Council of Economic Advisers: Chair's report 2016-2018

3 – Workstream 1: Inclusive Growth

Remit:

• To advise the Scottish Government in the further development of its inclusive growth policy agenda;
• to help identify policy areas that the Scottish Government should focus on to improve access to economic opportunities and reduce inequalities; and
• to help identify methodologies and approaches that could be employed in Scotland to support policy development around inclusive growth.

Key activities: agreed and advised on launch of diagnostic; advised on content, and participated at Scotland's Inclusive Growth Conference; advised on measurement and key policy areas for progressing towards inclusive growth.

The term inclusive growth (or IG) was introduced to Scottish Government economic policy in Scotland's Economic Strategy 2015. For over 10 years, the term has been used internationally with organisations including the OECD ^[8] and the World Economic Forum ^[9] carrying out analysis into measuring and delivering inclusive growth. UK based organisations and universities are also investigating IG; including the Joseph Rowntree Foundation, who launched an Inclusive Growth Monitor ^[10] in 2016, and the RSA Inclusive Growth Commission ^[11] which ran from April 2016 to April 2017.

In the UK, the Scottish Government were early in using the term inclusive growth, and are recognised by international partners as a leader in the field. The Scottish Government's vision of inclusive growth is 'growth that combines increased prosperity with greater equity; that creates opportunities for all and distributes the dividends of increased prosperity fairly'.

Inclusive growth is about the pace and pattern of growth in a country or region. Therefore, it should achieve sustainable economic growth, with a particular emphasis on who benefits. On this basis, inclusive growth policies are designed to tackle inequalities (in terms of outcomes and opportunities) and to stimulate sustainable growth. In doing so, they should shift the poverty curve over the longer term as a wider group will contribute to and share in the benefits of growth.

Over the past 2 years, the Council advised the Scottish Government on a range of analytical work to build the evidence base on inclusive growth in Scotland. This chapter presents the evidence that informed these discussions and the developments across the time-period. Key topics include stakeholder engagement, Scotland's Inclusive Growth Conference, and the diagnostic approach.

3.1. Context

Defining Inclusive Growth

The Council discussed the development of a framework to define and monitor inclusive growth for Scotland. Early work in 2016 used a framework to monitor IG across three themes: growth, inclusion, and sustainability. Building on this, work began to determine a national level framework to define inclusive growth, and provide a set of measures for assessing performance at a national and regional level. Development began in 2017 with a review of national and international IG frameworks already developed. These showed that a basket of indicators was essential to capture all elements. International and national evidence of key drivers of inclusive growth also informed the development.

Using the evidence gathered, and after gathering stakeholder views, officials deemed that the following components are essential to an IG monitoring framework. These are to be taken as a set, and not considered separately.

• Productivity - Economic growth is resilient, sustainable, and inclusive.
• Population - Scotland's population is healthy and skilled.
• Participation - Improved opportunities to access work, jobs are fulfilling, secure and well-paid, and everyone is able to maximise their potential.
• People - Economic benefits and opportunities are spread more widely across Scotland's population, with lower poverty levels.
• Place - More equal economic opportunities across Scotland's cities, towns and regions and rural areas, ensuring sustainable communities.

The components reflect the essential aspects of inclusive growth. In particular, the distinctive focus on people – with a focus on the protected characteristics – and on place – including looking at indicators across local author areas. These also sit in the context of sustainability constraints: environmental and financial.

Scotland performs fairly strongly across the five inclusive growth components. However, significant variations remain across regions – in part to geographic differences - and people groups. This workstream seeks to investigate these issues.

3.2. Discussion

Stakeholder engagement

Scotland and UK-wide Engagement

Effective action across the public, private, and third sectors is crucial to delivering inclusive growth and requires a shared vision for inclusive growth in Scotland. We are pleased that Scottish Government officials have maintained positive and constructive engagement with both internal and external stakeholders across the economic and social policy spectrum.

Within Scotland, officials have engaged with a wide range of public sector and private sector stakeholders; in particular, working with Local Authorities and Regional Economic Partnerships working on City Deals ^[12] to undertake diagnostic and prioritisation analysis. In addition, officials have had collaborative discussions with think tanks such as the Joseph Rowntree Foundation, who have contributed substantially to the field of evidence and analysis on inclusive growth within the UK.

