Linking cities and entrepreneurship

Posted by Dr Olmo Silva, SERC and LSE

Since the writings of Marshall and Schumpeter around a hundred years ago, entrepreneurs are considered a crucial ‘ingredient’ in promoting and sustaining economic growth. Paradoxically, the link between local entrepreneurship and economic dynamism is even more pronounced in today’s highly globalized world – dense local clusters of entrepreneurship are the real powerhouses of local modern economies, capable of leveraging knowledge spillovers and agglomeration forces to produce the ‘next big thing’ and project it into a global reach.

Despite its crucial importance to policy making and a deeper understanding of the functioning of our economic activities, relatively little economics research has focused on measuring and modeling entrepreneurship, and not enough is known about what role entrepreneurs play in fostering agglomeration and urban economies. 

Increasing our understanding of this crucial issue is the aim of a new network which looks to bring the ‘entrepreneur’ into urban and spatial economics.

A first workshop took place at the University of Stirling a few weeks ago. The local organizers were Stephan Heblich (one of our SERC affiliates) and George Panos. With the help of Stephan and George, we managed to put together a gathering of academics working on the economics of entrepreneurship, policy makers and local small-business entrepreneurs. 

During our first meeting, we heard a number of interesting pieces on the actual importance of entrepreneurs for the functioning and performance of their business; on the role of risk aversion in determining who chooses to be an entrepreneur and when; and on the role of entrepreneurial education.

The debate that followed revealed once again how little we know about these issues. Although entrepreneurs are clearly important and capable of taking on more risk, we have little evidence that education can really make random individuals more entrepreneurial and more risk-tolerant.

Fortunately, the entrepreneurs attending the meeting brought to the table some very interesting and somewhat more practical remarks: though we all agree it’s hard to make people entrepreneurial, we can set in place the conditions that ‘unleash’ the most entrepreneurial spirits. Surprisingly, credit availability was barely mentioned. What seems important instead is a tight network of other entrepreneurs with whom to share ideas, expertise, and information about market opportunities, needed inputs and motivated workers looking for job opportunities. That is, entrepreneurs really seem to benefit from being in a highly agglomerated urban environment. 

To sum up, it is definitely time to bring back entrepreneurship back from the cold and into our research on clustering and agglomeration economies. This is what this network aims to do.

We are hoping to organize another meeting in 2013 and two more in 2014. If you want to be kept in the loop, simply let me know by dropping me an email!

What Works Centre for Local Economic Growth

I wrote yesterday about the problem with Portas Pilots, arguing that the way the scheme was implemented will make it almost impossible to figure out whether the projects actually have an impact. This is just one example of a more general failure - government is often very bad at generating convincing evaluation evidence and (arguably) even worse at using that evidence to inform policy making. Could a NICE for social policy help fix this? It appears that we may be about to find out as the government has announced the establishment of four 'What Works centres' covering the areas of crime, ageing, early intervention and local economic growth.

The main task of these independent centres will be to undertake a systematic review of existing evidence to "produce a sound, accurate, clear and actionable synthesis of the global evidence base which:

• ranks interventions on the basis of effectiveness and cost effectiveness
• shows applicability
• shows the relative cost of interventions
• shows the strength of evidence on the agreed scale."

That is clearly going to be a massive challenge as our recent work for the National Audit Office reveals. In that report (to be published soon) we assessed the quality of a selection of government evaluation reports. Overall, we concluded that the reports that we looked at in the areas of business support and spatial policy (those that would be covered by the what works centre) were arguably not fit for purpose. We would be very wary about drawing any conclusions on the cost effectiveness of government interventions from these reports.

That said, there are some government evaluations and academic studies out there that would provide more convincing evidence. Presumably the What Works centre would rank these as of high quality and the others of (very) low quality and that would help local policy makers, right?

The problem, of course, is that the less careful the study the greater is the tendency to find big positive impacts of the policy. In contrast, more careful studies tend to have a hard time detecting much impact. In fact, for the NAO study, it appears that the correlation between these two attributes (quality of the study and claims about impact) was depressingly negative. When you take this kind of evidence to local government I am very worried that there will be a tendency to ignore the quality ranking and focus on the impact ranking. After all, evaluation is hard, and even well trained central government analysts, who should know better, are willing to claim that the robust evaluation of spatial policies (e.g. that would score high on the Maryland scale) is not possible. Those concerns multiply once you get to politicians (either local or national) particularly if the convincing evidence is overwhelmingly negative on policies that government seem determined to introduce. Just look at Enterprise Zones.

Does all of this mean we shouldn't even try? Of course not. Indeed, it's good to see the government and ESRC investing money in these new centres. And, it should go without saying, in many policy areas Britain is already streets ahead of other countries in terms of the role that evidence plays in policy formation. But embedding the use of evidence in the development of local economic growth policy is certainly going to be a challenging task for whoever picks up the baton ...

Problems with Portas Pilots

There has been a spate of recent coverage on the failure of (some) Portas Pilots to spend money quickly. Defenders of the scheme point to the fact that it is better to spend money wisely and that it is too early to tell whether the pilots are working.

