Lecture 7a - The Economics Network

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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
Co-ordination options
MICRO options
Relocate labour
Different MICRO
options
Relocate capital
Within Jurisdictions
MICRO & MACRO
options
Trans national
Central control
Discriminating tax
and expenditure
Automatic
stabilisers
Discriminating
monetary policy
Discretionary
Between Jurisdictions
Within the nation
MACRO options
Tariff & trade
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
In situ
Migration
policies
Policies to reallocate
capital
Spatial
reallocation
Mobility
policies
LM efficiency
policies
Inputs
Labour
Efficiency of
capital mkts.
Capital
Efficiency
of firms
Taxes &
Subsidies
Output
Other
Social
capital
Admin
controls
Technology
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
k2
k1
I200
I150
I100
l1
l2
Labour
substitution output
Regional and Local Economics (RELOCE)
Lecture slides – Lecture 7a
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)
Economic
Problems and Policy (REGPP) Lecture notes – Lecture 4.
Page 1
Regional
Loans
to industry
The cost effectiveness of 1930s Special Areas policy instruments
Initiative
Gross
Net cost per
Employment
expenditure
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*
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
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
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
By 1971
IDC jobs
89,000
IDC firm moves
474
Moore, Rhodes & Tyler (1986)
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
(1976) %
respondents
69
81
50
24
33
21
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
% of potential manufacturing Jobs lost in SE and Midlands as a result of IDCs
35
% of potential manufacturing jobs
 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
30
25
20
15
10
5
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
1981
99,000
235,000
42,000
Immigrant
1971
1981
58,000
72,000
534
Cost per job £
25,000
17,000
434
Source Moore, Rhodes and Tyler
Regional and Local Economics (RELOCE)
Lecture slides – Lecture 7a
Slide 15
Regional and local economics
Regional Distribution of IDC and Capital Subsidy 1960-77
Region
Scotland
Wales
North
South West
East Anglia
North West
Yorkshire/Humber
side
East Midlands
West Midlands
South East
UK
Total
number of
moves
into region
Total due
to
Regional
Policy
Investment
incentives
% of
moves
due to
policy
264
331
250
333
359
217
143
213
167
156
116
110
94
79
109
57
80
16
81%
50%
62%
35%
31%
43%
55%
251
71
124
2343
33
9
977
29
8
% of
policy
moves due
to capital
subsidy
51.2%
34.1%
51.3%
13.8%
30.9%
10.1%
13%
13%
299
42%
30.6%
Source Twomey & Taylor (1985), adapted from Armstrong and Taylor (1993)
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.)
REP
Firm moves
Indigenous
1971
40,000
1981
Immigrant
1971
1981
23,000
27,000
240
180
Cost per job £
73,000
Source Moore, Rhodes and Tyler
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
Capital
% Sector
£m
Leather
20
0.4% Vehicles
Instruments
51
1.0% Electrical
Clothing
56
1.1% Textiles
Timber & furniture
76
1.5% Coal & Petroleum
Shipbuilding
127
2.5% Mech. Engineering
Other metal
153
3.0% Food Drink &
Tobacco
Other manufacture
168
3.3% Metal manufacture
Bricks, cement etc
204
4.0% Chemicals
Paper & printing
239
4.7% Total
Capital
£m
285
305
326
337
366
468
%
5.6%
6.0%
6.4%
6.6%
7.2%
9.2%
830
1079
5090
16.3%
21.2%
100.0%
Source Moore, Rhodes & Taylor (1987)
Regional Labour Assistance by industry sector 1966 - 76
Sector
Labour
% Sector
£m
Leather
10 0.2% Shipbuilding
Coal & Petroleum
36 0.7% Paper & printing
Instruments
84 1.7% Chemicals
Timber & furniture
154 3.1% Textiles
Bricks, cement etc
164 3.3% Electrical
Other manufacture
183 3.7% Food Drink &
Tobacco
Other metal
213 4.3% Metal manufacture
Vehicles
258 5.2% Mech Engineering
Clothing
273 5.5% Total
Labour
£m
297
307
332
382
456
476
%
6.0%
6.2%
6.7%
7.7%
9.2%
9.6%
639 12.9%
674 13.6%
4938 100.0%
Source Moore, Rhodes & Taylor (1987)
Regional and Local Economics (RELOCE)
Lecture slides – Lecture 7a
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
Slide 21
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 nonassisted 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
Slide 22
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
Slide 24

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