Council report: Manchester’s Economy in the context of Environmental Sustainability

1 Introduction
1.1 Further to previous reports presented to this Scrutiny Committee in relation to sustainable economic development, and in which the concept of the ‘Steady State economy’ has been introduced, this report presents an economic perspective on steady state theory and compares and explores this in relation to current GM economic approaches the principles set out in the Greater Manchester Strategy.

2 Background
2.1 A report entitled Steady State Economics was presented to Economy, Employment and Skills Overview and Scrutiny Committee on 16 November 2011and was followed by a discussion regarding different approaches to sustainable economic growth and the tensions between economic growth and the sustainability of global resources and climate. The minutes of the meeting state:
“The Committee felt that the report gave a limited view of steady state economics and did not really provide a sufficient explanation of the theory or its applicability in the Greater Manchester area”
And to therefore to present a further report which
 “Explains how the Council’s economic policy fits into the context of the priorities identified in the report to create a model of sustainable
economic growth based around a more connected, talented and
greener city region;
 Provides comparison of the steady state economic model with other economic models;
 How the economic model that the city works under ensures the economy grows in ways that minimise negative impact on the environment”
2.2 In response to this request, Appendix 1 presents a detailed economic overview of Steady State Economics, comparison of this with other economic models including that which is closest to the current GM approach, and compares these in the context of the Greater Manchester Strategy. The report has intentionally been prepared from an Economist perspective.
2.3 During the discussion the Chair referred to an email she had received from a number of members of environmental groups which offered to work with council officers to produce a further report that gave a more comprehensive view of steady state economics and develop a potential strategy to handle tensions between sustainability and the Council’s economic priorities. The decision of the committee was
“To request that Council officers consult with the signatories of the
email sent to the Chair to produce a further report on steady state
economics and its applicability in terms of Manchester’s economy.”

2.4 Signatories to the meeting were invited to meet with the Head of
Environmental Strategy to discuss the report and will be given opportunity to present their views at a meeting to be held on 20th June 2012.

Appendix 1: An Economic Overview of Manchester’s Economy in the Context of Environmental Sustainability

1.0 Introduction
1.1 A request was made to provide a report on Manchester’s economy in the context of environmental sustainability, in particular to:
 Counter the tension that exists between the sustainability that steady state economics (SSE) advocates and the Council’s economic policy; and provide a comparison of a steady state model with other economic models.
 To explain how the economic model that the city works under ensures the economy grows in ways that minimise negative impact on the environment.

1.2 The report addressed the first two points in tandem, before exploring how existing policy, under which the Council operates, aims to create the right conditions for sustainable economic growth based on a connected, talented and greener city.

2.0 The importance of growth

2.1 The current recession has resulted in the UK facing one of its most turbulent economic times in recent history. Although output is now returning (slowly) to previous levels, evidence suggests that employment levels may not return to 2008 levels in Greater Manchester until 2015 (GMFM 2011). The immediate priority for Manchester in the aftermath of the recession and in a climate of declining public sector employment is the creation of new private sector jobs.

2.2 Manchester, given its scale, economic diversity, connectivity, and quality of life, remains best placed to deliver this in the North of England over the next decade, and will also be a major contributor to overall UK prosperity in terms of economic growth and the Government’s objective of rebalancing the UK economy and reducing overreliance on London and the Southeast.

2.3 However, Manchester continues to encounter a series of critical challenges, including: an economy that is not as productive as it could or should be; too many residents out of work; ill health; and land and property remains underutilised where there are significant opportunities to grow the economy.

2.4 These challenges are also set against other external factors which will drive, or inhibit, the city’s success and the future prosperity of its residents. The issues we face, such as climate change, the need for security of energy and food supply, and rising need for resource efficiency, are global in scope and not confined to Manchester or the UK.

2.5 To meet these challenges, economic policy must ensure that we leave later generations at least as well off as us in terms of social welfare, with at least as wide a set of choices as we have today. This will require delivering economic growth, at the same time as promoting social welfare, sound stewardship of the environment; and delivering stronger connections between the benefits of growth and residents in our most deprived communities.

2.6 Responding to climate change and environmental sustainability is probably the biggest single challenge facing the world over the next 30 years. The Climate Change Act 2008 commits the UK to an 80% reduction in carbon emissions by 2050. However these long-term timelines can give a mistaken impression that we have time to spare; it is the next few years that are increasingly crucial for any effective mitigation. Without action and a failure to adapt, the cost to Manchester could total £20bn (and the Northwest £70bn) over the course of the next decade (Manchester Mini-Stern 2009) [Based on the nature, speed and effectiveness of the response to legislative change, and not climate change itself]

2.7 Tackling the environmental challenges (and opportunities) presented by climate change will require effective action at international and national as well as local levels. One reaction amongst some commentators to the current economic crisis has been that places and communities should turn their backs on economic growth and adopt a ‘steady state’ economy (SSE), or at least consider alternative models for growth.

