Graham Gudgin

The following is a verbatim transcript of Graham Gudgin's presentation to the conference. Introduction
Neil Gibson and I are going to talk about the two reports Belfast: City Region and Belfast: the Economic Future. We regard these reports as a linked piece of work in many ways leading to joint recommendations and together these recommendations enhance the evidence base for taking the future of Belfast forward.

In the Belfast: City Region report, we examined three key questions. Firstly, "How important are cities in driving regional growth?" Secondly, more specifically, "What does Belfast do for the Northern Ireland economy, what is its function and role?" If Belfast is to become an even more important driver of the Northern Ireland economy it will have to be very competitive and increase its competitiveness. Finally I'm going to address the question of, "How does Belfast's competitiveness compare with other UK cities?"

Belfast: City region
It is important to recognise, that the national policy context has changed a lot. Throughout my working life the policy context has mostly been regional, we talked about regional problems and regional policy, but that's changed. The new policy context is about cities and city regions and it's also changing in Belfast, although not to the same degree as in England, Scotland and Wales. Nevertheless, the Regional Development Strategy aims to create a thriving metropolitan area centred on Belfast, and the Belfast Metropolitan Area Plan recognises that Belfast city remains the regional centre for administration, specialised high order services and cultural amenities. Belfast serves increasingly as a regional gateway with all the new European flights, the largest hub of the regional transport system and the cultural and arts capital of Northern Ireland.

Theoretical background
Let's do just a little bit of theory, to begin with; there are probably three elements of theory. Firstly the theory of central places, this is well known to geographers, it was a theory developed by a German geographer before the war, Walter Kristaller, a rather good and sophisticated piece of work which recognises that all cities and settlements are primarily and overwhelmingly service centres, that's their main role and raison d'être. Some services need only a small catchment area and a small area of demand to survive and they tend to be spread throughout every village and urban district - basic food shops would be the most obvious example. Other services need a larger catchment area and these tend to be concentrated in small towns and major urban retail centres, such as banks and solicitors. But other activities need a much wider market and in the case of Northern Ireland they would need a market as large as Northern Ireland itself, so there can often only be one main central concentration in the whole of a region like Northern Ireland and it makes great sense if they're all in one centre. In Northern Ireland's case, that's Belfast, so this idea explains why we have a hierarchy of settlements and why the main city has a series of towns around it and each town has a series of smaller centres around it.

Economists have tended to overlook the theory of central places and concentrate instead on the idea of agglomeration economies. Economists can't move without theories which say that 'if anything is concentrated or doing well it must have a cost advantage', so the idea here is that cities have some cost advantage but agglomerating activities gives you economies of scale. Unfortunately it's been very difficult to demonstrate that this is as important as economists would like to think. There are obviously some economies of scale in concentrating things in cities, but it's not as big an advantage as economists tend to think.

"The main challenge is 'How do we increase the size and export potential of the financial and business services sector?'"

Thirdly, there's a new set of ideas associated with Professor Michael Porter of Harvard University, the idea of clustering, that many activities are more competitive, internationally competitive and nationally competitive, if they cluster together, if you get a number of firms together doing the same thing. This is an idea that's become ultra-fashionable in Great Britain, but unfortunately it tends to be widely misinterpreted and I think it's all to the good that it's been less fashionable in Northern Ireland and we've avoided a lot of these misinterpretations. The main misinterpretation is to focus on manufacturing, and in fact a lot of manufacturing in the UK has been clustered. Linen textiles in Northern Ireland was a huge example of this, but nearly all of those manufacturing clusters have been in decline for a long time. The growing and competitive clusters are nearly all in the services, in particularly financial and business services and in cultural activities. If we think of Central London and its great international competitiveness, Central London is really a collection of clusters in finance, in business services and in cultural activities, often they're very tightly clustered, for instance, advertising in Fitzrovia or corporate law around the Inns of Court.

Trends in cities
As well as that basic theory there are a number of empirical observations, big trends that have been happening and affecting cities, one of the most important of these has been the urban rural shift in manufacturing. This really follows the observation that for many decades since the last war manufacturing activity has been leaving the cities and going to the small towns and rural areas across the country. Gallaher's tobacco factory in Belfast would again be an absolutely quintessential example of this. The huge tobacco factories used to be a big city centre activity in many of the big ports and cities, but about ten or fifteen years ago, Gallaher's, like many of the big tobacco companies, decided that city centre location wasn't very competitive. Gallaher's in Belfast moved out from the big Yorkgate works to a greenfield site at Ballymena. The Yorkgate site is now an entertainment and retail centre. Much of employment in Belfast is now in modern service based urban activities and the manufacturing has gone.

