up to 5.5% of GVA in 2008), and its growth potential.  This provides lessons for economic growth more widely, and how those pillars of growth inputs (capital, labour and technological innovation) need to be allocated.

Firstly, capital. Speaking with the creative entrepreneurs, I was struck by one event participant, from the UK, a self confessed technology geek and entrepreneur, who told me how investment capital generally appears to ‘not really want to come to weirdos like us!’

This is a personal tale of a wider capital problem.  The economic return in the creative industries is potentially significant but investment capital is culturally orthodox in its approach to investing in this sort of thing.

Investment in new innovative products and manufacturing needs equity finance, via the purchase of shares.  In investment terms, this is and has been seen as ‘risky’, as the financial return is dependent upon the success of the company.  However, in recent times capital investment has not wanted this risk and tended to play safe, seeking guaranteed returns.  As a result, capital has been misallocated on a large scale by flowing to the financing of debt, and the non-productive economic areas of property and land.  Hence the well documented growth in mortgage and debt products in the UK and in the infamous sub-prime mortgage market in the US.

Growth requires capital inputs to be allocated to the more riskier, but potentially more economically and socially productive areas of manufacturing and new creative ideas and start ups.  In this the recent ‘Start-up Britain’ initiative is welcome, but its far too little when you consider the quantum leap in capital flows required.

However, capital is only one input pillar of growth.  We also need to include labour.  The UK, in its industrial heyday, prided itself on having the most educated and skilled, inventive and productive people and labour force.  In the 50s, the height of career aspirations for children was to become engineers, not football stars or celebrities.  This cultural shift in aspirations away from productive areas is worrying and must be reversed.

Furthermore, our untapped human capital and labour pool of unemployed and underemployed is broadly seen as a benefit and welfare problem, not a skills and productivity input issue.  Unless we use every citizen productively they will remain a drag on the economy and fetter our future productive growth potential.

Finally, alongside capital and labour we need technological innovations and other (often public sector spend) inputs relating to culture, and institutions. Increasing productivity and efficiencies in pre-existing businesses through technological innovation is welcome.  However, doing things faster and more efficient is in my view a lesser allocation of innovation potential, compared to new technology-based products and activity, which advance society in some way.  This is where real economic gains can be made.

I would argue, as many delegates did, that you can only have this when you support creativity inputs in their own right, and not reduce everything to an immediate economic return.  That is why arts, music, gaming culture and the eccentricities of British culture are allowed to flourish.  In all the talk of growth, there is too little talk about harnessing cultural and creative energy within place, and publicly and privately funding this.

Finally, what about local enterprise partnerships (LEPS) in this growth agenda?  For local success in this sector, we require LEPs to consider local inputs to growth.  However, they have neither the power nor resources to make a big difference on growth.  At best, in already successful areas and the major cities, they will tidy up policy, herald greater business input into policy and streamline decision-making and action.

In the more deprived areas they will be hopelessly toothless, struggling against the tide of labour market failure and capital deserts.  The best they can do is to peddle furiously, to create and work with intermediary finance bodies and ‘angels’, and support more business to business finance groupings.

What all of this tells us is that the three inputs of growth need greater consideration and we need to allocate them accordingly.  If the market is not going to do it on its own, then you are going to have to allocate these inputs through public policy.

Simplistic mantras, like the public sector getting out of the way, are grossly simplistic and distraction.  I regret, there is no sign whatsoever that the ongoing misallocation of these key inputs to growth is fully recognised or a central part of current economic development thinking.  This is a big state and UK plc economic management issue.

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