2.8 Although every Manchester community benefitted to some extent during the more prosperous years of the last decade, we still have a long way to go in eradication deep-rooted deprivation in some neighbourhoods. Others have added that unfettered growth puts unsustainable pressure on our climate and natural resources; and assert that the existing ‘growth model’ will not deliver prosperity in some potentially many of the communities which we serve.

2.9 However, constraining the economy in some way is not an easy answer to the multiple economic challenges which Manchester faces. These issues raise a fundamental question (and therefore tension between steady state choices and delivering sustainable levels of growth) for the future of economic policy:

How can policy support a better balance between delivering economic growth now, without compromising the needs of future generations; and work within environmental limits?

2.10 We need strategy to deliver a sustainable economic future. However, as the remainder of this report sets out, however, even it were desirable there are no realistic prospects of developing an SSE in Manchester – as international and national policy is not geared to this goal, making any meaningful impact minimal, and seriously disadvantaging the city’s economic performance, to the detriment of its residents.

3.0 A comparison of a steady state model with other economic models

Steady state economics

3.1 It is not possible to specify that Manchester follows any one specific economic model to the letter. Models are, after all, an abstraction of reality. Therefore, this section provides an overview and critique of the steady state economic model and compares it with the endogenous growth model – which bears many similarities with Manchester’s economic policy – and holds that investment in human capital, innovation and knowledge are significant contributors to long-term economic growth and sustainable development.

3.2 Economic growth in terms of a modern economy is an increase in the production and consumption of goods and services. It is facilitated by increasing population, increasing per capita consumption, or both, and it is indicated by rising real GDP.

3.3 However, some economists suggest that there are limits to economic growth, predicting that in the long-run, population growth pushes wages down, natural resources become increasingly scarce, and the division of labour approaches the limits of its effectiveness. Each of these factors is driving greater attention to ensuring sustainable economic growth. In a steady-state economy (SSE), natural resources are consumed at a fixed, sustainable rate and the quality of the environment is maintained at a level that protects the health of human individuals, species, and ecosystems.

3.4 A steady state does not necessarily imply zero economic growth. Economic growth can take place so long as the productivity of natural and environmental resources is increased through technological advance. Rather than productivity (output per employee) being the focus of attention, environmental resource productivity (output per unit resource used) and environmental impacts take centre stage in order for there to be significant economic growth.

3.5 Under a steady-state model economic growth would most likely be reduced relative to the historical experience since in the past, environmental resource use faced far fewer constraints, since firms will not have paid the ‘full costs’ including negative externalities such as pollution, use of scarce resources, and so on.

3.6 The main challenges to achieving an SSE lie in a number of key areas, primarily on how a SSE can be made to work in practice – notwithstanding some form of global collective solution or regulation – to avoid ‘first-mover disadvantage’. It is doubtful that the world’s largest economies and cities would unilaterally adopt a steady state strategy given the current challenging global economic climate.

3.7 There is no political consensus for change to SSE across the UK with ‘slower growth’ lacking appeal to a majority of the electorate; and whether or not an SSE is so burdensome as to cause a larger ‘moral harm’, i.e. restricting poorer areas opportunities for growth and chances of raising living standards.

3.8 SSE models are often challenged as underestimating the potential for technological progress and the extent to which gains in efficiency can overcome the limits to growth; in other words that the economy can be ‘dematerialised’ or ‘decoupled’ so that it grows without using more and more resources. Proponents of decoupling cite transition to an information economy as proof of decoupling. Evidence shows that economies have achieved some success at relative decoupling, with for example, the amount of carbon dioxide emitted per £ of economic production decreasing over time in the UK.

3.9 It also remains unclear how a SSE approach would work within places that are witnessing rapid growth in population. Over three-quarters of the Northwest’s population growth was in Greater Manchester during the course of the last decade; and is projected to grow further over the next decade, especially within Manchester. Clearly any future ‘constraints to growth’ would place pressure on the welfare of the city’s residents should we not ensure a supply of housing that meets the demands of a growing economy and raises people’s quality of life.

3.10 Greater Manchester nor Manchester has the power to impose a steady state economy in isolation from the national or global economy and the prevailing policy environment. Any unilateral imposition of an SSE would seriously disadvantage the city’s economic performance, to the detriment of its residents. It is more meaningful to focus on ensuring that Manchester’s economic strategy and policies are directed towards creating more sustainable growth, both socially and environmentally.