To my mind, this misses the wider point that we will never know whether the Portas Pilots work because of the way that central government set up and run the scheme. To understand whether a pilot has a causal impact on the performance of high streets we need to be able to assess what would have happened in the absence of intervention. To do this, we need a control group that can be compared to the group of high streets that got money. Government had a perfect opportunity to create this control group because it invited bids and then only selected a few of the schemes to get funding. As I explained at the time, there were several ways that this set up could be used to allow effective evaluation of the pilot. Government didn't implement these, so we'll never be able to properly assess whether the scheme worked: if Portas Pilots do better than other high streets, it could be because government chose the places with better potential. If they do worse, it could be because government chose the hardest places to 'turn around'. Learning from pilots involves tackling these issues head-on. As this hasn't happened we will never know.

Interestingly, I've been working on the wider issues for an NAO report. One of the responses we received on that report suggested that spatial policy (like the Portas Pilots) can't be assessed using rigorous impact evaluation. As the Portas Pilots demonstrate, this isn't correct. But as long as parts of government aren't willing to embed evaluation right at the start of policy development it might as well be.

Council Tax increases

I know I am hardly the first person to point this out, but local government finance in the UK really is a mess (I was reminded of this by today's stories on council tax increases). I wonder whether the government realise that failure to sort this out has major implications for the extent to which any serious decentralisation can take place.

Take New Homes Bonus, for example. This is the payment that is supposed to provide incentives to local governments to allow more house building. At best, unfortunately, the NHB (double council tax for six years) offsets the direct costs to LAs of allowing more house building. So NHB removes the disincentive, but doesn't provide any positive incentive (which you tend to need to offset local objections). In other countries, this incentive comes from the fact that local tax revenues increases as population expands. In the UK, where council tax only covers, at best, about a fifth of local government expenditure that incentive is essentially non-existent.

Business rate retention has similar problems. The pro-growth incentives are dampened by the fact that periodically the system will be reset wiping out any increased revenues. That wouldn't happen if local tax revenues were more firmly linked to the local tax base.

I suspect that the government is about to run up against similar problems with some of the Heseltine proposals. It's great that the government is seriously considering moves towards a 'single pot' that would allow local authorities more flexibility over spending decisions. But some of these LAs will make bad decisions that end up costing money. With a different local tax system they would face strong pressures to deal with this failure because a good proportion of those costs would fall locally. Instead, under the existing system central government will almost certainly end up picking up the bill for LA failure.

In short, serious decentralisation almost certainly requires reform of local government financing to increase the importance of local tax bases. This, of course, has the potential to generate winners and losers - a very difficult proposition for government to deal with.

Solving London's Housing Crisis

I see Richard Rogers had a piece in the Evening Standard last night calling for a greater focus on design and brownfield as the means of solving London's housing crisis. I confess to being deeply puzzled. In 1999 the Urban Task Force (chaired by Richard Rogers) advocated precisely this solution. The report received cross-party support and underpinned Labour's approach to urban and regeneration policy. For example, Labour introduced a 60% target for the proportion of development that should occur on brownfield land. Unlike most housing targets, this one was actually met with many Local Authorities achieving considerably higher proportions of development on existing sites.

The problem, of course, is that much of this brownfield land isn't in places where people want to live and is expensive to build on. As a result, private sector demand is low and costs are high. Public money filled some of the gap, but not all of it so we got low overall development levels. This shortfall in supply helped drive up prices (and created affordability problems), particularly in parts of the country where demand was high. Calls for continued brownfield development need to explain how we fix this problem in a world with far less public expenditure to go around. Sure, 'better design' (to the extent it drives down costs rather than increases them) will help but I can't believe the effects can be that large.

Next, come the same old arguments about better use of the existing stock. Yes, England has around 700,000 empty homes. But only 72,000 of these are in London and only 24,000 of those are long term empty (more than six months). Should we try to make better use of those 24,000 properties? Of course. Will they solve London's housing crisis? No. Likewise, empty flats above shops which "may [my emphasis] not be counted in official statistics".

These arguments are simply a distraction from the central issue - the appropriate role for the planning system in helping solve the housing crisis. Our research suggests that planning constraints play a large and significant role in driving up the prices of residential and commercial development. That's why I believe some relaxation of constraints is a crucial component of any credible solution to the housing crisis. That would include some building on low (amenity) value greenbelt land. But I would also like to see a relaxation of height constraints and more tall buildings in our relatively expensive cities (including London). An 'up and out' strategy, if you want. Note, that this is an argument about the kind of land released by the planning system and restrictions imposed. Not, as Richard Rogers would caricature it, a call for radical relaxation of planning restrictions and an abandonment of the green belt.

Richard Rogers thinks we can solve the housing crisis without resorting to such an 'easy solution' (sic). But given that existing planning policy is partly to blame for the housing crisis, more of the same seems like a very odd solution.


  

Postgraduate fees: access all areas?

Posted by Dr Philip Wales, SERC

As the first cohort of undergraduates facing the new, higher rate of tuition fees go back for their second term at university, the debate over the impact of fees is starting to shift. Building on concerns about access to undergraduate courses, a growing chorus of academics, politicians and university groups have started to worry about the impact of fees on postgraduate higher education.

With good reason: Students from poorer backgrounds are under-represented in postgraduate study, and there is evidence that growing fees above undergraduate level may be a part of the explanation, according to new research published by SERC. Between 2003-04 and 2008-09, postgraduate fees increased by an average of 31.8%: from £3,232 per year to just over £4,261. In the face of budget cuts, the publicly-funded Research Councils have announced significant reductions in the number of supported Masters and PhD students, and there is mounting concern that higher undergraduate fees may feed into much larger increases over the next few years. According to the 1994 Group of Institutions, postgraduate fees rose 11% this year alone.

The findings, which I presented at the Royal Economic Society Annual Conference in March, at Cardiff Business School and at the LSE, draw on a rich new dataset of postgraduate tuition fees by institution, subject and time. Using micro-data from the Higher Education Statistics Agency (HESA), I find that a rise in postgraduate fees of 10 per cent leads to a reduction in the probability of students progressing directly on to a postgraduate degree of between 1.7 per cent and 4.5 per cent.

Progression to postgraduate study – which is crucial for those hoping to pursue academic careers or to access higher level professional positions – is heavily weighted towards students from higher socio-economic backgrounds. Students from managerial or professional backgrounds, for example, account for 60 per cent of those progressing, while students from the lowest socio-economic groups - routine occupations, never worked and long-term unemployed – account for no more than 4 per cent. 

Unsurprisingly, I find that first degree results make a big difference. Those earning firsts or 2:1s are over 10% more likely to do further study than those with 2:2s or below. But even after controlling for a wide range of other characteristics, there is worrying evidence of different participation rates among otherwise identical groups. Attendance at a private school prior to university significantly increases the likelihood of progression by between 0.9 per cent and 2.4 per cent. Men are around 3 per cent more likely than women to stay on.

The research makes the case for several important policy changes. Firstly, a systematic effort is needed to monitor all postgraduate tuition fees in the UK. The absence of a database of fees by subject, institution and qualification level has presented a significant barrier for research and is an essential pre-requisite for efforts to effectively monitor access above undergraduate level.

Secondly, there is a need to re-examine how public support for postgraduate study is allocated. The results suggest that students from poorer backgrounds are under-represented in postgraduate study and that the jump from undergraduate to postgraduate study presents an additional barrier. Policy makers should reconsider the funding arrangements for postgraduate study – and in particular, the extent of public support for students from low income backgrounds who aspire to study beyond undergraduate level.

Comparing prices and rents in Central London with new data

Posted by Dr Philippe Bracke, LSE and SERC 

As homeownership rates fall across the country, ‘Generation Rent’ seems here to stay. But beyond the media coverage, we know surprisingly little about the private rented sector – even down to the most basic issue: price dynamics.

The National Statistician's Review of Official Housing Market Statistics, issued in September 2012, has identified the lack of an official private rental index as one of the three major issues currently affecting housing market statistics. That ‘data gap’ makes it harder for policymakers to make effective decisions.

When official sources are inadequate, private datasets can be very useful. In recent research for SERC I analyse rental data from John D Wood & Co., a real estate agency. My main focus is on how prices and rents relate. The price-rent ratio – or its inverse, the rental yield – is an important determinant of people’s tenure decisions. And for investors, yields are fundamental to assess the viability of real estate investments.

Having access to individual rental contracts, as well as individual sales, I can compare prices and rents for properties with similar characteristics. I start by computing average prices and rents within “cells” of properties with homogeneous characteristics (eg, 2-bedroom flats in SW7). Using data for the period from 2004 to 2011, I identify two patterns:

1. Bigger properties display lower yields (higher price-rent ratios): this applies to houses vs. flats, but also to big flats vs. small flats. 
2. Properties located in more expensive neighbourhoods deliver lower yields.

These patterns are well-known among market practitioners. Moreover, they are not limited to these years or to Central London specifically: in the nineties, the Joseph Rowntree Foundation produced a report on rents and yields that highlighted the same stylised facts. However, these patterns have not been the subject of academic studies, so far.

Standard methodologies cannot take into account unobservable “quality” differences between properties. Results will be biased if, for instance, within a same cell properties for sale have higher quality than properties for rent. To overcome this issue, I run a more sophisticated analysis on a subset of the data. For each rental property in the dataset, I search the Land Registry (which contains all sales in England) and check when the property was last sold. If the property was sold less than six months before the beginning of the rental contract, I match its price and rent and compute its rental yield directly. Reassuringly, the results that I obtain with this subset of the data confirm the two patterns described above.

What explains these persistent differences in yields between properties of the same city? One reason could be unobserved costs. If transaction costs rise less than proportionally with prices, for instance, trading smaller properties becomes relatively more expensive. These extra costs would offset the higher gross yield for smaller properties so that ex-post returns are equalised. Or maybe ex-post returns are truly different: more expensive properties and exclusive areas display lower rental yields because they are perceived as safer, or, alternatively, investors expect to gain from pure price appreciation, not from rental income.

Our understanding of the private rental market is still in its infancy, at least for academics. But with an open-minded approach to data, we are starting to learn more.