Since 1990, while the UK’s rate of economic growth has averaged nearly 3% in real terms, manufacturing has lagged well behind at less than 1%, while service industries (excluding those which are primarily provided by the public sector) have achieved annual growth averaging around 4%.

These industries now account for more than half of GDP, and cover a huge range of activities. Economic growth has been concentrated especially in telecommunications, transport and logistics, financial, business and professional services (including those associated with real estate), retailing, and recreation/leisure.

Financial, business and professional services now contribute more than a quarter to total GDP, which means that it is double the size of the manufacturing sector.

In addition to banking and finance, this category also includes management consultancy, advertising and public relations, IT services, as well as the more traditional professions, such as solicitors, architects and accountants.

Since 1990, output of financial, business and professional services has grown at an average rate approaching 4% a year, while the smaller transport, logistics and communications sector has managed over 5%, largely on the strength of the rapid development of telecommunications services.

Location quotients express the degree to which a region is dependent on a particular industry or sector relative to the country as a whole.

By way of example, if a sector accounts for 10% of national GDP, a region in which it contributes 12% has a location quotient of 1.2, while that in which it represents just 8% has a location quotient of 0.8.

In relation to the country as a whole, it is clear that the north and midlands of England, as well as Wales remain dependent on manufacturing industries, with location quotients of between 1.2 and 1.4.

The share of GDP accounted for by manufacturing has fallen in all regions, but in the North West, Yorkshire and the Humber, the East Midlands, the South West and Northern Ireland the location quotients increased significantly (by more than 0.05) during the period from 1996 to 2006 (the latest year for which information is available).

Table 13.3: Location quotients for manufacturing

The widening of the regional divide during this period was therefore fuelled, in part, by the fact that the regions in the south and east which were already less dependent on manufacturing were able to make a speedier transition to faster-growing service industries.

It is too simplistic to say that a lot of manufacturing industry is a bad thing for the long-term health and wealth of a region’s economy.

Northern Ireland improved relative to the national average in terms of GDP per head, thanks in part to strong performances by its manufacturing sectors.

Between 1994 and 2004, output growth (measured in current prices) averaged 2.9% a year in Northern Ireland and 1.8% a year in the South West, but averaged less than 1% in the North East, the North West, the West Midlands, and Wales.

The problem faced by the poorer-performing regions is not so much that they have too much manufacturing, but that they often have too much of the wrong sort – low value-added sectors which are in long term decline.

London's position as one of the fastest-growing regions in most recent years is in large measure due to the fact that financial and business services now account for nearly a half of its economic activity, while in the South East and the East they contribute over 30%.

Yet this strength in financial services can also be a source of vulnerability. The depressed conditions which prevailed in financial markets between 2001 and 2003, in the aftermath of the bursting of the dotcom bubble brought about a mild recession in the London economy.

The current turbulence on global markets may also act as a depressant on the UK financial services sector and on London in particular.

Table 13.4: Location quotients for financial, business and professionalservices

While trends in other sectors have played a part, it is the relative importance and performance of manufacturing and of financial and business services in regional economies which has been the key determinant of their growth rates and their place in the pecking order.

Between 1996 and 2006, the output of financial and business services expanded rapidly in all regions, averaging 7.8% a year for the country as a whole. But growth lagged at less than 7.2% a year in the North East, West Midlands and Wales.

On the other hand, growth averaged 8.3% in London and an exceptional 9.7% in Northern Ireland.

Smaller regions are also vulnerable on account of their high dependence on a few manufacturing clusters.

Scotland’s experience in the wake of the dotcom crash of 2000 is a good case in point, with plant closures in the electronics sector causing its manufacturing sector to shrink by around 15% in the space of three years.

As another example, the North East is highly dependent on the Nissan car plant at Sunderland and the Teesside chemicals cluster.

The South East has a number of important advantages. Not only does it have a relatively high concentration of fast-growing service industries, but its manufacturing base is also biased towards higher-growth sectors.

The three broad sectors of electrical and optical engineering, transport equipment, and chemicals, together account for about half the region’s manufacturing output. While the South East has its fair share of petrochemicals plants, it is also home to an important pharmaceuticals 'cluster', centred on Kent. In addition, it has a heavy concentration of high tech engineering along the Thames Valley corridor.

London has a much smaller concentration of fast-growing manufacturing activities, but in this instance, the sector’s contribution to GDP is so small, that its composition and performance makes a negligible difference to the Capital’s overall performance.

There are examples, notably Edinburgh and Leeds, where thriving service sectors have developed. But in both instances, they have not spread out to other parts of the region, and so have not made a significant impact on overall economic performance.

For some regions, which lack strength in private sector services and whose manufacturing sectors have struggled, the result is an over-reliance on services which are ultimately funded by the taxpayer.

There were three regions (the North East, Wales and Northern Ireland) whose public sector services location quotients stood at more than 1.2 in 2006 with Scotland on the margin at 1.17.

Two regions (the North East and Yorkshire and the Humber) saw their location quotients increase by nearly 0.1 in the decade to 2006 while Northern Ireland’s dependency on the public sector fell considerably.

Table 13.5: Location quotients for public sector services*

*These are public administration and defence, education, and health and social work, all sectors in which the public sector predominates.

To make matters worse, the strategies pursued by disadvantaged Regions during the 1990s have lost their effectiveness. There is little chance of a repeat of the inward investment boom, which in some cases reversed the long term decline of manufacturing industries.

They must also cope with the end of the call centre boom of the past decade, as jobs are transferred to cheaper locations, especially in India. Ultimately, these approaches have been palliatives rather than cures, boosting output and creating jobs, but leaving regions vulnerable to the decisions of multinationals.

The bottom line is that many of the regions outside the greater South East are disadvantaged by structural weaknesses, as they struggle to make the transition to a self-sustaining and flexible services-based economy.

At the most basic level, they are unable to hang on to their educated workers. A step change in their long term growth rates cannot be accomplished until the drain of people to the south is curbed.