Regional and local economics

Lecture 7a. The early years: Regional policy and its effectiveness in the UK up to 1979.

Aims & Outcomes

Aims

  To examine policy options To review policy development up to 1979   To examine how policies should work, in theory To examine the outcomes from regional policy up to 1997

Outcomes

 To be aware of the options open to policymakers and how these have evolved  To have a working knowledge of generic policy instruments and their effect

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 1

Regional and local economics

What were the theoretical Policy Instruments?

Those that change the level of income or expenditure in specific regions (MACRO instruments)

Regional Policy Options MICRO options Co-ordination options Relocate labour Different MICRO options Relocate capital MICRO & MACRO options Within Jurisdictions Trans national Between Jurisdictions Within the nation Discriminating tax and expenditure Automatic stabilisers Central control MACRO options Discriminating monetary policy Tariff & trade Discretionary Adapted from Armstrong and Taylor (2000) pp 233

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Devolved

Slide 2

Regional and local economics  Those designed to influence the location decisions of firms or individuals (MICRO instruments)

Micro policy options Policies to reallocate labour Policies to reallocate capital In situ Migration policies Spatial reallocation Mobility policies Efficiency of capital mkts.

LM efficiency policies Efficiency of firms Taxes & Subsidies Social capital Admin controls Labour Inputs Output Technology Capital Other Adapted from Armstrong and Taylor (2000) pp 233

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 3

Regional and local economics

The main historical approaches

 Policies to relocate labour have been small-scale in expenditure terms  1945 -1960 inter-regional movement of firms regulated through IDCs backed up by the use of small-scale loans/grants and advance factory building on new industrial estates.

 1963 - 1975 IDCs strengthened, tax breaks on capital investment and automatic capital grants, labour subsidies after 1967, growth poles.

 Area of UK eligible for assistance increased substantially DAs and SDAs  Discretionary grants for businesses available throughout the period.

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 4

Regional and local economics

What was the rational for location controls?

 2 forms - land use planning regulations, industrial development certificates.

   Aimed at manufacturing - later to include office development.

Designed to divert industry into DAs to diversify the regional economy Carrot and stick approach

Advantages

 Effective, Cheap, Flexible, Dialogue

Disadvantages

  Effect on efficiency Reduced investment

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 5

Regional and local economics

What was the rational for capital subsidy?

    

Tax incentives and capital grants.

Induce firms to relocate by reducing the cost of investment Encourage existing firms to modernise Net new investment  extra capacity  new products improve BoP Replacement investment  improve capital stock (technology) Two effects - Output - Substitution

Advantages

 Higher gross investment, more jobs, improved efficiency, increased output

Disadvantages

 Employment reduction through substitution

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 6

Regional and local economics

What was the rationale for labour subsidy?

  

Regional Employment Premium

Counterbalance substitution effect from increased capital investment Need a short-term solution to shift stubborn unemployment Two effects  Output  Substitution - acts mainly on the output effect

Advantages

 Businesses get a clear cost advantage over those elsewhere

Disadvantages

 May not produce large enough cost reductions to encourage employment  Firms may not lower prices but increase profits or wages

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 7

Regional and local economics Capital

Income and substitution effects k 2 k 1

l 1 l 2 substitution output I 100 I 150 I 200

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Labour Slide 8

Regional and local economics

Other instruments

Growth poles

   Built on dominant propulsive firm(s) Takes advantage of strong input output linkages to spread benefits Leading edge firms likely to be at forefront of innovation

Advantages

  Growth transmitted down the supply chain Localised and urbanised economies of scale

Concerns

  Do industries need growth poles after initial stage of development Growth of “Branch Plants”

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 9

Regional and local economics

The impact of regional policy 1945 -1979

Prelude

  Scott P,

The Audit of Regional Policy 1934-1939

, Regional Studies, Vol 34.1 pp 55- 65.

Industrial transference Government Factory Building at growth points (same as growth poles) Loans to industry Page 1

The cost effectiveness of 1930s Special Areas policy instruments

Initiative Factory development SARA Nuffield trust Treasury Fund* Gross expenditure 4,500,000 754,000 1,914,000 1,161,000 Employment 12,000 12,500 16,800 10,200* Net cost per job created (£) 81 17 85 85*

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 10

Regional and local economics

Overview of all regional policy

Moore, Rhodes & Tyler (1986),

The Effects of Government Regional Economic Policy, DTI.