Over the last ten years we've been much more aware of globalisation, particularly with manufacturing activity. Increasingly in the last two or three years, manufacturing sector activity has also been leaving the cities, not only to go to the rural areas but to go abroad, although activity has been going abroad from the rural areas as well. So there's a double whammy in a sense for cities in manufacturing - manufacturing has been leaving cities to go to rural areas and to go abroad.

But this has been combined with a revival of the cities as service centres, the main role of cities is as service centres. The idea that cities are industrial centres is a historical anomaly, it's lasted perhaps two hundred years in the UK. But if you take the much longer history of cities, cities were developed as service centres and it's as service centres that they're returning to as their main function - this has been most obvious in London. A million manufacturing jobs have been lost in London in the last thirty years and it's now fully a service centre. As in many of the big conurbations and cities across the UK, its transition away from being an industrial city to being a service centre is now almost complete.

"As in many of the big conurbations and cities across the UK, [Belfast's] transition away from being an industrial city to being a service centre is now almost complete."

So let's just run through the evidence for those statements. Employment in manufacturing across the main cities of the UK, from 1971 up to 2001, has been falling rapidly. In fact Belfast has had the most rapid decline of any of these cities, partly because of what happened during the 1970s - in the worst of the troubles years manufacturing declined rapidly. Over the last ten years the decline has been much slower, but that's partly because rather little is left. Northern Ireland now has only a quarter of the manufacturing jobs it had thirty years ago, and most cities have lost at least 60% of their manufacturing over the past thirty years. Financial and business services have replaced manufacturing as the great growth sector across the UK and in particular in the large cities. Financial and business service employment has grown in all cities. From a low basis Belfast has had the fastest growth in the financial and business services sector of all the major cities, with growth of 350% - in most cities it's been at least 200%. We see that very rapid growth in Belfast and you can see the acceleration since 1997 so financial and business service employment has definitely gained from the ceasefires. Large call centres and computer based activities, were nervous about coming to Belfast when there was a danger of disruption, and you can see the acceleration since the ceasefires.

The role of cities
The importance of these two trends is that for a long time major cities had declining employment and declining population as well. Cities were a negative drag on their regions and that was because manufacturing was leaving. But slowly, steadily, the manufacturing has gone and the bigger weight now, the bigger influence on the growth of cities has been the expansion in financial and business services and we can see that a turnaround has occurred. It really occurred in the early 1990s, in London it occurred a bit later, but in nearly all of these cities there's been a turnaround. Belfast is again one of the faster growing cities because of its rapid increasing financial and business services. Business services, by the way, it might be better to call use the term professional services, cover a whole complex range of activities - legal activities, accountancy, market research, advertising, a broad mass of services, largely aimed at business, but to some extent to domestic residential customers as well. So we can see Belfast doing very well here, again a turnaround, the end of decline in the late 1980s and then a pick-up in the 1990s. Even in Liverpool, one of the worst performing of UK cities, had quite a sharp turnaround towards the end of the 1990s. This is very important as it shows the crossover between declining manufacturing employment and growing employment in financial and business services. London again was the first city to have this crossover; by 1990, financial and business services had become more important in London than manufacturing and in London now there are six times as many jobs in financial and business services as there are in manufacturing. In the UK as a whole this crossover occurred round about 1990 and in Belfast in 1992. Thirty years ago there were six times as many manufacturing jobs in Belfast as there were jobs in financial and business services. Now there are twice as many jobs in financial and business services as there are in manufacturing, a complete turnaround.

The role of Belfast in the wider region
Focusing on the question, "What's Belfast doing for Northern Ireland?" Firstly again a little bit of light theory; this slide is a characterisation of the typical relationship between a large regional city and its hinterland. The city economy largely exports professional services, specialist service activities, to the rest of the economy and the rest of the economy in turn provides produce and labour, food of course, but also many other activities. Successful cities also export services beyond their region and internationally and of course again London is the prime example of this, the great exporter of financial and business services, not only to the rest of the UK, but to the world economy. Cities tend to attract inward investment in fairly high value added, often graduate-dominated activities particularly in the service sector. The rest of the region exports manufacturing goods and food and attracts inward investment through the availability of labour and more than anything else available space.

Belfast itself has 16% of Northern Ireland's population, one in six, but makes up 28% of Northern Ireland's employment The more sophisticated and international the employers the greater the extent to which they're concentrated in Belfast.

