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

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

2. What were the theoretical Policy Instruments? Those that change the level of income or expenditure in specific regions (MACRO instruments) Regional Policy Options Co-ordination options MICRO options Relocate labour Relocate capital Within Jurisdictions Between Jurisdictions Different MICRO options MICRO & MACRO options Trans national Within the nation Central control MACRO options Discriminating tax and expenditure Discriminating monetary policy Tariff & trade Devolved Automatic stabilisers Discretionary Adapted from Armstrong and Taylor (2000) pp 233 Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

3. Those designed to influence the location decisions of firms or individuals (MICRO instruments) Micro policy options Policies to reallocate labour Policies to reallocate capital Spatial reallocation Efficiency of capital mkts. Efficiency of firms Social capital In situ Migration policies Mobility policies LM efficiency policies Taxes & Subsidies Admin controls Inputs Output Technology Adapted from Armstrong and Taylor (2000) pp 233 Labour Capital Other Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

4. The main historical approaches • Policies to relocate labour have been small-scale in expenditure terms • 1945 -1960 inter-regional movement of firms regulated through IDCsbacked 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

5. 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

6. 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

7. 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

8. Capital k2 I200 k1 I150 I100 l1 l2 Labour substitution output Income and substitution effects Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

9. 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

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

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

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

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

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

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

16. Regional Distribution of IDC and Capital Subsidy 1960-77 Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

17. 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

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

19. Sectors that benefited from the £10bn regional subsidies between 1966 & 1976 Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

20. 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

21. 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

22. 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

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

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