Scottish Government Policy Action

• Scotland's Centre for Regional Inclusive Growth

The Council has been interested in the development of Scotland's Centre for Regional Inclusive Growth. The Cabinet Secretary for Economy, Jobs, and Fair Work announced this initiative at the Economy, Jobs, and Fair Work Committee data inquiry in November 2017. The Centre will be a partnership between Scottish Government and others who have expertise and interest in regional economic development. It will provide a platform for disseminating analysis on inclusive growth at a local and regional level; sharing best practice; and developing ways to support the use of local and regional data and evidence to inform inclusive growth policies. The Centre will build on the current inclusive growth diagnostic work. It will also support Scottish Government policy initiatives on regional partnerships and city region and growth deals.

The Centre aims to increase understanding of regional strengths, challenges, and opportunities in order to drive inclusive growth in different regions of Scotland. Working with academics and other partners, the Centre will align interests in regional economic development to deliver demonstrable improvements in inclusive growth outcomes that benefit local communities and individuals.

International Engagement

In addition, Scotland's approach to inclusive growth has gained interest from a number of international organisations. At an official level, engagement has taken place with the OECD, Department for International Development, the World Bank, and World Economic Forum. Engagement has particularly concerned the work on inclusive growth diagnostics. In addition, the Chief Economist has spoken at a number of national, UK, and international engagements on the Scottish approach to inclusive growth. Most recently in 2018, the Chief Economist spoke at an event in Paris on Business and Inclusive Growth at the OECD headquarters.

Scotland's Inclusive Growth Conference

In October 2017, the Scottish Government held an international conference in Glasgow on inclusive growth. This was a landmark event in engagement on inclusive growth, and the Council was pleased to help shape and contribute to the day.

The Programme for Government 2016-17 announced the commitment to hold an international conference on inclusive growth. The conference aimed to draw together local and international leaders in inclusive growth, as well as business leaders and policy makers, to share evidence and best practice on how to move towards inclusive growth.

Council members provided advice on the broad programme and themes of the day. Including advising officials of the importance of involving the business community, to increase understanding of inclusive growth from the business perspective, and share best practice of how business can contribute to inclusive growth. Several Council members were present on the day, with Harry Burns and Sara Carter addressing the conference, and Anton Muscatelli hosting the day at the University of Glasgow.

The full day conference attracted over 140 delegates from the public and private sector who engaged in workshop sessions and heard from a number of keynote speakers. These included the First Minister, Cabinet Secretary for Finance and the Constitution, Gabriella Ramos (Chief of Staff, OECD), Gerry Rice (Director of Communications, IMF) and the Minister for Financial Markets and Consumer Affairs Minsters in Sweden, and the Minister without portfolio, responsible for Development, Strategic Projects and Cohesion in the Government of Slovenia. The day was made of three types of session: keynote addresses, panel discussions, and workshops.

• Panel sessions looked at building capacity, inclusion, entrepreneurship, and fair work for inclusive growth.
• Breakout sessions covered approaches to inclusive growth. Discussions looked at overcoming exclusion; challenges and opportunities for SME's taking a role in supporting inclusive growth; place based approaches; and fair work practices and how they can drive inclusive growth.

Speakers and delegates alike noted that the conference was a success in bringing together many influencers in the field of IG. Greater awareness emerged of best practice in policy, evidence of what works and experience in other places to progress this agenda. Moreover, presentation and discussion on potential priorities and next steps for Scotland allowed for clearer alignment of current policies with the IG ambition.

In particular, the international conference created the opportunity for the Scottish Government to share best practice with, and learn from, countries and organisations across the world. Officials have continued discussions that took place at the conference with the World Economic Forum (WEF) and OECD, and plan to widen engagement in 2018. Initial topics of discussion have focussed on approaches toward monitoring and evaluating performance, as well as on regional and local applications of inclusive growth.

Wellbeing Economy Governments

Scotland's Inclusive Growth Conference also facilitated the inaugural planning meeting for a new international group of Wellbeing Economy Governments (WEGo). WEGo will comprise of countries that seek to promote policy innovations, expertise, and best practice among countries with a shared ambition of championing a wellbeing economy for their citizens and the environment.