Economic models and endogenous growth

3.11 Early neoclassical models of growth were first devised by Nobel Prize winning economist Robert Solow over 40 years ago. Neoclassical economists believe that to raise an economy’s long-term trend rate of growth requires an increase in the labour supply and also a higher level of productivity of labour and capital. Endogenous growth economists however, believe that improvements in productivity can be linked directly to a faster pace of innovation and extra investment in human capital. They stress the need for government and private sector institutions, which successfully nurture innovation, and provide the right growth incentives for individuals and businesses to be inventive.

3.12 Whilst population growth and increased income also put pressure on supplies of resources, market prices for goods and resources increase – and this in turn provided additional opportunities and incentives for innovation and technology to use new sources of resource.

3.13 Endogenous models also predict positive externalities and spill-over effects from development of a high valued-added knowledge economy, which is able to develop and maintain a competitive advantage in growth industries in the global economy. Other positive spill-overs include the development of new innovations and products that improve quality of life and wellbeing; and can address the challenge of climate change adaptation and mitigation of environmental impacts.

3.14 However, the rate of technological progress should not be taken as a constant in the growth model – government policies can permanently raise a country’s growth rate if they lead to more intense competition in markets and help to  stimulate product and process innovation. Endogenous growth theorists are strong believers in the potential for economies of scale from new capital investment to be experienced in nearly every industry and market.

3.15 Implications from the applications of an endogenous growth model are for policies which embrace openness, competition, change, and innovation in order to promote growth and prosperity. Conversely, policies which have the effect of restricting or slowing change (for example steady-state), or by protecting or favouring particular industries or firms are likely over time to slow down growth to the overall disadvantage of businesses and residents.

3.16 There are important factors which steady-state thinking brings to the fore, for example in terms of influencing behaviour change and energy security etc.
However, there needs to be a more pragmatic approach to driving investments in the type of growth which Manchester needs in order to deliver a low-carbon and resource efficient economy; and a more prosperous society.

3.17 The following section aims to provide an explanation of how the economic model that the city works under ensures that Manchester grows in ways that minimise negative impact on the environment; and creates the right conditions for sustainable economic growth based around a more connected, talented and greener city. Whilst this is not a detailed sustainability appraisal the issues highlighted have a strong ‘fit’ with Forum of the Future’s five capitals model which provides the overarching context in which sustainable economic growth can best be understood and promoted.

4.0 Delivering sustainable economic growth

4.1 Manchester, through the Greater Manchester Strategy (GMS) and the city’s Community Strategy, has set an ambitious vision for 2020 to secure long-term growth of the city and to enable the area to fulfil its economic potential, whilst ensuring that residents are able to share in and contribute to that prosperity.

4.2 A precondition for success is sustainable economic growth, which in turn requires higher productivity from a better-functioning labour market, reducing dependency on public services, and ensuring all part of Greater Manchester and its people enjoy the opportunities a stronger economy brings.

Business and financial capital

4.3 The GMS aims to secure Manchester’s place as one of Europe’s premier cities, synonymous with creativity, culture, sport and the commercial exploitation of a world-class knowledge base within the context of a low carbon economy and a commitment to sustainable development.

4.4 A critical opportunity for Manchester is to support businesses to help to secure the transition to a low carbon economy and culture and to ensure our businesses are equipped to adapt to climate change. Decoupling economic growth from ever-increasing carbon emissions can make a real contribution to  increasing Manchester’s productivity and lead to opportunities that enhance prosperity.

4.5 The commitment across Greater Manchester to deliver a reduction in collective carbon emissions by 2020 should be seen as representing a significant opportunity to deliver substantial growth in low carbon businesses and supply chains, with significant economic gains for businesses leading the design and implementation of new products and services.

4.6 Reducing energy demand and increasing efficiency is also part of the wider sustainable consumption and production agenda aimed at using our increasingly scarce resources in a more sustainable way. Greater Manchester is establishing a Low Carbon Hub to integrate the delivery of a range of carbon-reduction measures, combining the knowledge of Universities with the innovation and investment from local businesses, and providing a focus for Government to work with the city and its partners to accelerate a transition to a low carbon economy.

Human and social capital

4.7 Greater Manchester has established a Skills & Employment Partnership which brings together the Local Enterprise Partnership together with education & training providers and government agencies to help marshall skills delivery to meet the needs of our employers and communities, providing a platform from which to build a responsive skills system.

4.8 The GMS makes a commitment to developing human capital by promoting and supporting Manchester’s ability to compete on the international stage for talent, investment, trade and ideas. It also aims to promote strong social capital where all people are valued and have the opportunity to contribute and succeed in life; and aims to create a city where every neighbourhood and every borough can contribute to our shared sustainable future.

