regional and local economics slide 1 lecture 7a. the early years: regional policy and its...

Regional and local economics

Slide 1

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

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 1997Outcomes 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

Aims & Outcomes

Regional and Local Economics (RELOCE)

Lecture slides – Lecture 7a


Slide 2

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

Regional Policy Options

MICRO options Co-ordination options

MACRO options

Relocate labour Relocate capital Within Jurisdictions

Devolved

Between Jurisdictions

Different MICRO options

MICRO & MACRO options

Trans national Within the nation

Central control

Tariff & trade

Discriminating monetary policy

Discriminating tax and expenditure

Automatic stabilisers

Discretionary

What were the theoretical Policy Instruments?



Adapted from Armstrong and Taylor (2000) pp 233


Slide 3

Those designed to influence the location decisions of firms or individuals (MICRO instruments)

Micro policy optionsPolicies to reallocate

labourPolicies to reallocate

capital

In situ Spatial reallocation

LM efficiency policies

Mobility policies

Migration policies

Efficiency of capital mkts.

Efficiency of firms

Social capital

Admin controls

Taxes & Subsidies

OutputInputs Technology

Labour Capital Other



Adapted from Armstrong and Taylor (2000) pp 233


Slide 4

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.

The main historical approaches




Slide 5

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

What was the rational for location controls?




Slide 6

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

What was the rational for capital subsidy?




Slide 7

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

What was the rationale for labour subsidy?




Slide 8

Capital

Labour

I100

I200

I150

l1

k2

k1

l2

substitution output

Income and substitution effects




Slide 9

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”

Other instruments




Slide 10

PreludeScott 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 industryRegional Economic Problems and Policy (REGPP) Lecture notes – Lecture 4. Page 1

The cost effectiveness of 1930s Special Areas policy instruments Initiative Gross

expenditure Employment

Net cost per job created (£)

Factory development 4,500,000 12,000 81 SARA 754,000 12,500 17 Nuffield trust 1,914,000 16,800 85 Treasury Fund* 1,161,000 10,200* 85*

The impact of regional policy 1945 -1979




Slide 11

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 60 - 71 71 - 81 Loss 71 - 81 Total Immigrant firms 170 48 -45 173 Indigenous firms 139 173 -35 277 Total net 309 221 -80 450 Multiplier 124 88 -32 180 Grand total 433 309 -112 630 Moore, Rhodes & Tyler (1986) 1 The difference between gross and net jobs is 74,000

Overview of all regional policy




Slide 12

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 By 1971 By 1981 IDC jobs 89,000 74,000 IDC firm moves 474 126 Moore, Rhodes & Tyler (1986)

Impact of industrial development certificates




Slide 13

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 (1968) % respondents

(1976) % respondents

Labour availability 80 69 Regional Incentives 81 64 IDC 50 21 Access to markets 24 32 Transport 33 42 Site Characteristics 21 19

IDC’s, the real reasons why firms relocate




Slide 14

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

Detrimental effects of IDC’s



1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

0

5

10

15

20

25

30

35

% of potential manufacturing Jobs lost in SE and Midlands as a result of IDCs

% o

f p

ote

nti

al m

an

ufa

ctu

rin

g jo

bs


Slide 15

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

Indigenous Immigrant Cost per job £1971 1981 1971 1981

RDG 99,000 235,000 58,000 72,000 25,000RSA 42,000 17,000Firm moves 534 434Source Moore, Rhodes and Tyler

Impact of capital subsidies




Slide 16

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

% of policy

moves due to capital

subsidy Scotland 264 213 109 81% 51.2% Wales 331 167 57 50% 34.1% North 250 156 80 62% 51.3% South West 333 116 16 35% 13.8% East Anglia 359 110 31% North West 217 94 29 43% 30.9% Yorkshire/Humberside

143 79 8 55% 10.1%

East Midlands 251 33 13% West Midlands 71 9 13% South East 124 UK 2343 977 299 42% 30.6% Source Twomey & Taylor (1985), adapted from Armstrong and Taylor (1993)




Slide 17

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

Capital Subsidies as an aid to Diversification




Slide 18

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 Immigrant Cost per job £1971 1981 1971 1981

REP 40,000 23,000 27,000 73,000Firm moves 240 180Source Moore, Rhodes and Tyler

Impact of labour subsidies




Slide 19

Regional Labour Assistance by industry sector 1966 - 76 Sector Labour

£m % Sector Labour

£m %

Leather 10 0.2% Shipbuilding 297 6.0% Coal & Petroleum 36 0.7% Paper & printing 307 6.2% Instruments 84 1.7% Chemicals 332 6.7% Timber & furniture 154 3.1% Textiles 382 7.7% Bricks, cement etc 164 3.3% Electrical 456 9.2% Other manufacture 183 3.7% Food Drink &

Tobacco 476 9.6%

Other metal 213 4.3% Metal manufacture 639 12.9% Vehicles 258 5.2% Mech Engineering 674 13.6% Clothing 273 5.5% Total 4938 100.0% Source Moore, Rhodes & Taylor (1987)

Regional Capital Assistance by industry sector 1966 - 76 Sector Capital

£m % Sector Capital

£m %

Leather 20 0.4% Vehicles 285 5.6% Instruments 51 1.0% Electrical 305 6.0% Clothing 56 1.1% Textiles 326 6.4% Timber & furniture 76 1.5% Coal & Petroleum 337 6.6% Shipbuilding 127 2.5% Mech. Engineering 366 7.2% Other metal 153 3.0% Food Drink &

Tobacco 468 9.2%

Other manufacture 168 3.3% Metal manufacture 830 16.3% Bricks, cement etc 204 4.0% Chemicals 1079 21.2% Paper & printing 239 4.7% Total 5090 100.0% Source Moore, Rhodes & Taylor (1987)

Sectors that

benefited from

the £10bn

regional

subsidies

between 1966

& 1976




Slide 20

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

What were the problems with REP?




Slide 21

There are many ways regional policy can be used UK “active” policy has tended to use the MICRO instrumentsThree 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.

Conclusions (1)




Slide 22

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.

Conclusions (2)




Slide 23

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.




Slide 24

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



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