The October 2017 meeting laid the groundwork for advancing this agenda. Present were senior officials from New Zealand, Costa Rica, and Scotland, as well as Ministers from Sweden and Slovenia. The core group of Scotland, Costa Rica, and Slovenia are currently making plans to expand the group before launch at the OECD's World Forum in November 2018. The Council is supportive of this initiative, and welcomed the opportunity to contribute to the Group's most recent meeting (May 2018) with Sara Cater chairing an extensive evidence session, and Harry Burns giving a presentation that linked the ambition to improve wellbeing with the policy actions required to achieve inclusive growth.

The Diagnostic Approach

Underpinning the Scottish Government's inclusive growth work has been analysis of the conditions, constraints, and opportunities for delivering inclusive growth. To do this, the SG used a diagnostic approach. The Council has paid particular attention to the approach and outputs. An inclusive growth diagnostic is a systematic approach to assessing what is constraining a country from achieving inclusive growth by investigating economic and social systems. Originally developed by the World Bank and Harvard University, diagnostics are increasingly in use in developing countries.

Scotland was the first advanced economy to undertake a diagnostic. The Scottish Government's methodology started with the premise of a link between inclusivity and growth. There is a growing body of international evidence that delivering sustainable growth and addressing long-standing inequalities are reinforcing, and not competing, objectives. Recent work from the IMF ^[13] and the OECD ^[14] supports this.

The diagnostic was organised around drivers of inclusive growth, unpicking elements of inclusivity and growth to understand which constraints needs to be unlocked and prioritised. The key is considering social and economic interactions together.

Across 2016 and 2017, officials and local partners implemented the diagnostic approach. Outputs influenced the prioritisation of actions that aim to support moving towards inclusive growth. At time of writing, the diagnostic approach is in use to inform priorities for a number of Growth Deals and Regional Economic Partnerships.

In February 2016, we approved plans for the Scottish Government to take forward an inclusive growth diagnostic for Scotland. The was based around benchmarking potential inclusive growth drivers with comparator countries (New Zealand, Switzerland, Sweden, Denmark and Finland) to identify areas where Scotland does not perform so well across drivers of growth, inclusion and sustainability. Additional social and economic analysis explored the reasons why particular areas may be constraining inclusive growth.

The over 30 potential drivers of inclusive growth examined ranged from infrastructure to access to finance to equality of opportunity. Areas identified as national-level priorities, with strong evidence of impact across growth, inclusion and/ or sustainability, included digital and new business methods take up, inequality of caring responsibilities, and lifestyle choices determined by social and economic deprivation.

North Ayrshire Inclusive Growth Diagnostic Pilot

Overview

In 2017, the Office of the Chief Economic Adviser at the Scottish Government and North Ayrshire Council undertook a joint pilot project to assess what was holding back long-term sustainable inclusivity and growth in North Ayrshire (NA). This pilot refined the inclusive growth diagnostic approach, which has subsequently been applied in a number of other local areas and regions. The work sought to identify those prioritised investment decisions with the potential to deliver long-term transformational change. The project received the Policy Development Award at the Scottish Public Service Awards in December 2017.

Please see Scotland's Centre for Regional Inclusive Growth website for full, published results.

Activities

The diagnostic approach applied in North Ayrshire consists of the following stages:

Stage 1: The Inclusive Growth Story

The diagnostic process began by benchmarking North Ayrshire's performance on a range of inclusive growth indicators against neighbouring local authorities and the Scottish average to identify high-level areas of achievement and challenge. This expanded the focus of policy-making beyond the traditional measures of economic success and highlighted the areas to investigate throughout the diagnostic.

The high level inclusive growth challenges identified in North Ayrshire include:

• Productivity and the legacy of industrial decline, as evidenced by low GVA per head, low business start-up rates, low business expenditure on Research and Development, and significant employment in low wage, low value sectors.
• Economic and social inclusion, as evidenced by lagging female labour market participation (relative to the Scottish average) and gender segregation in skilled/ higher paid occupations; high unemployment, in-work poverty and high levels of deprivation; and poor health outcomes, including mental health outcomes (which are both an outcome and driver of inclusion).

Stage 2: Understanding the drivers of inclusive growth

Due to the breadth of potential issues identified, a holistic approach was used to better understand the causes of these. This covered three levels: the external environment; local conditions; and, social factors. This approach helped produce a list of drivers of inclusive growth outcomes, see Table 1 below.

