The Political Economy of Growth and Institutional Reform

Project: Research

Description

"It is widely accepted that the UK suffers from persistent weaknesses in areas that are crucial for medium to long-run economic prosperity. Amongst the starkest examples are aspects of human capital formation and investment in infrastructure.
A long tail of poor achievement at the end of secondary education has been a defining feature of the UK school systems. A fifth of children in England on free school meals do not reach the expected maths level at age 7 and this proportion rises to a third by age 11. This sets the UK apart from several other advanced economies, and creates damaging effects for both growth and inequality.
Vocational education and apprenticeships have been the object of continuing political attention and policy reform for decades. Despite these efforts, a longstanding feature of the UK skills system is its relative weakness in intermediate level training in comparison with some of its main competitors.
Investment in infrastructure, especially transport and energy, is another area where enduring weaknesses have been identified. High levels of congestion are placing parts of the transport system under strain. Deteriorating energy generating capacity is raising fears that security of supply may not be ensured in the medium term.
Since the 1990s, house building and development in certain areas of the UK has become a significant problem, with growth and redistributive implications. Evidence suggests it has led to increases in house prices and reductions in housing quality, increases in housing market volatility, and large transfers of wealth from the young and the poor to the old and the wealthy.
In all of these areas, existing studies have concentrated on identifying and measuring the effects of policy inefficiencies, and proposing alternative policy arrangements. In other countries, research has started to shift from studying the relative merits of different policy alternatives, to studying the obstacles to the introduction of different sets of policies. In the UK, however, this type of research is still rare, and fundamental questions regarding the origins of inefficiencies remain unanswered.
There has been little detailed analysis of the structures of incentives that lie at the foundations of long-lasting policy distortions in those areas. I.e. a systematic treatment of the political economy roots of these distortions is still largely missing. The same can be said of studies of the drivers of institutional reform, focused on the conditions under which welfare-improving institutional change becomes feasible.
This project aims to fill these gaps, building on existing literature and giving policy makers and civil society a wider set of analytical tools with which to frame debates around institutional reform of growth-relevant policy areas.
The project aims to achieve this by producing a detailed account of the political economy root-causes of structural weaknesses that hamper growth. This will involve an interdisciplinary research effort, bridging political economy and political science, to embed the analysis firmly in the idiosyncrasies of the UK macro-political system. This exercise will shed light on the institutional changes required to address those weaknesses and promote long-term growth. The final step is to investigate the constellation of forces that drive institutional change in politically-charged environments, such as those that surround skills formation and infrastructure investment.
The analysis will draw on available evidence on entrenched policy dysfunctions in skills and infrastructure; political economy models, while seeking to explore their interactions with the Westminster parliamentary model; results from international empirical research looking at the conditions required to initiate reforms, their effective development and implementation; and new research on recent policy innovation in the UK, including changes in the governance of monetary, fiscal and competition policy."

Key findings

"The project met all the objectives that were set out in the original research proposal. In particular:

Revealed that structural weaknesses in the UK economy, e.g. infrastructure investments and housing, are deeply rooted in the institutions, processes and incentives that underpin the formulation of policy.

Presented evidence that the British political system, in some areas of policy, including infrastructure and housing, and compared to other countries, amplifies the risk of sub-optimal outcomes. Specifically, it amplifies the biases caused by marginal voters/constituencies; poses exceptional challenges to the formulation of credible policy commitments over the long term; and its intensely partisan and adversarial political environment clouds debates about policy options.

Identified multiple problems in policy making around infrastructure investments in the UK: short-sightedness and lack of forward-looking strategy; failure to secure cross-party agreement, translated into high political risk; weaknesses in the evidence base, even in the cases where there is cross- party support; and failure to secure local community consent, which often leads to political procrastination.

Developed options for institutional reform designed to address those problems, based on a review of international best practice: namely the creation of a deliberative forum where politicians, experts, interest groups, and representatives of local communities may engage in structured, informed discussions about policy options for infrastructure investment.

The results of the research on infrastructure were cited in Parliament (House of Commons Public Bill Committee); fed into the consultation process of the Independent Armitt Review of Infrastructure; and were widely commented on by professional groups (e.g. Civil Engineering Contractors Association, Construction Industry Training Board, Chartered Institution of Highways and Transportation, Pinsent Masons) and specialist press (e.g. Public Finance).

Identified the institutional roots of housing supply constraints that afflict some parts of England: a combination of weak or absent city-wide/regional planning coordination; high fiscal centralisation / limited local fiscal autonomy; planning system based on development control (individual planning permissions) rather than on general rules.

Presented evidence that the risk of housing planning decisions in England being distorted in favour of current homeowners is real and significant.

Described the type of changes in the governance of land that would be required to address the problem: an approach to planning that is based on, but it is not confined to, the input from local communities, i.e. a rebalancing of planning powers from the local higher tiers of governance.

The results of our work on housing captured the interest of the media (e.g. The Economist, Public Finance, Local Government Chronicle, Public Sector Executive), and received praise from a panel of academics, policy experts, and professional groups in private roundtable held at the Institute for Government on the 17th of November 2014. We are in the process of submitting a paper summarising this work to an academic journal.

Identified examples of institutional reform that show the way forward for the UK to address the structural weaknesses mentioned above. These include cases where party-political battles led to successful institutional reform, and where governments whose plans had run against public opposition came to adopt innovative policy making practices."
StatusFinished
Effective start/end date26/01/1425/01/15

Funding

  • ESRC (Economic and Social Research Council): £108,783.00

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political economy
infrastructure
reform
institutional change
planning
housing
public finance
evidence
governance
political system
incentive
expert
housing supply
community
energy
housing quality
capital formation
competition policy
economy
innovation policy