Here's a spectrum of dominance, "In which activities does Belfast dominate the Northern Ireland economy?" I suspect if we ask many people what Belfast dominates in, they might immediately think of retailing, but actually that's in the low dominance category. The high dominance category, these are activities in which Belfast has more than half of Northern Ireland's total employment, are in financial and professional services and public administration, those are the real core large city dominant activities. In terms of medium dominance Belfast has about a third of Northern Ireland's employment in transport and communications, mainly communications, and in cultural and entertainment activities. Its low dominance of Northern Ireland's total employment (in which it still has at least a quarter) are retail, distribution, hotels and restaurants and health services with the big teaching hospitals. And if we look at these activities in greater detail, then we can see that the single biggest dominant activity in Belfast is banking. Nearly 80% of all banking employment in Northern Ireland is in Belfast, followed by insurance, having nearly two thirds of activities in the capital, and then other professional services. Over half of all the advertising, legal, accountancy, consultancy, all those sort of activities, are based in Belfast. Computing and software, also very concentrated, very much an urban activity, are concentrated in Belfast, and so on down this list.

Between 20-25% of all employees in those areas are graduates, and the concentration of graduates is mainly in the Belfast 'travel to work' area, not necessarily in the city itself, because of a preference for rural living. The dominant influence of Belfast in attracting a skilled graduate labour force is a very important point. Belfast is also a major centre of headquarters of private sector administration as well as of course being the major centre of public administration in Northern Ireland, so Belfast has the headquarters of BT, Viridian, Bombardier, Shorts, Translink and many other companies.

The Belfast economy
I want to address the question of just how sophisticated the Belfast economy is, because we can think of a hierarchy of sophistication. Look at the bottom cities which just aren't doing too well at all, cities in which professional services and financial services are often imported either from London or from other cities, and in which there's no critical mass in these important urban activities. The sort of cities we're thinking of might be Stoke-on-Trent, Hull, Sheffield and Liverpool - they're not the main regional centres. In the middle we've got the regional cities, these are doing well as regional capitals servicing their regional economies but not necessarily with large service export industries to export beyond the region and internationally, and then we're thinking about major cities like Glasgow, but perhaps more typically cities like Birmingham and Nottingham. And at the top the most successful cities are those with specialisms, often with clusters in key financial and business services, highly competitive and able to export. London of course, a world city, is hugely competitive in this respect, but other examples would be Edinburgh, Bristol, Manchester and also Leeds which has done very well in areas like corporate law.

Belfast, although its financial and business service sector has been growing fast, is still relatively underdeveloped and in Northern Ireland as a whole, this very important sector is particularly underdeveloped. One of the messages we would like to leave with this conference is the importance of becoming competitive in these sectors, and in Northern Ireland we're lagging a bit on this. Economic development policy in NI is still, in our view, rather too oriented towards manufacturing and towards activities that look a bit like manufacturing. In the service sector you can get support for software because that seems to produce a product but it's harder to get support for other services where what's being sold is expertise rather than a tangible product which you can actually hand over.

Tourism can also be important and Belfast of course has obvious and well publicised disadvantages in this respect, but tourism is steadily growing in Northern Ireland as a whole. Belfast's share of tourist trips, although still much too low for a major city, has been steadily increasing. This is perhaps the one area which we'd all recognise as an area where there's huge potential for increase. At present, when visitors come to Belfast and write up their experiences in the national press or on television holiday programmes, they tend to say, "Well, there's perhaps not quite enough to do in Belfast at present, and it's not geared up enough to tourism". Of course there's a great difficulty here of 'chicken and egg'; It's difficult to have a successful tourist industry unless you have a lot of tourists and vice versa. So that's an area which we could all give more thought to and where the public sector is inevitably going to have to play an important role.

The role of Belfast in the region
Just to sum up on the question "What does Belfast do?" It's a financial and business services hub, it's a governance and administration centre in the private sector and the public sector, very importantly a provider of specialist services, a headquarters location, concentration of skilled workers and a gateway to Northern Ireland with its airports and its ports and one could add to this list.