This exercise identified 'excluded' groups – that is, groups sharing similar characteristics that have been particularly excluded from the benefits of economic growth, especially labour market inclusion. The excluded groups identified were young people, those with long-term health problems, those in in-work poverty, and females.

Table 1: Inclusive Growth Drivers in North Ayrshire

Infrastructure

• Slow roll out of digital infrastructure and poor coverage (mobile)
• Lack of appropriate business premises
• Housing: energy efficiency and availability of smaller properties
• Transport (people to jobs)
• Transport (goods to market)

Skills

• Intermediate and advanced skills
• Entry-level skills/ work-readiness
• Basic digital skills (which can also limit social inclusion)
• Digital innovation/ advanced digital skills

Social Capital

• Community empowerment
• Aspirations (individual and business)
• Health, particularly mental, compounds inclusion challenges
• Difficulties in accessing affordable and flexible childcare

Value/ quality of jobs

• Structure of the economy/ sectors/ industries
• Availability of local jobs (jobs density)
• Sustainable working population

Stage 3: Vision and Outcomes

The subsequent activity was based on an agreed vision for NA that placed equal weight on the importance of growth, inclusion, and sustainability in the local area.

At this stage, a range of groups across North Ayrshire were consulted to identify at a high level whether the constraints identified by the Pilot were considered as barriers by stakeholders. These engagements were held as part of a North Ayrshire Council officer's normal activity schedule.

Stage 4: Identifying Priorities

The prioritisation exercise ranks the identified constraints based on the interaction of two dimensions: impact and deliverability.

• Impact – An evidence-based approach that ranks constraints based on their relative importance in unlocking inclusive growth opportunities. The methodology takes into account an assessment of synergies and trade-offs and impact on key excluded groups.
• Deliverability – led by decision makers in North Ayrshire Council. This stage is a more qualitative assessment taking account of the preferences of policy-makers, local communities and the private sector, as well as a time dimension and funding feasibility. This build on community engagement NAC had carried out, as well as existing knowledge of the concerns and priorities of the community and private sector.

The main constraints to inclusive growth in North Ayrshire identified by the diagnostic include:

• Intermediate/Advanced skills
• Jobs density
• Health and wellbeing
• Basic digital skills
• Entry-level skills

• Business-specific skills
• Childcare
• Migration and population decline
• Sector composition
• Digital connectivity

Stage 5: Delivery: Operationalising Results

Following the first four steps of the diagnostic framework, North Ayrshire Council have prioritised and implemented several actions to address these constraints.

The findings of the diagnostic are used to inform investment and policy decisions in the short, medium, and long term. The analysis informed the development of strategies and programmes, including the Community Planning Partnership Fair for All Strategy to reduce inequalities in North Ayrshire and its associated Pledges.

In the short term, the work is being incorporated into current programmes. More emphasis on excluded groups such as females can be seen in Skills for Life programmes, which have focused on lone parents. Investment in health and employability services has been increased, resulting in increased employability referrals from Health Visitors, and some support has been provided with condition management through an occupational health provider SALUS. North Ayrshire Council have also increased investment in developing basic digital skills in recent budgets. The analysis contributed to the March 2017 budget, which made a significant investment to take forward the North Ayrshire Fair for All Strategy. Investment funds created include:

• Community Investment Fund (£2,600,000);
• Poverty Challenge Fund (£850,000);
• Basic Income Pledge (£200,000); and the
• Participatory Budgeting Fund (£900,000).

In the medium to longer term, North Ayrshire Council are assessing current activity against each of the constraints and excluded groups, and identifying where further action is required. This will inform the development of key projects, including:

• Ayrshire Growth Deal
• Regional Partnership
• Supported Employment for disabled residents
• Final phase of EU funding 2019-2022
• Basic income pilot
• Implementation of Fair for All strategy

Going forward, engagement will continue between North Ayrshire Council, the Scottish Government, and its agencies. The inclusive growth diagnostic is being rolled out across Ayrshire to inform the work of the Ayrshire Growth Deal and the Ayrshire Regional Partnership. By focusing on inclusive growth, the regional partners will ensure that community's needs are considered in economic growth plans.

