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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.

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Presentation on theme: "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."— Presentation transcript:

1 Regional and local economics Slide 1 Lecture 7a. The early years: Regional policy and its effectiveness in the UK up to 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 Regional and local economics 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 labourRelocate capitalWithin Jurisdictions Devolved Between Jurisdictions Different MICRO options MICRO & MACRO options Trans nationalWithin the nation Central control Tariff & trade Discriminating monetary policy Discriminating tax and expenditure Automatic stabilisers Discretionary What were the theoretical Policy Instruments? Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a Adapted from Armstrong and Taylor (2000) pp 233

3 Regional and local economics Slide 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 In situ Spatial reallocation LM efficiency policies Mobility policies Migration policies Efficiency of capital mkts. Efficiency of firms Social capital Admin controls Taxes & Subsidies OutputInputsTechnology LabourCapitalOther Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a Adapted from Armstrong and Taylor (2000) pp 233

4 Regional and local economics Slide 4  Policies to relocate labour have been small-scale in expenditure terms  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.  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 Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

5 Regional and local economics 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? Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

6 Regional and local economics 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? Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

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

8 Regional and local economics Slide 8 Capital Labour I 100 I 200 I 150 l1l1 k2k2 k1k1 l2l2 substitutionoutput Income and substitution effects Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

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

10 Regional and local economics Slide 10 Prelude Scott P, The Audit of Regional Policy , Regional Studies, Vol 34.1 pp  Industrial transference  Government Factory Building at growth points (same as growth poles)  Loans to industry The impact of regional policy Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

11 Regional and local economics 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. Overview of all regional policy Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

12 Regional and local economics 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 Impact of industrial development certificates Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

13 Regional and local economics Slide 13 Regional development Incentives: Minutes of evidence, House of Commons Expenditure Committee (T & I sub-committee) , HCP85-1) & Heron (1981) quoted in Table 29, Regional Industrial Policy, DTI, (1983) IDC’s, the real reasons why firms relocate Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

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

15 Regional and local economics 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 Impact of capital subsidies Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

16 Regional and local economics Slide 16 Regional Distribution of IDC and Capital Subsidy Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

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

18 Regional and local economics Slide 18  Designed to offset displacement (substitution) effect of RDG/RSA  Used for a decade  Still 27,000 jobs induced by REP 1981  Expensive to the exchequer (£150million p.a.) Impact of labour subsidies Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

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

20 Regional and local economics 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? Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

21 Regional and local economics Slide 21  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. Conclusions (1) Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

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

23 Regional and local economics Slide 23 Further reading  Harris, (1991), Regional Economic Policy in Northern Ireland , 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 , University of Portsmouth Department of Economics Discussion Paper Number 45. Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a

24 Regional and local economics Slide 24 Further reading  Scott P, (2000) The Audit of Regional Policy , Regional Studies Vol pp  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 , 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 pp 459 – 470  Wren & Taylor (1999) Industrial Restructuring and Regional Policy, Oxford Economic Papers pp Regional and Local Economics (RELOCE) Lecture slides – Lecture 7a


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