1.  INTRODUCTION

  Is there a link between devolution and regional disparities? Can devolution to the English regions reduce the "persistent gap" in growth rates between regions, as this Select Committee enquires? This memorandum will try to provide an answer to these questions in light of the impact of recent processes of devolution and decentralization across the world.

  Many proponents of devolution assume a connection between the transfer of powers to regional tiers of government and economic development. For them, devolution yields an economic dividend in terms of more efficient, better targeted public policies and, eventually, of a reduction in spatial disparities. This position is, however, at odds with the majority of the literature on fiscal decentralization, which emphasises the spatially regressive effects devolution can have.

  In light of these contrasting positions, it is surprising that the empirical analysis of the connection between devolution and regional disparities has attracted little attention, leading to speculation and thinly supported arguments, especially in a period when increasing regional disparities and devolution have both become firmly established trends. On the one hand, devolution initiatives have become the norm. Hence, since the late 1970s, many countries with centralised systems of governance have implemented plans to devolve powers to regions, while already decentralised countries have tended to decentralise yet more powers to the sub-national level. On the other, divergence, or at least a discontinuity in the converging trend, between the regions of a large array of countries has become commonplace within countries in many areas of the world.

  In this memorandum I will first briefly present the former trend before dealing with the latter and trying to link devolution to growing economic disparities.

2.  DEVOLUTION IN A COMPARATIVE PERSPECTIVE

  In the last three decades there has been a pervasive tendency for countries to devolve resources and authority from national to sub-national government tiers. This trend can be conceptualised as two simultaneous movements since the mid 1970s: the introduction of devolution in countries that previously employed highly centralist government structures, and an even greater decentralization in countries whose regions already enjoyed some degree of autonomy. With reference to the first group, in Europe the centralist tendencies prevalent in the continent up until the 1970s have been reversed. Belgium became a federal state in the early 1990s, Italy is currently moving in that direction, and regions in Spain enjoy in some cases greater powers than states in federations. The UK and Poland have taken significant steps to devolve authority and resources to their respective regions. And even the traditionally centralist France has introduced limited measures toward greater regionalization, with Corsica at the centre of an almost perennial debate about the granting of enhanced regional autonomy. If we consider the populations of those countries implementing moves towards devolution, 87% of the total EU population has experienced some sort of decentralization since the late 1970s, covering eight out of the current fifteen member states.

  Outside the EU this trend has been, if anything, even more marked. The extremity of devolutionary forces in some areas has given rise to the emergence of separate nation-states, no bigger in size than many regions. For example, the collapse of the Soviet Union resulted in the emergence of fifteen new nation states. The Czech Republic and Slovakia were created without conflict out of former Czechoslovakia; and five states have so far emerged out of war-torn Yugoslavia. Outside Europe a similar tendency is evident. Following a drawn-out guerrilla war, Eritrea achieved independence from Ethiopia and Indonesia's occupation of East Timor has also come to an end.

  In other cases, although the process has not resulted in outright independence, it is clearly in evidence through the constitutional and policy-based alterations that have occurred. Indonesia again is representative of this trend, having passed laws in 1999 designed to bolster the autonomy of sub-national governmental tiers after sustained separatist pressure from constituent regions. In China, where the central government has traditionally kept a tight rein on regional governmental autonomy, moves towards marketisation and liberalization have provided the rationale, and central government deficits the incentive, for widespread fiscal decentralization which has endowed considerable new tax raising and expenditure powers on the provinces.

  The trend is also not confined to previously centralised states. In many Latin American countries, and in particular in Mexico and Brazil—which have long been federalist countries on paper—the revival of democracy has led to significant political and fiscal changes involving sub-national governments. In Mexico, recent political changes that have resulted in far greater democratic representation for regional interests, have also underpinned substantial moves towards increasing the flexibility, autonomy and financial independence of the Mexican states. In Brazil, following the passing of the 1988 Brazilian Constitution, the political influence of the states was greatly increased.

  A similar evolution can be discerned in India and the US, both federal democracies and now favouring a greater redistribution of authority and/or resources to their respective states. In India, the reaction to accusations of national governmental elitism and the existence of a controlling class during the 1970s gave rise to progressive moves towards bolstering the authority and responsibilities of regional and local governments. More recently, the realisation that central government has struggled to control its own expenditure and deficits has brought about subtle but continuous devolution of responsibilities to the states, associated with the drive towards greater marketisation and liberalism. In America, disillusionment with central politics in the 1970s, following the Vietnam war and successive oil crises, coincided during the 1980s and early 1990s with rising central deficits, setting the stage for a politically popular increase in the legitimacy and authority of the states that suited the central government well.

