Dan Lewis: How to create a policy that will see the regions flourish

REGIONAL policy must accept global reality. Britain and certainly Yorkshire just can't do it all. The UK has less than one per cent of the world population and just over three per cent of global GDP.

And Yorkshire and the Humber's 90bn economy, and five million inhabitants, account for around eight per cent of British output.

Yet, in the era of austerity, a new regional policy must focus on enhancing transport mobility, fostering entrepreneurial culture and reducing the mitigating role of too much public spending in this region's economy.

To date, regional policy has not worked in Britain. I've never doubted the well-meaning intentions of those civil servants and contractors working in Britain's tax and EU-funded regional development industry. But uncomfortable as it may be, we must nevertheless face the facts. Decades of regional policy, including the super-charged one we just went through, did not equalise regional economic disparity with other regions or accelerate development.

If anything, they did the reverse. At 9.3 per cent, unemployment in these parts is some way above the national average of 7.9 per cent. And although by no means the lowest in the UK, Gross Value Added per capita in Yorkshire and Humber is about two-thirds of that of Greater London.

So I am quite encouraged by the coalition's plans – now being enacted – for Local Enterprise Partnerships. These public sector lite organisations appear to have a much higher proportion of private business involvement than the outgoing regional development agencies. Culture always emanates from the top and a mission to grow business faster is a good start.

As I noted earlier, small areas can't do it all – build cars, ships and host many of the world's leading companies. What is interesting though is that where regions can succeed is in the creation of clusters. Economic or business clusters can be described as a concentration of connected suppliers, businesses and institutions all working in the same field and geographical area.

Yorkshire Forward thought they could enhance a range of them; bioscience, chemicals, digital industries, food and drink, healthcare and environmental technologies.

This was far too much and unachievable. The truth is that clusters emerge for the strangest of reasons – and usually nothing to do with – or in spite of – government.

Take the Swiss watch and clock industry. In 1541, Jean Calvin banned the wearing of jewellery, forcing the goldsmiths to come up with new devices that would not be for show – but displayed in your home: clocks. Later, those skills led to the development of watches that could be carried. This cluster is now worth $18bn a year to the Swiss Economy.

Equally, Silicon Valley was not created by government design, but by privately-funded universities like Stanford, creating a host of engineering graduates who just happened to coincide with the computer boom. This led to the relocation of many venture capital and tech firms to the surrounding area.

More recently, London's Hedge Fund industry in Mayfair, which exploded under Tony Blair (and now under threat from the EU), was an unexpected offshoot of financial innovation, non-dom tax laws and a largely long-only fund management industry that was becoming stagnant in the face of low market returns.

So trying to pick a winning cluster is a tall order and not a good use of taxpayers funds. Far better to concentrate on tangible – and sometimes boring and unpopular – easy wins. This means giving regions the freedom to set their own minimum wages and levels of welfare, especially as the cost of living in Yorkshire is lower than London and an advantage to be exploited.

At a time of high unemployment and welfare dependency, Britain's less well-off regions should be given to the freedom to lower the cost of employment for the great unskilled and increase their incentive with lower regionally-adjusted benefits.

I have some doubts about high speed rail which obviously would help an already successful Leeds. First, I'd rather see rural rail subsidies redirected to rural road-building and buses. A new regional policy must understand that you can't bring much work to the workers, it's much cheaper to take the workers to the work. Improving transport access from those rural areas that are so poorly served at the moment is a clear way to do this.

Then we ought to look at reducing agricultural subsidies which tend to hold back our countryside's development and reallocating some of those funds to tourism – which brings in people, capital and jobs.

Privately owned and allocated capital was, is and always will be the greatest engine of regional economic growth.

That has to be the start and end point for successful regional policy. Government's role should be to enable lower-cost infrastructure growth, reduce the burden of employment and generally step back and let business flourish.

It's time to start. We have nothing to lose except our bureaucratic illusions.

Dan Lewis is chief executive of the Economic Policy Centre.