    604,000 gross manufacturing jobs created in DAs (450,000 net) Subject to multiplier of 1.4

Most jobs from indigenous firms Immigrant firms more important in the first period but accounted for most of the subsequent losses.

(Net) Manufacturing jobs created by regional policy in development areas (000s) 1 Immigrant firms Indigenous firms Total net Multiplier Grand total 60 - 71

170 139 309 124 433

71 - 81

48 173 221 88 309

Loss 71 - 81

-45 -35 -80 -32 -112

Total

173 277 450 180 630 Moore, Rhodes & Tyler (1986) 1 The difference between gross and net jobs is 74,000

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 11

Regional and local economics

Impact of industrial development certificates

 Introduced in 1948 withdrawn in 1982   Responsible for 74,000 surviving jobs by 1981 Estimated that 600 firms relocated to DAs as a result of IDCs  Low cost to the exchequer and a powerful policy at its height Instrument IDC jobs IDC firm moves Moore, Rhodes & Tyler (1986) By 1971 89,000 474 By 1981 74,000 126

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 12

Regional and local economics

IDC’s, the real reasons why firms relocate

Regional development Incentives: Minutes of evidence

, House of Commons Expenditure Committee (T & I sub-committee) 1973-74, HCP85-1) & Heron (1981) quoted in Table 29,

Regional Industrial Policy

, DTI, (1983)

Factors

Labour availability

Regional Incentives IDC

Access to markets Transport Site Characteristics

(1968) % respondents

80

81 50

24 33 21

(1976) % respondents

69

64 21

32 42 19

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 13

Regional and local economics

Detrimental effects of IDC’s

    Only 18% of firms refused IDCs moved to acceptable areas 13.6% of potential jobs that could have been created in SE were lost Impacted disproportionately on large firms Problem of the “Branch Plant” firm 35 30 25 20 15 10 5 % of potential manufacturing Jobs lost in SE and Midlands as a result of IDCs 0

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 14

Regional and local economics

Impact of capital subsidies

 Bulk of policy expenditure and majority of surviving jobs   Responsible for 350,000 jobs in indigenous and immigrant firms Reasonably inexpensive in terms of cost per job  Expenditure peaked after 1979 RDG RSA Firm moves Indigenous 1971 99,000 Source Moore, Rhodes and Tyler 1981 235,000 42,000 Immigrant 1971 58,000 534

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

1981 72,000 434 Cost per job £ 25,000 17,000 Slide 15

Regional and local economics

Regional Distribution of IDC and Capital Subsidy 1960-77

Region Total number of moves into region Total due to Regional Policy Investment incentives % of moves due to policy Scotland Wales 264 331 213 167 109 57 North South West East Anglia North West 250 333 359 217 143 156 116 110 94 79 80 16 29 8 Yorkshire/Humber side East Midlands West Midlands 251 71 33 9 South East 124 UK 2343 977 299 Source Twomey & Taylor (1985), adapted from Armstrong and Taylor (1993) 81% 50% 62% 35% 31% 43% 55% 13% 13% 42% % of policy moves due to capital subsidy 51.2% 34.1% 51.3% 13.8% 30.9% 10.1% 30.6%

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 16

Regional and local economics

Capital Subsidies as an aid to Diversification

 Subsidy became important factor in firms investment planning  Peripheral areas became less specialised  Grants aided re-structuring of firms

Problems

 Too much investment – deadweight loss  Displacement of jobs in non-assisted areas and smaller firms

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 17

Regional and local economics

Impact of labour subsidies

 Designed to offset displacement (substitution) effect of RDG/RSA  Used for a decade 1967-78  Still 27,000 jobs induced by REP surviving @ 1981  Expensive to the exchequer (£150million p.a.) Indigenous REP Firm moves 1971 40,000 Source Moore, Rhodes and Tyler 1981 Immigrant 1971 23,000 240 1981 27,000 180 Cost per job £ 73,000

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 18

Regional and local economics

Sectors that benefited from the £10bn regional subsidies between 1966 & 1976

Regional Capital Assistance by industry sector 1966 - 76 Sector Leather Instruments Clothing Timber & furniture Shipbuilding Other metal Capital £m 20 51 56 76 127 153 % Sector

0.4%

Vehicles

1.0%

Electrical

1.1%

Textiles

1.5%

Coal & Petroleum

2.5% 3.0%

Mech. Engineering Food Drink & Other manufacture 168 Tobacco

3.3%

Metal manufacture Bricks, cement etc Paper & printing 204 239 Source Moore, Rhodes & Taylor (1987)