  In brief, the devolutionary trend is a widespread phenomenon. There is evidence of some form of decentralisation in a large number of developed and developing countries, across both unitary and federal states, and in both rich and poor nations.

3.  GROWING REGIONAL INEQUALITIES

  Parallel to this devolutionary trend, there has been a tendency for regional inequalities in most countries of the world to remain stable or to increase. Following an extended period of convergence after the Second World War, since the 1980s the trend has been for a large number of countries have witnessed either a slowdown in convergence or a reversal to divergence.

  The magnitude of the trend varies substantially, with the developing countries undergoing the boldest changes. Among the developing countries for which regional data are available, Mexico and India display the strongest divergence, with increases in regional disparities of 12.11% and 25.28% respectively in the period between 1980 and 2000. China, which witnessed a significant reduction of disparities during the 1980s, saw a rise of regional disparities of more than 20% during the 1990s. The developed countries, despite being less extreme, also experienced increases in disparities, especially in the US and France, with an 8.82% and 8.36% rise respectively. And for the EU as a whole, regional inequalities increased by 11.24% between 1990 and 2000.

  The evolution of regional disparities is linked in many cases to the intensity and the timing of devolutionary and decentralizing trends. Countries in which the drive towards devolution took place earlier tend to experience a growth in intranational disparities at an earlier stage. The revival of federalism in the US during the Reagan presidency or the passing of the French regionalization laws (Deferre law) during the 1980s were accompanied by increases in territorial imbalances. The vigour of the decentralization process in Brazil, India, Mexico, and the transfer of resources to Spanish regions and Chinese provinces during the 1990s are associated with a rise in disparities during this decade. While various forces obviously shape the evolution of disparities—not least the slowdown in economic growth rates in numerous countries in the last three decades, and the opening up of many to international trade—there also seems to be a connection between the timing of devolutionary and decentralization initiatives and the growth in disparities.

4.  THE LINK BETWEEN DEVOLUTION AND DISPARITIES

  This connection may be the result of the equality and the efficiency implications of devolutionary processes.

  The equality implications of devolution are normally linked to changes in the fiscal system. These basically take both static and dynamic forms. In a static context, devolution accentuates the autonomy of regions, and given the diversity of different regions' tax bases and welfare responsibilities, a contraction of transfers is likely to make actual government spending at sub-national levels less progressive. By reducing the equalising role of the central government across regions, the latent inequalities between them take on more importance in the determination of regional budgets. Arguments in favour of devolution point to the incentivising effect of tax appropriation at regional levels. Where regions are able to spend more of the taxes they collect, then tax efficiency will increase and, moreover, lagging regions will have a stronger incentive to tax effectively so as not to fall further behind other regions. Hence, a contraction in governmental transfers may be progressive for the nation as a whole. But this argument is flawed since mechanical limitations associated with poorer regions limit their tax bases and the extent to which they can increase tax effort without engendering migration.

  A further, dynamic, effect of devolution that carries with it profound implications for the regressiveness of state government expenditures, involves the derivation of transfers from central to regional governments. During devolution regions often gain more influence over the distribution of transfers, promoting a more regressive system. This is because the empowerment of the regions gives a disproportionate negotiating strength to the richer regions, whose support is more important to the central government. The relevance of this political aspect should not be underestimated. It has been found that variables such as the proportion of central government representatives originating from a particular state, state domestic product per capita and whether or not the same party was in power at the state and central levels were, in the context of India, consistent and robust determinants of grant aid to the states.

  Devolution holds further implications for differentiated, subnational governments if we consider the hidden, or subtle, costs that devolution entails. The differing abilities of individual regions to handle these costs become an important consideration. The cost incidence falls more heavily upon poorer regions, while, at the same time, the efficiency with which to deal with these extra costs is concentrated more heavily in richer regions. This is because the latter enjoy deeper resources, access to more skilled workers, have or are located near to the largest markets, and often have access to larger financial and fiscal resources. As devolution progresses, therefore, and costs arise and fall to the states, the differential efficiencies and capacities across them are likely to manifest themselves in more, or less, effective public management. As a result, devolutionary attempts may promote regressiveness at the subnational level.

