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Planning and the economy: a complex relationship

Published in Town Planning Review (Liverpool University Press), Volume 79, Issue 4 (November 2008)

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The diplomat thought that he had won the first prize in his foreign ministry’s lottery. Having spent the past few years in his country’s capital in Central Europe he received an attractive offer. For the next three years he could work at the embassy in London, a vibrant city in a country that had seen more than one and a half decades of uninterrupted economic growth. The prospect was so good that he did not hesitate to pack his suitcases and move.

But unfortunately, his original excitement soon started to wear off when it came to house hunting. After a long search, he found a small house in Chiswick for his family. Altogether about 120 square metres – but disappointingly no cellar – it was quite a bit smaller than his home back on the continent. The building standard was also much lower, and, much to his surprise, the monthly rent was higher than his net income: £4600. Luckily for him, the foreign ministry has a policy in place by which he only has to pay what a comparable home in his country’s capital would have cost, so he pays only £800 a month – the rest is covered by the embassy.

When I met this diplomat a few weeks ago, he was still trying to work out why housing in London was so expensive and yet often so substandard. But above all, he could not understand how it was that after the longest period of economic growth in recent history many Britons find it harder than ever to afford decent accommodation. Shouldn’t a rich country be able to offer its inhabitants a much better quality of life?

What sounds like a paradoxical experience may not be so much of a paradox after all. House prices, quality of life and economic growth are very much interlinked in Britain’s recent history, and it is not always easy to disentangle the three. However, if we want to understand why they are connected, it is necessary to subject them to an economic analysis, and that means analysing the way Britain’s built environment has been planned.

The acknowledgement that planning and the economy are closely linked is relatively new. For many decades, economists have preferred to deal with other factors when analysing the British economy. They examined interest rates, money supply, regulation or labour markets – and with very good reasons, too – but the economics of planning simply did not appear on the radar of many economists (and they probably did not know much about the subject either). So when it came to identifying the factors that were determining economic growth, it was frequently overlooked as an issue. It was a bit like the joke of the drunkard who had lost his keys in a dark street and then started looking for them under a remote lamp-post where the light was better.

On the other side of the fence were planners, and they were not that much interested in economics either. It was for them to plan and for the market to follow, so many thought. The response of a planner, asked whether land price data could be useful, was unequivocal: ‘We would not see the point of looking at price data Planning should lead, not prices. Land price should reflect planning, not the other way round’ (Evans and Hartwich, 2005a, 18). The history of planners and economists was for a long time one of mutual lack of interest and probably even a degree of prejudice.

Things have changed in the past decade or so. The Department of the Environment first commissioned research into land prices and land supply in 1992 (Eve, 1992). The McKinsey Global Institute named planning as one of the obstacles to productivity growth in 1998 (McKinsey Global Institute, 1998). Furthermore, there have been two HM Treasury/ODPM/DCLG enquiries into housing supply and land use planning undertaken by Bank of England economist Kate Barker (2003; 2004; 2006a, b). Undoubtedly, all these voluminous reports have altered the tone of the debate towards an open recognition that economics can tell us something about planning and its effects.

Since the introduction of the modern planning system in 1947, the main effect – at least from an economics perspective – has been the restriction of land supply.

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