Economic Shocks Research A report to the Department for Business, Innovation and Skills 27 March 2013 Economic Shocks Research A report to the Department for Business, Innovation and Skills Contents Executive Summary..................................................................................................................i 1. Introduction ..........................................................................................................................1 2. Types of shock.....................................................................................................................7 3. Effects of shocks ...............................................................................................................13 4. Responding to shocks – theoretical and practical frameworks ...................................23 5. Options for government response...................................................................................29 6. Synthesising what works and learning............................................................................51 7. Setting out the framework.................................................................................................61 Annex A: Bibliography ............................................................................................................1 Annex B: Details of the literature search...............................................................................1 Annex C: Consultee list...........................................................................................................1 Annex D: Long list of evidence on what works ....................................................................1 Authors: Cook, J., Pringle, S., Bailey, D., Cammiss, S., Wilkinson, C., Amison, P. Contact: Jonathan Cook Tel: +44 7715 071501 email: [email protected] Approved by: Simon Pringle Date: 27 March 2013 Director www.sqw.co.uk Economic Shocks Research A report to the Department for Business, Innovation and Skills Executive Summary 1. SQW Ltd (SQW) and Coventry University Business School were commissioned by the Department for Business, Innovation and Skills (BIS) to undertake research into economic shocks and to produce a framework to inform decision‐making on whether government should intervene in the event of a shock, and the options for the appropriate form of intervention. Background 2. The study defined economic shocks as instances of significant job losses, encompassing the closure or rationalisation of large commercial undertakings due to market forces and/or strategic decision‐taking, or shocks resulting from external factors such as natural disasters and other events (such as fires, social unrest and strikes). 3. The framework has been informed by good practice and lessons from previous shocks, both in the UK and internationally, drawing on consultations and a review of existing literature. As the study was undertaken in a short timescale, from mid‐January to the end of March 2013, the literature review and consultation process was pragmatically defined. A systematic review of the literature was not possible in the timescale or resource of the study, and the consultations were limited to just under 30 individuals with a range of perspectives. 4. The evidence highlights that each shock needs to be taken on its own terms: the combination of issues in play, the potential effects of shocks, and the context within which they occur vary. Therefore, the framework has been developed with this in mind – as such it is seen as a “decision‐taking” framework, in that partners will need to play an active role in the process; the framework is not designed to be a mechanistic approach to decision‐making. The process and causes of shocks 5. The literature identifies that there are different ‘moments’ in shocks, which can affect their process and development. These moments can include: foreseeing shocks and seeking to influence the decision‐making of businesses in order to prevent a shock implementing mitigating actions to reduce the effect of a potential shock actions during the process of a shock responses in the aftermath, either in the short‐term or long‐term. 6. The process of shocks and the opportunities for action are dependent on when the shock is announced and known – some can be slow‐burn and foreseen, others can be overnight and sudden. Similarly, the period for impacts can span from immediate through to longer‐term effects. 7. The immediate causes of business closures are due to business decision‐making, but the wider context of causes needs to be understood in the light of sectoral, market and i Economic Shocks Research A report to the Department for Business, Innovation and Skills technological trends. These trends can include the changing nature and size of demand in markets, over‐capacity in supply/provision, cheaper competition from international producers, and altering business models including with respect to the processes of innovation. The macroeconomic environment can have a particular bearing on some of these causes. For example, economic downturns can have a noticeable effect on demand, as can exchange rate shifts, which can affect the competitiveness of goods and services. Some of the causes can be tracked and understood over time, which can contribute to foresight of shocks (or potential shocks). 8. Disasters and events, on the other hand, normally occur out of the blue, for example flooding, social unrest and other disasters. Whilst they are wholly unexpected in terms of when and where they might occur, contingency planning might be possible, e.g. under the guise of climate change adaptation (in relation to flooding). The potential effects of shocks and the rationales for intervening 9. A framework and key set of issues can be established to guide assessment of the potential effects, though it is important to take each shock in its own context. The study identified four key domains, which are important in implementing the framework: the direct business(es) involved; the supply chains of the business(es) affected; workforce and skills, notably those workers within businesses and supply chain companies; and place and communities, covering specific land and property issues, communities and wider place competitiveness. 10. Assessing the overall effect of a shock needs to take into consideration that something will happen anyway. Workers may well find alternative destinations before closure, and positive effects may emerge, such as new business creation. Moreover, the assessment and diagnosis of a shock is critical in understanding whether there is a case for government i ntervention. 11. Understanding the rationale for intervening at the level of a business that is closing/may close is challenging for policy‐makers, because of the political pressures that may affect any rational decision‐taking. Issues of national security (e.g. to energy supply, health care resources and financial stability) are seen as cases when government should step in, but deciding whether to intervene to prevent, say, a manufacturing business from locating a plant elsewhere or closing a plant in the UK rather than one overseas is less straightforward. Three fundamental issues have been identified as being important in taking such a decision: the importance of the business, its supply chains and its skills/technologies in relation to national industrial policy; whether the shock has been foreseen with sufficient time until impending closure; and whether the decision can be influenced in a sustainable way (i.e. can the business be persuaded to stay, and will this mean it will stay for the long‐term). 12. If there is not a case for intervening at the level of the direct business(es) involved, there may be rationales for responding to other elements, for instance supporting workers to find alternative positive destinations, providing assistance to supply chain businesses to diversify and to access new markets, and addressing issues relating to sites, wider ‘sense of place’ issues and the communities affected. 13. The evidence on assessment and diagnosis is critical in framing any case for support: in the example of the characteristics of the workforce affected it is quite hard to present a case for ii Economic Shocks Research A report to the Department for Business, Innovation and Skills significant government support for flexible, mobile and highly‐skilled workers; but a case could be made for workers facing multiple barriers. 14. A final key factor in understanding the effects of shocks is the important interplay between the business, supply chains, labour markets and place. In the examples of more substantive shocks that affect all domains, there is likely to be a strong case for intervention, and an holistic approach to the response may be appropriate, which begins to take us into the area of longer‐term economic development and local/regional restructuring/resilience. The case study material highlights that this can be challenging to deliver, especially in tough economic contexts. Learning from past responses 15. Drawing on the case material, there are a number of lessons for determining and delivering appropriate responses. These include the following: Appropriate mix of interventions: More effective and rounded responses seek to address all of the issues, even if this is over the longer‐term in instances where wider restructuring and/or resilience needs to be an objective (e.g. responding to shipyard closures in Gothenburg). The importance of good intelligence: