1.  The Institution of Economic Development (IED) is the UK's leading professional body of economic development practitioners, with a remit to represent the professional interests of its members and to advance the practice of local and regional development. To this end, inter alia, it accredits post-graduate UK university qualifications in economic development, organises seminars and conferences, and publishes guidance on economic development practice. We welcome the ODPM Committee's Inquiry into ways of reducing UK regional disparities in prosperity, since such matters lie at the centre of our membership's responsibilities.

  2.  We restrict our observations to certain points of specific concern to our membership, in the belief that the Committee will receive submissions from others covering the full range of policy and practice issues that have a bearing on its Inquiry. Our points focus on the measurement of regional disparities, and more specifically the triggers/indicators applied to determine eligibility for national and EU regional development assistance. We obviously have an opinion as to the direction that regional initiatives are taking within the UK at present, and we offer some views on this in passing. However, as practitioners our members are especially concerned with ensuring that whatever spatial initiatives are agreed, their implementation is effective, and that the criteria for eligibility are fair and transparent and serve the ends to which they are intended. In this respect, our experience as recounted below suggests that there are significant limitations in the indicators currently applied to identify spatial disparities in economic performance within the UK. These indicators are used by policy makers to identify the nature and degree of regional disparities in prosperity; to determine eligibility for assistance to overcome such disparities and the overall level of such assistance to be provided; and to assess the effectiveness of measures to this end. So weaknesses at this level are sufficient to undermine the delivery of policy initiatives, however well-founded the policies themselves may be in theory.

  3.  The two criteria generally accepted as indicators of spatial economic disparities are unemployment rates and gross domestic product (GDP) per head. The former provides the key trigger for eligibility for UK Regional Selective Assistance (RSA); the latter for determination of regional assistance under Objective 1 of the EU Structural Funds. For Objective 2, as with RSA, the principal emphasis is currently on rates of unemployment. Regional development agencies (RDAs) in the devolved territorial administrations and in England also have access to a host of supplementary spatially targeted programmes, a major factor in determining their eligibility for which is need as assessed under one or both of these indicators.

  4.   Unemployment rate indicators: There is growing concern amongst practitioners about the validity of using UK spatial comparisons of unemployment rates for the purposes of identifying variations in regional performance, for determining eligibility for regional aid, and for monitoring and evaluating the effectiveness of outcomes. Issues include the methods of establishing appropriate local labour market boundaries on which to calculate conceptually valid unemployment rates, which considerably delayed the revision of Travel-to-Work Areas following the 1991 Population Census. Of particular concern to the IED is the growing evidence that, regardless of the boundaries chosen, neither the claimant count nor the ILO measure of unemployment provides a satisfactory indicator of the state of regional labour markets nor, in consequence, of the degree of regional disparity within the UK, and the urgency of the need to address it. National initiatives to address labour market problems, such as New Deal, themselves affect the calculations of rates of unemployment, without immediately tackling the underlying imbalances in local and regional labour markets. Moreover, the claimant count (and to a lesser degree the ILO measure) does not capture those members of a local or regional labour force who move into and out of work without registering for benefit, those members who could work but are discouraged because of the current conditions of their local or regional labour market, or those who find it expedient to avail themselves of sickness and disability benefits or early retirement rather than search for work.

  5.  By stating that the current unemployment indicators are inadequate, we reject the notion that those who are not counted because they are considered economically "inactive" are in some way "playing the system". Their withdrawal is a logical reaction to weak market conditions for their services: where labour market conditions are tight similarly placed people are far more likely to accept employment. Such withdrawals from the labour market now increasingly cloud the picture of regional disparities provided by unemployment rate indicators, and in the process mask the extent to which such disparities exist and require attention. This is because the numbers who withdraw from the labour market are far greater in those parts of the UK that continue to suffer from structural readjustment problems, following the collapse of their local economic base. Leading authorities on such matters have recently provided extensive and detailed evidence (Beatty et al, 2002) of the extent to which withdrawals from the labour market under adverse economic conditions compress conventionally measured spatial unemployment rate differentials. Table 1 is taken from this source and focuses on the standard UK regions.