4.0%

Chemicals 4.7% Total Regional Labour Assistance by industry sector 1966 - 76 Sector Labour % Sector Leather Coal & Petroleum Instruments Timber & furniture Bricks, cement etc Other manufacture Other metal £m 10 36 84 154 164 183 213

0.2%

Shipbuilding

0.7%

Paper & printing

1.7%

Chemicals

3.1%

Textiles

3.3%

Electrical

3.7%

Food Drink & Tobacco

4.3%

Metal manufacture Vehicles 258

5.2%

Mech Engineering Clothing 273 Source Moore, Rhodes & Taylor (1987)

5.5%

Total

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Capital £m 285 305 326 337 366 468 %

5.6% 6.0% 6.4% 6.6% 7.2% 9.2%

830

16.3%

1079

21.2%

5090 100.0%

Labour £m 297 307 332 382 456 476 %

6.0% 6.2% 6.7% 7.7% 9.2% 9.6%

639 674 4938

12.9% 13.6% 100.0%

Slide 19

Regional and local economics

What were the problems with REP?

 The small impact on production costs was rapidly reduced by inflation  Prone to leakage  39% used REP to boost profit levels  12% paid out higher wages  49% lowered prices or promoted sales – what it was intended for  Seen as “compensation” to cover cost of being in a DA  Had little affect on restructuring of firms as they continued to replace labour with capital

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 20

Regional and local economics

Conclusions (1)

 There are many ways regional policy can be used  UK “active” policy has tended to use the MICRO instruments  Three main policy strands - controls on location - capital subsidies - labour subsidies.  Location controls - cheap - effective - open dialogue downsides - sub optimal - curtailed some investment.

 Capital subsidies ran throughout the period - designed to make industry more viable and competitive in world markets.  Labour subsidies were short lived and designed to off-set the substitution effect of capital subsidies.

 Growth pole policies good idea but attracted mono industries and branch plants.

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

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Regional and local economics

Conclusions (2)

 Early policy experiments before 1945 successful  Regional policy had a positive affect in DAs  Location controls, effective and cheap but cost to potential jobs in non assisted areas problem with “Branch Plants  Capital subsidies, the backbone of policy, majority of spending and jobs. Expenditure concentrated in a small number of manufacturing sectors. Problem of deadweight and displacement  Labour subsidies, short lived, expensive, little effect on production cost, prone to leakage.

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

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Regional and local economics

Further reading

 Harris, (1991),

Regional Economic Policy in Northern Ireland 1945- 1988,

Gower Publishing Company Ltd., Chapter 3.

 Armstrong & Taylor, (2000),

Regional Economics & Policy

, Blackwell, Chapter 9, pp 232 – 258.

 Scott,P, (1994)

British Regional policy and Structural Change in the Development areas: 1945:51

, University of Portsmouth Department of Economics Discussion Paper Number 39.

 Scott,P, (1994)

The costs of ‘passive’ British regional policy 1951-64

, University of Portsmouth Department of Economics Discussion Paper Number 45.

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

Slide 23

Regional and local economics

Further reading

 Scott P, (2000)

The Audit of Regional Policy 1934-1939

, Regional Studies Vol. 34.1 pp 55-65  Moore, Rhodes & Tyler (1986),

The Effects of Government Regional Economic Policy,

DTI  Armstrong & Taylor, (1993),

Regional Economics & Policy

, Harvester Wheatsheaf, Chapter(s) 9, 10 & 14 (selective).

 Armstrong & Taylor, (2000),

Regional Economics & Policy

, Blackwell, Chapter(s) 9.

 Harris, (1991),

Regional Economic Policy in Northern Ireland 1945- 1988,

Gower Publishing Company Ltd., Chapter 4 & 7 

Regional Industrial Policy: Some Economic Issues

, DTI, (1983)  Harris, (1991),

The employment Creation Effects of factor Subsidies: Some Estimates for Northern Ireland Manufacturing Industry

, Journal of Regional Science  Begg and McDowall (1987

) The Effect of Regional Investment Incentives on Company Decisions

, Regional Studies Vol. 21.5 pp 459 – 470  Wren & Taylor (1999)

Industrial Restructuring and Regional Policy

, Oxford Economic Papers pp 487 - 516

Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

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