This paper examines the prospects for the New Economy in the South East of England. No longer able to compete as a low cost centre of production, the UK (and the South East in particular) is focusing on building a knowledge-driven economy. But labour productivity is poor when compared with other EU countries and, more especially, with the US. This implies that GVA (formerly GDP) growth is far from optimal. The South East England Development Agency has set the region's sights on becoming one of the 'top 10' European regions in terms of GVA per capita. This can only be achieved if skills are harnessed to increase the productivity of the existing workforce and to increase employment participation.

Fundamental to understanding the role skills play are a series of theoretical models known as 'endogenous growth' models which demonstrate how increasing returns to human capital can generate a sustained increase in economic growth. The paper then focuses on a study conducted by Huggins for SEEDA which demonstrates high levels of knowledge capital and knowledge-based industrial sector capacity in the region but which also shows that the South East is failing to translate this into increased wealth or an increased capacity to innovate. Some key sources of productivity loss and some key areas of skills shortages are examined before using the preliminary results of the Skills Foresight in the South East econometric model to demonstrate what is likely to happen if no intervening action is taken.

Finally, the paper discusses the problems of the South East labour market's dual nature and draws some implications from the paper for official statistics.