The UK's neglected regions could be fired up by the power of imagination

http://www.theguardian.com/commentisfree/2014/mar/24/uk-neglected-regions-economists-wales

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If you split your time as I do, between London and your native Wales, you soon develop a sense of deep disconnection. The crane count in London rises inexorably higher, but economic growth where I was born is running, in the most recent figures, at a decidedly depressing -4%.

A blank stare of inter-generational hopelessness haunts the faces of the families in what was once the engine room of the world. It is hard not to feel, as even the playboy Prince Edward said on a visit to 1930s south Wales, that "something must be done". But the elusive search for that "something" – the policy panaceas of central planning or deregulation – have meant we are now more unequal than ever. Britain desperately needs a new approach, a growth lab for its nations, its regions and its poor.

The "wrong kind of recovery", like the wrong kind of snow or the recent flooding fiasco, is perhaps a symptom of our small island syndrome. The conditions on the ground are always an afterthought, a doodle in the margin for the Whitehall mandarin. Yet many people find themselves marooned from the mainstream simply because of the places in which they live. Anglesey, anchored off Wales's northern coast, is, for example, now the poorest part of Britain. With an average income of slightly more than £10,000 in 2012, in the global prosperity league it teeters just above Malaysia.

This is not, to be fair, a new or uniquely British problem. Income inequality has been rising in many developed countries for the best part of three decades. The plight of rust belt regions bypassed by new markets and technologies is a global phenomenon from Merthyr to Michigan. Which makes it all the more surprising that the policy cupboard is bare.

The problem is partly a problem of economics itself. Economists, with their intellectual roots in 19th-century physics, build general models of the world to generate universal prescriptions. But real-world economies tend to follow the Anna Karenina principle: successful places are more or less alike, while the poor performing ones are all uniquely miserable. Poverty and economic underdevelopment may be universal problems, but they need custom-built solutions as they almost always arise for particular reasons in particular places.

This means we need a radical shift in our mental models of how change happens. Micro tinkering and macro pump priming have failed to attack the roots of deep poverty; a new "mesoeconomics" – micro and macro's forgotten middle sibling – aimed at the intermediate scale of the region, the city and its neighbourhoods may prove a better bet. Less growth engine, with its levers of centrally directed power, more growth lab, a network of local experiments prototyping the future like the policy equivalent of the 3D printer.

The good news is that economics is entering a new golden age of applied creativity. Importing outside insights, from geography to neuroscience, and exploiting the power of big data is helping us understand local economies in unprecedented levels of detail and complexity. Harvard economist Ricardo Hausmann and his colleagues have shown in a recent paper, for example, how to predict which industries will emerge or disappear in a given city just by knowing its current specialisation, making possible – arguably for the first time – smart, evidence-based choices about future sectoral strategy at a local level. In the London borough of Enfield a granular analysis of the supply chains of the council, supermarkets and energy companies is identifying new opportunities for local "import substitution".

The power of place-based economics is on the rise everywhere. Diversity, in terms of ethnicity, skills or mindset, is increasingly a key factor. The phenomenal success of the city of Boulder in Colorado, the start-up guru Brad Feld argues, is based on its magnetic attraction to the smart, and even slightly weird, from the 60s hippy era onwards. Other American success stories like Austin, and even Seattle and San Francisco, have followed similar trajectories. In the UK, Bristol harnessed its own unique collection of sub-cultures to launch a distinctive music scene, and has used gathering points like the Watershed, and now the Engine Shed in the buzzing Temple quarter, to create what Watershed managing director Dick Penny calls Bristol's "real respect" for "difference and invention". Instead of chasing old-style inward investment, cities should be chasing talent – taking a leaf out of the book of the Arch Grant fund in Missouri that attracts 20 new global start-up founders to St Louis annually with its promise of a $50,000 sweetener. Perhaps we could even devolve immigration as Canada has done in the case of Quebec.

Policymakers are perhaps beginning to rediscover economics' lost art: the power of imagination. We need lots of it because no two places are alike. But new solutions locally will need new local finance. The £2bn earmarked so far for the City Deals is a step in the right direction, but it is less than 5% of what Lord Heseltine originally said was needed. And the taxes already or soon-to-be devolved to the Celtic rim can so far be categorised as either unusable or unnoticeable.

Local economic growth, if it is to be genuinely self-regenerating, needs to be funded by the proceeds of its own failure or success. So along with the new localism being touted for public services, we need local economic powerhouses run on their own steam. Assigning corporation tax locally for all firms with profits of less than a million – the backbone of our regional economies – would give mayors and first ministers £20bn annually, a revenue source tied to the success of their own policies and a budget line against which they could borrow to invest. It is the real devolution dividend, from Wales to Walsall, we are still waiting for.