Belfast is also an entertainment centre strengthened by very successful investment in buildings such as the Waterfront Hall and also of course the Odyssey. So Belfast is a key component and I think to some extent a driver of the whole Northern Ireland economy. If Northern Ireland is really going to succeed, Belfast is going to have to become a more important driver and the thrust of economic change is pushing in that direction. To achieve this, Belfast is going to have to become increasingly competitive, we can measure its competitiveness in GDP (i.e.value-added) per employee. This is often rather mis-measured, but we've tried to measure it carefully and Northern Ireland is about average for northern cities in the UK. Belfast is still below the UK average, but much better than the failing cities or the cities with more difficulties, Sheffield, Tyne and Wear and Liverpool and similar to Birmingham and Nottingham. The occupational structure for Belfast is reasonably average in terms of managers and professionals, but there is quite a high proportion of people in the unskilled elementary occupations.

"If you want to get rich, if you want to be a successful high productivity city, it seems to be very strongly associated with the proportion of graduates."

The importance of graduates
Now this slide shows a new piece of research here which hasn't been seen before and I want to draw your attention to the findings. There is a low proportion of graduates working in the public sector in Belfast compared to other UK cities. If you want to get rich, if you want to be a successful high productivity city, that seems to be very strongly associated with the proportion of graduates. Each percentage point addition to the percentage of graduates in the city will add perhaps £1,000 per year to the average income in the private sector and £600 per year to the average income of everybody in the local economy. The variation is huge; at the bottom cities who only have 8% of graduates in their employment and at the top end London at nearly 30%. That's nearly a 4:1 ratio, in London the average income is £30,000 a year, at the bottom end it's £18,000 a year. This really focuses our attention on what cities need to do to be successful, they need to attract activities which are high value added and that means graduate intensive activities. Therefore, cities have to be attractive to graduates in terms of places to live and attractive to firms which employ graduates. This is not to do with the supply of graduates, it's not to do with the local education system or universities because successful cities like London suck in graduates from everywhere, across the world, across the UK. I was just counting up last night, twenty young people that I personally know who were educated in Northern Ireland and are now working in London. It's really about the demand, it's having the firms who will pay the high wages to attract well educated people.

Conclusions
Just to finish off, Belfast has some obvious problems. It's still got a very high proportion of unqualified residents; that's partly because a lot of the well educated people go for better paid jobs in London and elsewhere. So we need to generate an economy which can employ these people as well, but of course the faster we can retrain and 'upskill' unqualified people, the better the Belfast economy will be. And Belfast is not particularly good on start-up rates for new companies, but then most cities aren't. Many new companies want to start up in cheaper out-of-town locations, and Belfast doesn't compare well with other cities and that's something which we probably need to give rather more thought to. Belfast has positives and negatives, but in a very real sense, we could regard the negatives as challenges. The main challenge is, "How do we increase the size and export potential of the financial and business services sector?" That's something for all of us, something for Belfast, something particularly, I think, for Department of Enterprise Trade and Industry and Invest NI, and I do hope they're going to give that more attention in the coming years. So, cities are becoming increasingly important as service sector providers and as service exporters and it's crucial to move up the ladder of exporting services. If we do move up the ladder we'll need to employ more graduates, but our wages and productivity will rise quite steeply. Belfast is still probably in the lower half of that spectrum, but moving up. The faster we can get Belfast to move up, the more quickly it will become a top UK city.

Dr Graham Gudgin

Regional Forecasts


Regional economist and regional policy specialist

Dr Graham Gudgin is a joint director of Regional Forecasts. His most recent previous appointment was as Special Adviser to the Northern Ireland First Minister on economic policy from 1998-2002. Prior to this, he was the Director of the Northern Ireland Economic Research Centre, the post which he held since the Centre was established in 1985. Before that, he was a Senior Research Officer in the Department of Applied Economics, University of Cambridge and Economics Fellow of Selwyn College, Cambridge.

His research specialisms are regional economic policy and forecasting and small firms. He is the author of a large number of books, reports and journal articles on regional economic growth in the UK and on the growth of small firms. He has also published widely on economic development issues in NI. He has recently been involved in developing local forecast models for a number of UK urban areas including Birmingham, Manchester, Glasgow and Belfast. This work has entailed development of detailed local forecasting models which cover housing variables in addition to economic variables. Advising local Government on urban policy to support economic growth is currently a major straw in Graham's work in Regional Forecasts. He has been advisor to the House of Commons NI Affairs Committee, a member of the Labour Party Commission on the Future of Regional Policy in England, a member of the CBI Corporate affairs Committee in NI and a member of the Executive Committee of the Economic and Social Research Institute (ESRI) in Dublin. He was a member of the NIERC Board from 2002-2004, and is currently a member of the Board of the Economic Research Institute of Northern Ireland (ERINI).