  The first of these costs involves the simple administrative strain that a devolution of resources and responsibilities presents. Within the context of relatively poor, subnational governments in developing countries and or peripheral regions in developed areas, the most basic assumptions underlying devolutionary initiatives are called into question. Crucially, policies advocating the decentralization of resources and responsibilities assume, first, that decentralised resources will be spent at least as effectively as the central government may have spent them, and, second, that responsibilities will be managed at least as competently. Indeed, devolutionists argue that the greater knowledge of local markets and social conditions that subnational governmental units possess, affords them the opportunity to target policy spending more effectively than the central government and hence increase overall public expenditure efficiency. But there is little evidence to support the claim that local policy makers are automatically more knowledgeable. Information collection and application is a costly exercise at any level of government, making the effective targeting of expenditure an expensive and time-consuming act, made costlier, of course, by deficiencies in information technology, research staff and skills and capital such as information and communication technologies. Given that such deficiencies tend to predominate in poorer regions and localities, these considerations present a trade off between centrally directed and locally directed expenditures that is often overlooked.

  Further costs are implied by the economic competition that devolution engenders at the regional and local levels. Territorial competition for economic activity at the regional level has become commonplace as capital has become more mobile and therefore has been presented with a vast array of locational choices. The intensity of competition increases as more regions from more countries compete for the same mobile industry. Such competition can be, however, inefficient. This is especially true when competition for mobile assets involves tax concessions and incentives or is designed to attract industry that is already interested in the market potential of a region or country. In these cases, the competitive efforts represent a deadweight loss to the nation as a whole in the absence of strong regulatory bodies.

  Two points related to this process arise in the context of devolution. First, devolution represents an effective endorsement of this process. For good or ill, the contraction of central government's role in attracting and allocating industry, at a time when territorial competition is becoming more intense, can only be taken as a recommendation for this competitive process. Given that this process is endorsed, it is surely the prerogative of central government to protect the interests of those states attempting to compete from a weaker financial and administrative platform. Second, however, while on the one hand devolution imposes the cost of competition upon all subnational units, on the other, it makes little provision for the differing abilities of regional and local governments to meet those cost requirements. In contrast to the argument that responsibility decentralization will bring about innovative ways to stimulate and attract industry, the reality is that in most cases the attraction of industry is still very much incentive based. Once again the higher costs of giving incentives to industry tend to fall on relatively less developed regions that are often forced to offer greater tax concessions, larger loans and grants, and a plethora of subtle enticements in order to attract industry. Richer regions, in contrast, can rely on plentiful resources, shared ideas and abundant, skilled and entrepreneurial workers, providing them with yet another systematic advantage under a devolved framework. The outcomes of this process are readily apparent. In the US and Brazil, it is the less developed states that tend to bear the greatest cost per employment created of attracting large multinational companies. This is the case in Alabama or South Carolina in the US or Bahia in Brazil. And in China, the spiralling decline in the quality of working conditions in many of the multiple special economic zones that have emerged throughout the country in an attempt to attract industry belies the implicit solution that poorer states are forced to adopt. The second cost of devolution, therefore, alongside the administrative strain it imposes, concerns the cost of competitive industrial attraction. The efficiency of states in meeting such costs are diverse, and the extent to which states can consequently capitalise upon the opportunities presented by devolution are therefore skewed and regressive. Again, then, the imposition of a cost through devolution is accompanied by fundamental tendencies towards the divergence of regional incomes.

5.  CONCLUSION

  While the widespread decentralization of powers to regional governments across the world has proved popular and seems to be associated with significant social and political benefits, any claims of a supposed economic dividend in terms of territorial equity should be greeted with caution, if not with outright scepticism. The development of devolution around the world represents a profound shift in the nature of governance. Concern for equality across regions is implicitly compromised through policies that emphasise regional autonomy, and the equity role of government gives way to the objective of securing conditions to allow competition to proceed. Devolution thus seems to be contributing to perpetuate and, in some cases, aggravate, existing economic disparities. This process may also have happened as a result of the interplay of economic forces and regardless of the institutional setting of every space. My concern is, however, that these economic forces towards greater concentration of economic activity in dynamic centres seem to be both encouraged and facilitated by devolutionary initiatives, giving rise to the emergent inequalities documented. Moreover, as these inequalities widen, the economic rationale of agglomeration implies a strengthening of the motivations towards concentration, as resources, capacities, and competitive abilities progressively gravitate towards more successful regions and their administrations. Devolution per se will thus not deliver the greater territorial equity. This objective would require the establishment of substantial inter-territorial fiscal equalization systems at the national or supranational level if the persistence, recurrence, and permanence of economic disparities is not to become one of the hallmarks of the future.