  6.  The adjustments to the claimant count required to reflect a definition of unemployment that includes "those who might reasonably be expected to have been in work in a fully-employed economy" (Beatty et al, 2002, p.28) indicate the extent to which current conventional measures of unemployment are grossly understating the degree of spatial variation in labour market conditions—and hence prosperity—within the UK. The use of a measure—the claimant count—to determine the degree to which such disparities exist is largely self-defeating because the indicator itself contains significant elements of "negative feedback": the capacity of the labour force to respond to variations in local and regional conditions through differential levels of labour market participation.

  *includes extra ILO unemployed, government schemes, excess sickness claimants and early retired

  7.  From the viewpoint of the economic development practitioner, reliance on an indicator subject to such negative feedback to trigger eligibility for regional aid in tackling spatial differentials, or to assess the effectiveness of such measures in doing so, is inappropriate and inequitable. The implications for regional policy of the presence of real spatial variations in regional labour market conditions that greater exceed those revealed by traditional claimant counts should be self-evident. Without attempting to develop this point further, the true extent of such regional differentials helps explain spatial variations in the success rates of various national training and regeneration initiatives that an analysis based on the much narrower variations in regional claimant counts cannot begin to address.

  8.   GDP per head indicators: These are favoured in the disbursement of regional assistance through the EU largely because of the issues considered above. The use of this measure, or related ones such as Gross Value Added (GVA) per head, is likely to become as central to the monitoring of development strategies in the English RDAs, as it has long been for the equivalent devolved territorial RDAs. GDP per head relates to the whole residential population of a region, so when used appropriately as an indicator it is not affected by the negative feedback attached to the claimant count. Elements of the same problem are, however, present when this measure is used as a proxy for differences in regional productivity. GDP per head merely relates an area's residential population to the annual value of its sales of goods and services. Clearly, those areas with high levels of real unemployment that reflect a weak labour market and a struggling economic base will also have lower GDP, since they are not operating at anything approaching full capacity. Under these circumstances, attempts to use this measure as an indicator of spatial variations in productivity are inappropriate. To identify such variations in productivity, an area's output should be related not to its total residential population, but to those in work: spatial productivity differentials should be measured in terms of output per worker. Failure to observe this distinction will lead to regions with low workforce activity rates being categorised as suffering, incorrectly, from low productivity rather than under-utilisation of their capacity.

  9.  In considering the next round of EU regional policy, the Alliance for Regional Aid has made a case (ARA, 2002) for retaining the 75% threshold trigger for Objective 1 EU eligibility (focused on lagging regions), as determined by comparing a NUTS 2 EU region's GDP per head with the EU mean. The Alliance then goes on to argue that the present spatial targeting for Objective 2 assistance (currently aimed at the conversion of regions facing difficulties) should not be abandoned when a new round is established in 2007 by a reversion to EU-wide eligibility as is currently the case for Objective 3 assistance. ARA's reasoning is based on its belief that disparities in economic performance amongst EU regions no longer eligible for Objective 1 assistance will remain marked and will still need to be addressed through spatial policy instruments, a contention to which the IED would lend its support.

  10.  Moreover, there is solid evidence that, in the UK at least, regional disparities have their origins as much in deficiencies in spatial demand as in supply side constraints. A recent Regional Studies Association (RSA) report (WPREP, 2001) argues cogently that policies to stimulate enterprise and expansion across all UK regions through a knowledge and skills based promotion of innovative high-tech regional clusters cannot by themselves tackle those aspects of regional disparities in prosperity that are due to inadequate demand for labour in under-performing regions. Before such growth stimuli can adequately impact on lagging regional economies, they will be dampened by tight labour market conditions in leading regions, unless the Government acknowledges "the need for stronger discriminatory measures to encourage development specifically in lagging regions" (WPREP, 2001, p.2).

