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Technical Guidance Note 4
National Regional Policy
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Technical Guidance Note : National Regional Policy
Technical Guidance Note 5
National Regional Policy
Contents
1.0Introduction and Definition
2.0The Origins of National Regional Policy
3.0National Regional Policy Instruments
4.0The Development of UK Regional Policy
5.0The Effectiveness of UK Regional Policy
6.0National Regional Policies in European Countries
7.0Recent Developments in National Regional Policy
1.0Introduction and Definition
1.1 Introduction
This Guidance Note introduces National Regional Policy. It provided a schematic outline under which all regional policy instruments can be classified before looking, at some depth, at UK Regional Policy. In order to widen the analysis, the Guidance Note provides an analysis of general developments across European countries in recent years. It does not touch upon EU regional Policy which is the subject matter of Guidance Note 5.
1.2National Regional Policy Defined
When we use the terms “National Regional Policy” then we are referring to the actions taken by sovereign governments in using their budgets to try to influence the performance of regions within their territory.
The Regional Development Glossary produced by RSEDP2 defines Regional Economic (Development) Policy thus:
“The terms are used in connection with the Government’s use of the state budget, through its expenditure and taxation powers, to seek to influence economic performance in the regions. Since the responsibility for the use of treasury funds and the levying of taxation lies with Government Ministries, centralisation, in terms of decision-making will be a feature of such policies”.
In classifying a range of actions as National Regional Policy we are differentiating them from actions taken at a higher level of spatial aggregation. This is referred to as Supra-National Regional Policy as in the case of EU Regional Policy, which is also covered in this Guidance Note.
National Regional Policy can also be differentiated from actions which are undertaken at the regional level. These regional development initiatives can be taken by a variety of different actors within regions. Although they may be supported by public funds, Central Government is not directly involved.
2.0The Origins of National Regional Policy
These are to be found in the UK during the inter-war years, when in the 1920s unemployment rose dramatically in response to a decline in demand for the UK’s major exporting industries. Due to the spatial concentration of these industries (to be near to (i) required resources – coal, iron ore, etc. for steel production and heavy engineering (ii) deep water berths – for shipbuilding (iii) population concentrations – for labour), high levels of unemployment were recorded in the UK’s peripheral regions: Scotland, Northern Ireland, Northern England and Wales.
The first involvement of the Government came in 1928 when it created the Industrial Transference Board. The idea behind the Industrial Transference Board was to encourage unemployed workers (by providing money to cover the costs) to leave regions of high unemployment and to move to other parts of the country where unemployment levels were not so pronounced.
The economic situation worsened in the 1930’s with the onset of the Great Depression. In 1933 the measured unemployment rate in Wales was 37.8%, while in Scotland it was 30.2%. the North east of England and Northern Ireland were also suffering high levels with rates of 29.8% and 28.9%, whereas in London the rate was 14.2%! The UK Government responded to this situation, in 1934, with the Special Areas (Development and Improvement) Act, which designated 4 “Special Areas”. The Special Areas Act was a response to mounting political pressure to take action to assist areas of high long-term unemployment, although the Government of the day, was reluctant to interfere in the location of industry.
The map of the Special Areas is shown below, illustrating the fact that their spatial coverage was very limited. Other weaknesses of this act were: small amount of money allocated, inability to provide funds for any profit-making enterprise or to any project which could receive any other Government finance. As a consequence, the changes introduced as a result of the Special Areas Act failed to have any significant effect on the unemployment problem in these areas.
/ The arrival of a General Election was the event which led to a change of approach, with the adoption of financial assistance to private sector enterprises located in areas of high unemployment. Development Boards were created to set up companies to operate Industrial Estates, where factories would be built for investors who would locate there and offer jobs to (unemployed) workers.This became the first instance in which a policy of “taking work to the workers” as opposed to one of “moving the workers to the work” was put in place, and this “work to workers” policy has become the orthodox view in National Regional Policy ever since.
3.0National Regional Policy Instruments
The two figures which are re-produced in the pages which follow set out, in a schematic fashion, and in broad terms the policy instruments which are at the disposal of Central Government. Both figures are taken from “Regional Economics and Policy”, by H Armstrong and J Taylor, 3rd Edition, Blackwell Publishers Ltd., 2001.
In the first of these figures, the distinction is made between policy instruments at the “micro” level and those at the “macro” level. The micro instruments seek to influence the location decisions of individual actors (workers, owners of enterprises, and investors), while at the macro level the instruments are used to try to change the level of income and expenditure at the regional level (Gross Regional Income, Gross Regional Expenditure).
The micro instrument toolbox is where the traditional dilemma between moving work to the workers and moving workers to the work is to be found, and these two possibilities are further explored in the second figure.