4.9 Manchester’s Employment & Skills Action Plan sets out the priorities for delivering a sustainable and efficient labour market, helping to ensure that there is a sufficient supply of labour, with the right skills, enterprising attitudes and ambitions now and in the future to meet the demands of employers. It aims to achieve this through: increasing the number of Manchester residents that are working; increasing the competitiveness of Manchester residents by enhancing skills; and supporting business growth and maximising local socioeconomic benefit from sustainable business growth.

4.10 Significant demand for green jobs and skills is being generated through the creation of major programmes of activity designed to meet our carbon reduction targets of 48% by 2020 for Greater Manchester (from 1990) and 41% for Manchester (from 2005). By 2015 the programmes covered by the Low Carbon Economic Area (LCEA) – domestic retrofit, non-domestic retrofit and low carbon infrastructure – are estimated to deliver an additional 34,800 jobs in the built environment sector.

4.11 Skills will play a pivotal role in establishing Greater Manchester’s competitive edge in low carbon economies. Addressing this is the Low Carbon Skills and Employment programme of the LCEA. The priority is for Greater Manchester to gain the maximum benefit from low carbon industries by anticipating and fostering skills and employment opportunities for local providers, employers and individuals.

4.12 Without addressing this priority we risk having contractors, jobs and skills imported from elsewhere, with incomes and profits leaving the area. Built around the approach established through the LCEA, existing jobs will be safeguarded, and new ones created, in order to deliver the other Greater Manchester climate change programmes for green infrastructure, transport, and sustainable consumption and production.

4.13 Manchester is also pioneering the implementation and development of Community Budgets to support greater social mobility, inclusion and economic opportunity. These will accelerate work on tackling poverty and better life chances, improving outcomes in the early years, and reducing offending rates.

4.14 The approach will also help to generate new ways of working that significantly reduce demand for public services and particularly costly acute interventions; and save money by improving the way that Greater Manchester’s public service organisations invest and get a return on their investment.

Physical and natural infrastructure

4.15 The GMS is founded on the principles of creating a city where every neighbourhood and every borough can contribute to our shared sustainable future; and ensuring that we continue to grow into a fairer healthier, safer and more inclusive place to live, known for excellent, efficient, value for money services and transport choices.

4.16 It also places importance on: supporting the city’s housing market; securing further investment in digital infrastructure and transport networks that connect people to economic opportunity; securing a transition to a low carbon economy; and recognises the importance of generating a sense of place that values local amenities and the natural environment.

4.17 Greater Manchester, with Manchester at its core, has a spatial form which is basically well structured and can be further enhanced by careful location of new development and well planned improvements to transport systems.
Increased density of well-connected people and firms is highly correlated with strong economic performance and most significantly, improved environmental outcomes.

4.18 Simply put, dense areas result in reduced CO2 levels, by reducing travel and facilitating more cycling and walking. Encouraging these beneficial effects means increasing intensification within existing built-up areas, with a focus on urban growth nodes, town centres and major transport hubs.

4.19 The focus of transport strategy in Greater Manchester has been to prioritise investment in support of sustainable economic growth, at the same time as seeking to support the transition to a low carbon economy and connect people to economic opportunity.

4.20 Greater Manchester’s third Local Transport Plan sets out a robust strategy aimed at ensuring that the transport network continues to support the economy to improve the life chances of residents and the success of business, as well as ensuring that carbon emissions from transport are reduced, and that the overall transport system promotes healthy lifestyles.

4.21 Finally, GMS calls for programme to increase the quality of life, sense of place and experience across the city region through excellence in public services, an improved public realm, higher levels of tree cover and green-space. It also calls for an across-the-board improvement in the development and management of the city region’s public realm, including design quality, cultural and heritage interpretation, signage and wayfaring and sustainability, particularly in the face of climate change and the urban heat island effects.

5.0 Conclusion

5.1 Manchester is of international and national significance for economic growth and is central to the UK’s efforts to rebalance its current overreliance on financial services and London. The Manchester Independent Economic Review (MIER) concluded that outside London and the Southeast, Greater Manchester is the area with the greatest potential to increase productivity.
However, despite this potential, the need to focus on private sector-led growth is even more important in the current climate of continuing recession and reducing public sector spend. It is vital that stronger economies like Manchester’s are allowed to drive national growth.

5.2 Economic growth remains the only practical means of delivering employment for all, a rising standard of living for citizens, fostering greater opportunity, supporting and valuing diversity, social mobility, delivering a commitment to fairness; and securing a sustainable economic future. Unilateral imposition of steady state economics in Manchester alone will have negligible impact upon major global drivers such as climate change, whilst having a major negative impact upon Manchester’s prosperity and the wellbeing of its residents.

5.3 Given the greater sustainability of working and living in high density areas such as cities in terms of both use of natural resources and carbon emissions, the continued sustainable economic growth of Manchester, with specific support for the low carbon goods and services sector, would be a pragmatic economic position, wholly compatible with the GMS.