  11.  The IED has no problem with the RSA's conclusion that a boost to current levels of UK spatial assistance targeted at the poorest regions is required. Nevertheless, this begs the question of how to determine which regions are sufficiently lagging to deserve additional discriminatory spatial assistance. Our confidence in the use of GDP per head as an appropriate indicator in this respect has been shaken by the results of the latest revisions to regional GDP estimates for the past decade recently undertaken by the ONS. As with claimant rates, these major revisions have revealed a far greater degree of disparity in regional GDP per head amongst UK regions than has hitherto been supposed. The revisions, while reinforcing the extent to which poorer regions lag behind the South East, have also highlighted the anomalous situation in which those parts of the UK dependent on such a trigger for regional assistance can find themselves. For example, the Scottish Highlands and Islands lost its Objective 1 status in the current round of EU funding because under the unrevised ONS data it appeared to have failed the 75% EU GDP per head threshold. However, on the revised data it now appears that there was a good case for the Highlands and Islands retaining their Objective 1 status for the current funding round. Since the transitional funding made available to this region will disappear after 2006, the loss of eligibility triggered by statistical legerdemain is not a trivial issue, and it will be heightened by the almost certain loss of Objective 1 status for the remaining UK regions in 2007, as a consequence of the accession of New Members.

  12.  The current UK emphasis on individual employability and a bottom-up partnership approach to regional renewal as the strategy appropriate for all UK regions appears to be largely founded on a questionable belief that each region contains within its boundaries sufficient capacity to respond to appropriate supply-side stimuli without additional targeted EU and national demand stimuli to promote development in lagging regions. For reasons already indicated, we do not share what is claimed by WPREP (2001) to be the "Government's implicit view... that regional disparities are now very much a secondary issue compared with the need to boost national economic performance" (p.7). The IED believes that the failure of the standard indicators of regional disparities to reveal the true extent of variations in spatial prosperity within the UK has contributed to a significant extent to this mistaken view, and to the under-funding of development programmes in lagging regions required to compensate for the lopsided spatial growth of the UK economy.

  13.  This leads us to conclude that your Inquiry should recognise that regional convergence requires a more pro-active pursuit of strategies favouring lagging UK regions, and one that entails the allocation of additional resources to this end. At present, despite the additionality rules governing the disbursement of EU Structural Funds assistance, there is some basis for arguing that UK national spending on regional aid has been allowed to decline as EU funding has grown. In any event, as Table 2 indicates, there is no dispute that, in the face of major—and growing—levels of regional disparity, the UK currently spends far less on regional aid than most other EU Member States.

  14.  The IED therefore supports proposals made by The Alliance for Regional Aid that a new Objective 2 scheme of targeted EU assistance should come into operation after 2006 utilising the principle of "indirect zoning". This entails the allocation by the Commission of a level of population coverage to each Member State and a list of identified themes to be targeted. Given appropriate parameters on the size of targeted areas, national governments could then be given the freedom to draw their own eligibility maps for targeting regional aid to under-performing areas. With such a scheme in operation, the IED hopes that the overall sums made available under regional aid to UK regions would increase, despite the accession of new Member States making major demands on regional assistance. The increase could be achieved by a combination of transfers from other EU programmes, such as the CAP, in the form of modulation and decoupling, and by additional injections from the UK government. Through these means, enhanced programmes of UK regional aid would be specifically targeted at policy measures designed to address the issues affecting under-performing regions rather than spread thinly across all parts of the UK.

  15.  Lastly, we urge that the criteria for eligibility under such a scheme should involve agreement on clear and transparent indicators established in consultation with territorial administrations, and with regional and local authorities, giving adequate attention to the concerns held by economic development practitioners on the operation of current tests of eligibility. We concur with the Alliance that, if accurately calculated, GDP per head is the fairest and most transparent way to assess eligibility for a new Objective 2 programme, into which an enhanced UK budget for regional selective assistance could be integrated. This would allow UK current and transitional Objective 1 areas to be offered the necessary degree of targeted support when their eligibility for any EU targeted aid under this heading disappears in 2007.

Tony Jackson

Chair, on behalf of the National Council of the Institution of Economic Development,

January 2003

REFERENCES:

  ARA (2002) The next round of EU regional policy: a road map for Britain Barnsley, The Alliance for Regional Aid

  Beatty C, Fothergill S, Gore T, Green A (2002) The real level of unemployment 2002 Sheffield, Centre for Regional Economic and Social Research, Sheffield Hallam University

  WPREP (2001) Labour's new regional policy: an assessment Sussex, Regional Studies Association Working Party on Regional Economic Policy