Changes to macroeconomic policy instruments at the national level can have different effects on individual regions within the country. For example, income taxation has the effect of reducing income disparities between rich and poor regions since the amount of tax paid in poorer regions is lower. Similarly import controls will produce more favourable effects on regions producing import substituting products. The use of such policy instruments to influence regional performance requires a high level of understanding of the structure and working of regional economies, which would be required to use macro policy instruments for regional development purposes. A further problem relates to the fact that most countries are fiscal and monetary unions denying the Government the opportunity to manipulate level and rates of taxation, interest rates and the like at the regional level.
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Technical Guidance Note : National Regional Policy
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Technical Guidance Note : National Regional Policy
A particular problem which arises relates to coordination of policies within jurisdictions, where, all too often, the impact of regional policy (implemented by a line Ministry such the MoERD or the Department of Trade and Industry in the UK) is weakened by the (spending) policies of other line ministries, which do not prioritise regional impact to the same extent.
4.0The Development of UK Regional Policy
In post-war UK the Government passed the Distribution of Industry Act (1945), which extended the pre-war designated areas. The new areas (Development Areas) included important cities such as Glasgow, Newcastle, Cardiff as well as adding some new areas. These changes are shown in the figure and remained in force until 1958.The Act gave power to the Government to give loans and grants to firms, to build factories, to buy land for this purpose (by compulsory purchase if necessary), to reclaim derelict land, and, to establish industrial estates. Wartime controls on new factory building were maintained (licences required for new factory building) and replaced in 1947 with Industrial Development Certificates which were required for any new industrial building exceeding 465 square metres (5000 square feet)[1]. As a result, the Development Areas (which had 20% of Britain’s population) secured 51.1% of the total amount of new industrial building 1945-7! /
Between 1945 and 1960 UK Government spending, under Regional policy, on loans and grants to enterprises amounted to £12M, whereas £78M was spent on factory construction and industrial estate development!
Legislation in 1960 (Local Employment Act) introduced Development Districts based upon unemployment levels recorded by local employment offices (>4.5% of persons insured to work). This introduced many areas to the map of assisted areas some in regions which until then had not qualified for regional assistance. This persisted until 1966 when this approach was dropped because of the problems which had arisen (too many changes in designated area status). /The change established new Development Areas (larger than previous e.g. the whole of Scotland, and covering 40% of the land area of Britain - see the figure). During the 60s there was a massive expansion in UK Regional Policy (total spending in 62-63 of £22M compared with £325M in 69-70).
The focus of the policy instruments remains consistent, and this was to induce manufacturing enterprises to locate factories and plant and equipment in the assisted regions through the use of a mixture of incentives and controls. On the incentives side, loans and grants continued to be provided to enterprises and these became easier to obtain, although decisions on awards were the responsibility of a Government Committee and therefore could not be considered to be certain. /
As part of these changes, an automatic grant (Investment Grants) towards the cost of investment in plant and machinery which was available nationally but at a higher rate in the Development Areas (40% as compared to 20% elsewhere) was introduced. As a temporary measure, rates of 45% in DAs and 25% elsewhere applied in 1967 and 1968.
During this period two other instruments were introduced the Selective Employment Tax (1966) and the Regional Employment Premium (1967)[2]. The former was a national levy on all workers employed in the service sector and was designed to transfer labour into manufacturing where productivity increases were higher. The Regional Employment Premium was a payment to manufacturing firms, in the DAs, of £1.50 (at the time)per week for male adult employees, with lower rates for adult women and young people.
This automatic assistance to firms was continued in 1972 (Industry Act) when the Regional Development Grant was introduced. This capital subsidy to firms in the assisted area was designed to help them modernise their plant and equipment and was not tied to employment creation as previous grants had been. The RDG provided a subsidy to firms payable at a fixed percentage (22% in SDAs, 20% in DAs) on capital expenditure on new building, works, plant or machinery for most industrial undertakings.
The 1972 Act also introduced Regional Selective Assistance. Regional policy expenditure in the UK peaked in 1976, but the real turning point occurred in the early 1980s. Revisions at this time included a phased reduction in the geographical coverage of the Assisted Areas, a reduction in the RDG grant rate and a four-month deferral on RDG payments. The RDG was scrapped in 1988. It was superseded by the Regional Enterprise Grant scheme from 1988 to 1997, which restricted the assistance to small and innovative projects.
Since the early 1980s, discretionary assistance has taken an increasing share of regional policy expenditure, and as virtually all assistance was in this form over the 1990s. The mainstay of regional policy in this period is Regional Selective Assistance (RSA), which was introduced at the same time as RDG in 1972. RSA is made on a discretionary basis towards capital investment in projects that either create or retain employment in the Assisted Areas.
