Decentralised Reciprocity

The UK is one of the most centralised, top-down and space-blind governance systems in the industrialised world. The overwhelming majority of policy decisions are taken in Westminster and Whitehall with little or no recourse to local priorities, local debates or local needs.

The UK is also one of the most inter-regionally unbalanced economies in the industrialised world. Productivity and prosperity gaps across UK regions are very high by international standards. For many observers, the scope of the centralised governance system to respond to local challenges ranges between very limited and almost non-existent. Our Rebuilding Macroeconomics research project examines how networks of devolved and reciprocal local business and financial relationships might contribute to the rejuvenation of local and regional economies.

This is not how it has always been. During the nineteenth and early twentieth century the vibrancy of the economy was spearheaded by local businesses and local banks. These local economic and financial networks underpinned the development of our great cities. Their activities ranged from financing, design and delivery of local community goods and services ranging from (electricity, gas, water, sewerage) infrastructure, technical and educational colleges and institutes, parks and recreational public spaces, through to the provision of heritage and cultural assets such as museums, galleries and orchestras.

Local commercial networks also spearheaded the growth of cities in the mid-west and west coast of the USA, cities in Germany and Italy and cities in Canada and Australia. These local business networks remain very important in Germany, the USA, Canada and Australia. In the UK they have largely withered away, replaced by top-down and highly centralised financial, corporate and public governance arrangements. After a century of centralisation, these local business networks are mostly absent in the UK’s institutional and governance landscape today.

The UK is embarking on a journey of devolution, characterised by a patchwork of different, and in some cases overlapping and contradictory devolution arrangements (City-Region Combined Authority deals, LEPs, Local Industrial Strategies, a quasi-federal Scottish devolution settlement etc.), which have the potential to set in train a wholesale reconfiguring of the UK governance systems. The intention is to galvanise greater engagement and collaboration between local public, private and civil society actors in local decision-making.

While the political emphasis is on increased local decision-making and accountability, there is very little discussion regarding the long-term financial and fiscal implications of devolution. The emphasis is on political deals, rather than long-term consideration of the implications. This missing debate is important, because successful devolution is not just about government. Sub-national governance reforms will have little or no real long-term effects unless they are accompanied by re-establishing and re-energising local financial and business network culture typical of earlier decades.

To galvanise local communities, devolved government needs to work with devolved banks, local investors, locally-organized business, and local public ‘anchor’ organizations such as universities. The problem is that in the case of the UK this is not easy, because national policies have inadvertently blocked, diminished or extinguished many of these bodies. This sets the challenge of how to go about re-galvanising the UK local economies which we intend to address in our research project.

For example, in the 1940s Britain created a successful Bank of England-banking consortium – ICFC - with branches across the country devolving authority that funded SMEs. It merged with Finance for Industry to form 3i, which became Europe’s most successful venture capital institution. It was the privatized and eventually became a marginal player. One of our fastest growing banks today for SME finance replicates local banking by devolving control to its branches (“the branch is the bank”). Its branches have built strong reciprocal relations with their corporate customers, reminiscent of nineteenth century banking. But Handelsbanken is Swedish. Germany and the US have retained their local banking systems.

Much more work is required to understand how the behaviour of the current UK financial system as a whole might evolve in response to new institutional changes in the commercial and governance system. Our research project examines how networks of devolved and reciprocal local business and financial relationships might contribute to the rejuvenation of local and regional economies.

The research on the financial sector will aim to identify how countries such as Germany and Scandinavia have been able to sustain a devolved financial structure and the roles of public as well as private institutions in achieving this. We will examine the private and public-private relationships that have promoted the functioning and resilience of local banking to cyclical fluctuations in different countries. We will also investigate how institutions that promote local relationship banking have succeeded in doing this, and how their experiences contrast with those banks that remain more centralized and transactional.