The economic structure of remote rural areas and implications for

development

Professor Deborah Roberts Social, Geographical and Economic Sciences group,

The James Hutton Institute

Commission for Territorial Cohesion Policy and EU Budget (COTER) Seminar Overcoming Barriers to Economic Development - A Remote Island Perspective. Lerwick,, 9 September 2016

Case studies: The Western Isles and Shetland

Two very different remote island economies but which share similar problems

Indicator Period

Western

Isles

Shetland

Islands Scotland

Population 2014 27,250 23,230 5,347,600

Population change 2001-2011 +4.5 +5.4 +4.6

% Claiming Key Benefits 2009-Q4 15.7 9.7 17.6

% Claiming Pension Credits 2012-Q4 21 10.6 15.4

Gross Value Added per head (£) 2014 16,325 26,083 23,102

Factors influencing economic structure

Households

Products

Industries

Labour, capital

Government

Imports and exports

Imports

Non-local labour & capital

Income transfers

• Population aging • Outmigration

• Lack of agglomeration economies

• Low rates of innovation

• High transport costs • Poor infrastructure

Industry structure

Household structure

The Industrial structure of remote areas (1)

1. Remote rural economies often have a disproportionate dependence on relatively few industrial sectors (“narrow economic base”)

• Primary sectors • Mining and extraction • Tourism Economies are unstable and sensitive to external factors (eg. weather, world market prices, exchange rates)

0

5

10

15

20

25

30

35

40

45

50

Western Isles Shetland Scotland

Primary sector Secondary sector

Services Public sector

0

5000

10000

15000

20000

25000

30000

1971 1976/77 1982/83 1987/88 1996/97 2003

£ (

2003 p

rices)

GRVA per head Shetland Household income per head Shetland

Household income per head UK

GRVA per head and household income per head, Shetland, 1971-

2. Vulnerable to closure of large firms

3. Strength of market inter-connections between sectors (input-output linkages) often limited Leakage of benefits Takes time for new sectors to integrate

Example: Integration of oil-related sectors in Shetland

The Industrial structure of remote areas (2)

• Impact on regional GVA very rapid and large (reaching peak in late 1980s)

• Impact on household income far less noticeable

• Integration of oil-related sectors in Shetland economy has grown over time

• Having a high level of integration is problematic once a sector is in long-run decline

Changes in Shetland oil supply base multipliers over time, 2003 prices

The Industrial structure of remote areas (3)

Household structure in remote areas (1)

1. Population aging and youth outmigration • Implications for labour market • Type and costs of service provision

2. Social changes are weakening links with production sphere of the economy

• Long distance commuters; • Increased mobility • Lifestyle changes

Example: Which type of household has the greatest potential for stimulating the Western Isles economy? (“Key household sector”)

Area All ages Children (0-15) Working Ages1 Pensionable

Ages2

SCOTLAND 8.8 5.5 4.0 26.7

Western Isles -10.8 -27.6 -19.1 19.6

Shetland Islands 8.3 -2.8 0.4 44.2

Population Projections to 2037, National Record Scotland

0

10

20

30

40

50

60

70

80

90

100

Wages and

Salaries

Self

employment

Investments Annuities &

Pensions

Social sec.

benefits

Other sources

% o

f to

tal

inco

me

Households, no children Households with children Retired households

Income by household type

Key households in Western Isles

0 5 10 15 20 25 30 35

Food, drink & tob.

Heating, fuel & light

Clothing & footwear

Transport

Housing costs

Other

% of total expenditure

Retiree households Households with children Households, no children

Expenditure by household type

Retiree households - largest multipliers but role as connectors limited. Rural areas with aging populations may become less able to retain benefits from increased local economic activity.

Households with children most integrated within economy and best “connectors” between production and consumption.

Economy-wide dependence on transfer income (1)

Regional growth is driven by activity which creates an income from outside the region. In remote areas, this includes significant levels of transfer income to: • production sectors (eg CAP support),

• local government (to support public sector activities)

• households (pensions, non-local income, investments)

highly vulnerable to changes in the policy environment

Example: How important is transfer income for the Western Isles economy?

Households

Products

Industries

Labour, capital

Government

Imports and exports

Imports

Non-local labour & capital

Income transfers

• 41% of employment comes about as a result from the spending of transfer income.

• Most important sources of transfer income direct and indirect terms relates to public sector and EU transfer payments (37% output; 34% employment)

• Transfer income supports professional and associate professional occupations (lower skilled jobs more dependent on income from exports and tourism).

Transfers to industry sectors &

local government

Transfers to

households

£’000 % £’000 %

Value of output 162547 37 31496 7

Factor income 89977 41 14407 7

Household income 79558 30 73397 28

Employment (FTEs) 3276 34 722 7

Contribution of transfer income to regional economic activity, Western Isles

Economy-wide dependence on transfer income (2)

Conclusions and implications for policy (1)

1. Need to look beyond GDP GDP alone is a poor indicator of the economic performance of remote areas. Complement with: • other economic indicators (eg household income), • social indicators (plus be careful of per capita indicators which will be affected by net outmigration) 2. Need policies which re-link industries and households • Population–focussed policies aimed at retaining and attracting

young people and harnessing the benefits of older residents • Rural development needs a mix of household types (Improving connectivity to improve sustainability)

3. Need policies which increase industrial diversity plus strengthen links between existing clusters • Smart specialisation which builds on existing comparative

advantages (Renewable energy) • Recognises the social and cultural assets of territories as well as

their natural assets (Fit to context) 4. Need policies which recognise the unique structure of remote rural economies “The challenges faced by rural areas are to harness the benefits of space as well as the costs of distance” (Castle, 1991)

Conclusions and implications for policy (2)

Thank you for your attention deb.roberts@hutton.ac.uk

Twitter: @aDebRoberts

Commission for Territorial Cohesion Policy and EU Budget (COTER) Seminar Overcoming Barriers to Economic Development - A Remote Island Perspective. Lerwick,, 9 September 2016

Sources: Roberts, D. and Newlands, D. (2010) The economic integration of new sectors in rural areas: a case study of the Shetland economy, Environment and Planning A, 42: 2687-2704. Roberts, D. (2005) “The role of households in sustaining rural economies: A structural path analysis” European Review of Agricultural Economics, 32 (3): 393 – 420. Roberts, D. (2003) The economic base of rural areas: A SAM-based analysis of the Western Isles, 1997, Environment and Planning A. Vol. 35, 95-111. Roberts, D. and Thomson, K.J. (2003) Structural change in peripheral rural areas: the case of the Western Isles, 1988/89-1997. Regional Studies. Vol. 37.1, 61-70.