1979 saw the election of a Conservative Government which reduced the coverage of the assisted areas (from covering 43% of the population of Britain to 25%), abolished Special Development Area status, abolished IDC’s, reduced the rate of RDGs to 15% in the DAs, and completely abolished the RDG. The result of these actions was dramatic reduction in regional policy spending, form £2,200 million in 1975/6 (1995 prices) at its peak, to its current level of £200m per annum.
Over the period 1960 to 2002, some £32 billion was spent in regional assistance, of which £18.8bn (59%) was on automatic investment support, £7.8bn (24%) was on employment premiums and £5.4bn (17%) was on discretionary assistance (all at 1995 prices).
As result of the changes started at the turn of the 80’s, regional policy has focused less on the attraction of large capital investments to the assisted areas and more on supporting indigenous development in the regions the promotion of improvements in the managerial skills and strategies of local business. Successive Governments have sought to implement a more selective, cost effective form of assistance which addressed the particular difficulties which can arise in the Assisted Areas: remoteness from best business practice, poor rate of small business growth and the failure to innovate.
Today regional aid consists of aid for investment granted to large companies or in certain limited circumstances operating aid which in both case are targeted on specific regions to redress regional disparities. Increased levels of investment aid granted to SMEs located within the disadvantaged regions over and above what is allowed in other areas is also considered regional aid. In Great Britain the main forms of State Aid is through discretionary grant schemes:i.Grant for Business Investment (GBI) which helps fund new investment projects that lead to long-term improvements in productivity, skills and employment.
ii.Regional Selective Assistance (RSA) - administered by RSA Scotland, part of the Scottish Executive, aimed at encouraging new investment projects, strengthening existing employment and new job creation. /
iii.RSA Cymru Wales (Regional Selective Assistance) - delivered by the Welsh Assembly Government to help support new commercially viable capital investment projects that create or safeguard permanent jobs.
5.0The Effectiveness of UK Regional Policy
This is usually expressed in term of the number of jobs which can be attributed to the assistance which has been provided to the beneficiary firms. However this is not an easy figure to calculate as the provision of financial assistance is only one of a number of factors which will determine whether a firm takes on additional workers or not. A second problem relates to the question of whether the firm would have increased employment even if no regional assistance had been available. For this reasons estimates of job creation as a result of regional policy have been left to the studies of regional economists using econometric models and other techniques (shift-share analysis) to derive estimates.
These estimates have suggested a regional policy impact of 604,000 new jobs in the assisted areas between 1960 and 1981, 154,000 subsequently were lost. The application of a regional multiplier of 1.4 to the net employment change provided an overall estimate of 630,000 new jobs created (and still surviving in 1981), an average of 30,000 p.a.. More recent studies attribute from 9000 to 19000 p.a..
Regional policy has been successful in creating jobs in the UK assisted areas, and it has to be remembered that much of this impact was secured when the national and international economy was experiencing cyclical downswings. The problem of the effectiveness of regional problem is that despite the job creation unemployment remains higher in the assisted areas than the national average. /The South East of England continue to enjoy the lowest rate of unemployment at 5%, while the North East (8.8%), the West Midlands (8.5%) Wales and the North West (8%) all suffer from higher levels of unemployment.
6.0National Regional Policies in European Countries
6.1The Regional Problem:
Traditionally this was seen as industrial regions in decline with low growth rates and high levels of unemployment.
However in Europe today the picture is much more varied, with countries such as Austria, the Netherlands, Luxembourg and Denmark which do not have regional disparities of such dimension. In the Nordic countries, the problem is to maintain the population in the northern parts of the territories (and to maintain services to the population). In a third group of countries (Germany and Italy) the problem is one of severe internal disparity(between west and east Germany and between Northern Italy and the Mezzogiorno). In the fourth group (Greece, Portugal and Spain) the problem is seen as one of the level of national economic development. The final group comprises of Belgium, France and the UK where regional disparities are acknowledged the problem is identified in terms of the need to address the specific problems influencing the performance of individual regions.
There is, despite the differences noted a growing realisation in all countries of the need to try to realize the growth potential of all regions, for the growth of the region and for the growth of the national economy.
7.0Recent Developments in National Regional Policy
7.1Regional Policy:
National Regional Policy across Europe has been subject to a number of important developments:
- an increasing focus upon supporting growth, competitiveness and productivity at the regional level (but concern with problems regions not ignored)
- development of regional policy to extend beyond investment incentives (grants to assist business) to include a wider range of instruments which often seek to influence innovative activity and support improvements to the business environment
- a general decline in the importance of regional assistance (more discretionary, replacements of grants with loans, reduced aid ceilings)
- interest in the performance of all regions in the country rather just on narrowly defined problem regions
- greater importance assigned to the role of partnerships in regional development
- more emphasis on regional programming (under the influence of EU procedures) and on strategy development
- increased importance in the conduct of regional policy on important urban centres and their problems recognizing the role which such centres play in the determination of regional growth and competitiveness.
7.2Policy Instruments: