Brexit: Territorial Inequality and the Future of Nations

Penn IUR, Perry World House and The Wharton School hosted a lunchtime talk, “Brexit: Territorial Inequality and the Future of Nations”, with visiting speaker Andrés Rodríguez-Pose, Professor of Economic Geography, President of the Regional Science Association International, London School of Economics on September 20, 2016. Professor Rodríguez-Pose was joined by panelists, Joao Gomes, Howard Butcher III Professor of Finance, the Wharton School; and Gilles Duranton, Dean’s Chair in Real Estate Professor, Chair, Real Estate Department, the Wharton School. Penn IUR Co-Director Susan Wachter gave introductory remarks.

Rodríguez-Pose framed his discussion by introducing the set of theories that predict economic dynamism in cities. Citing authors such as Glaeser, Rodríguez-Pose explained that agglomeration and density lead cities to be richer, greener, healthier, and happier places to live and work. Cities such as London, Paris, or Tokyo act as key drivers of growth in a country, transforming not just the lives of those in the city but also those throughout the country. Agglomeration and density, do produce negative externalities such as pollution, congestion and the rising cost of living, he acknowledge but such externalities are outweighed by the positives of growth and prosperity.

He remarked on the importance of a “forgotten” externality that threatens to attack the very basis of economic prosperity in cities: inequality. Using London, United Kingdom as his primary example, he argued that increasing interterritorial inequality contributes to the rise of populism, as seen in the recent results of the Brexit vote. Rodríguez-Pose posited that the division of prosperity in London and the southern UK compared to the struggling northern and more rural regions led to a poorer population that felt they had been left behind. Rodríguez-Pose noted that this inequality resulted in higher “leave” votes among poorer, less-educated Brexit voters. He emphasized that this is not unique to the United Kingdom, but can be seen in the United States, Thailand, and other countries where rising populism is leading to political dissatisfaction that ultimately affects the economy, undermining city, region, and country growth.

The irony of the Brexit vote, Rodríguez-Pose highlighted, is that the outcome attacks the very basis on which the economic prosperity of the city, and subsequently the country, has been founded, emphasizing that the Brexit vote will primarily affect the northern and more rural residents who will receive less welfare as a result of a shrinking tax base and who will see limited manufacturing jobs for medium skilled workers. Rodríguez-Pose offered six solutions for counties facing rising territorial inequality: 1) do nothing, 2) encourage migration, 3) bet on top cities, 4) decentralize, 5) increase social and welfare policies, and 6) increase place-sensitive policies. None of these solutions are without problems, he asserts, but the sixth is the most promising since it combines people- and place-based approaches to empower local stakeholders to take greater control of their future.

During the discussion following Rodriguez-Pose’s presentation, Gomes agreed that inequality undoubtedly played a role in the outcome of the Brexit vote, but argued that economic safety of the UK was a major concern for voters. Despite the poll results, the leaders of the country want the UK to remain an economic success, so whether the separation from the European Union proves to be financially disastrous or financially beneficial, the government will respond accordingly in time to ensure the UK remains economically strong, Gomes claims. Duranton drew attention to the role of housing in the polarization of regions and countries. Lack of affordable housing, he argued, leads to a strong division of income levels, which only serves to drive inequality; By building more affordable housing in areas where people want to live, cities and countries may be able to drive down inequality.

Following the presentations, Wachter moderated a brief discussion, providing a chance for Rodríguez-Pose to respond to the panelists comments and opened the floor for questions from the audience. Rodríguez-Pose’s responses stressed the political nature of the Brexit decision, acknowledging the negotiations going forward will not be driven solely by economics. He also noted the success some second and third tier cities have seen betting on affordable housing and high quality universities to draw residents in, but warned that there must be jobs available for the newcomers, so they do not end up on welfare, further exacerbating inequality.