Scottish Government Policy Action

The Council continue to be interested operationalizing inclusive growth through policies that can drive change across Scotland, and the Scottish Government is currently looking at mainstreaming an inclusive growth policy lens across Government. Current policies with a strong link to inclusive growth ambitions are:

• The Business Pledge

As acknowledged earlier, buy-in from the private sector is essential to achieve the inclusive growth ambitions. The Scottish Government already supports a number of initiatives that aim to mainstream inclusive practices in companies operating across Scotland. The Business Pledge is the primary focus offering a shared partnership between the Scottish Government and business, with the shared goal of boosting productivity, competitiveness, and sustainable employment through fair work, workforce engagement and development, and progressive business practices. The Council acknowledges that there are many businesses not signed up to the Pledge that nevertheless align in ambition, but we continue to support the Pledge and its aims. At time of writing, 500 businesses had signed up to the Business Pledge.

• Regional Economic Partnerships and City Deals

The Scottish Government has committed over £1.3 billion to City Region Deals in Glasgow City Region, Inverness & Highlands, Aberdeen City & Shire, Edinburgh and South East Scotland and Stirling and Clackmannanshire; and is focused on securing deals for all of Scotland. The Scottish Government's approach to these growth deals is to support inclusive economic growth, strengthening regional economies over the longer term, creating jobs and tackling inequality.

In addition, the Scottish Government is committed to extending the Regional Economic Partnerships across all of Scotland. These Regional Partnerships seek to align resources and priorities across local authorities, the private sector, enterprise agencies, education and skills providers and others in order to boost inclusive economic growth

• Tackling Child Poverty

In November 2017, the Child Poverty (Scotland) Act was passed, establishing Scotland as the only part of the UK with statutory targets to reduce child poverty significantly by 2030.

The 'Every Child, Every Chance: the Tackling Child Poverty Delivery Plan' was published in March 2018. The Plan outlines actions to support progress towards the new child poverty targets. Actions include investing £12 million in parental employment support and the development of an income supplement for low income families. In addition, it includes the development of new support for childcare after school and in the holidays, and investment over the next two years to provide additional practical support to children experiencing food insecurity during school holidays. Finally, the Plan includes a new minimum School Clothing Grant of £100 delivered by each local authority in Scotland.

Reflections and Recommendations for Inclusive Growth

The Council continue to believe that inclusive growth should be the most important objective for Scotland. Despite being an economically successful nation, deep inequalities still exist indicating that the pattern of growth has not benefitted society equally. Furthermore, Scotland has potential to improve the pace of overall growth.

Concerning Engagement

The Scottish Government has been effective in engaging with a wide number of organisations learning from and adding to the theory and best practice of inclusive growth. The Council recommends continued engagement and collaboration with national, local, and international organisations. Scotland's International Inclusive Growth Conference proved a valuable opportunity for building partnership and we support the plan to use the Centre for Regional Inclusive Growth as a facilitator of constructive engagement.

Furthermore, we encourage increased collaboration with the private sector in working toward inclusive growth, and promoting initiatives such as the Business Pledge. Actions to support the private sector and businesses engage and influence inclusive growth, such as the Pledge, are commendable and continue to be important. An enhanced understanding of how the private and public sector can work together to achieve inclusive growth is essential.

Concerning the overall approach

The Council recognise the considerable work undertaken around building an evidence base for inclusive growth since mid-2016. The Scottish Government is now at the more critical time of implementing inclusive growth policies more systematically. We are pleased that the government is already taking steps to do this, and recommend maintaining an increased focus on operationalizing inclusive growth, both at a national and a regional level, ensuring a joined-up approach across Scottish Government policy activity to ensure effectiveness.

In particular, we recommend that the Scottish Government continue to investigate what bottom-up approaches could be implemented across Scotland to support inclusive growth. After considering national and international evidence, it remains evident that a bottom-up approach to inclusive growth can prove most effective. Indeed, this is especially important in relation to equipping people with the right skills to enter the labour market, and early years interventions. We commend the Government for such policies already in place, including for childcare.

To support delivery of effective inclusive growth policy, we also recommend improved reporting and evaluation of the progress around inclusive growth, both at a national and policy specific level to assess impact. Focus on the inclusive growth outcomes and the National Performance Framework will be vital.