THE ALLIANCE FOR REGIONAL AID

  The Alliance for Regional Aid acts as the collective voice of local authorities in Britain's traditional industrial areas. It brings together four local authority associations—Coalfield Communities Campaign, Leading Action for Textiles, Clothing and Footwear, Steel Action and the UK wing of the European Industrial Regions Association. The associations include around 140 local authorities covering the vast majority of the industrial areas of Northern England, the Midlands, Scotland and Wales. These are the principal areas targeted by the Government's regional policies.

  Since its formation in 1997, the Alliance has taken an active role in trying to shape UK and EU regional policy and has developed constructive working relationships with Government departments and the European institutions.

THE SCALE OF THE REGIONAL PROBLEM

  There is a widespread tendency to understate the scale of regional disparities in the UK. This arises in particular because claimant unemployment rates—traditionally the most popular measure—these days point to only modest differences, typically only a three or four percentage point gap between the best and worst regions. Claimant unemployment is however an unreliable guide to the scale of disparities, not least because so much joblessness is excluded from the claimant count. It is also wrong to focus exclusively on differences between whole regions because it is often at the sub-regional scale that inequalities in prosperity and job opportunities are most marked.

  Three alternative measures provide a better guide than claimant unemployment. One is GDP per head, the measure favoured by the EU to designate Objective 1 status. Most of Britain's traditional industrial areas come in at 70-90% of the EU and UK averages. However, GDP figures are distorted by commuting flows (the figures measure local production in relation to resident local population) so their usefulness is limited at the local scale.

  A second alternative are the wider measures of unemployment such as those produced by Sheffield Hallam University (1). These show that in the areas where claimant unemployment is high there are also disproportionate concentrations of hidden unemployment among people diverted onto other benefits or out of the benefits system altogether. According to these wider measures, the gap between the best and worst local authorities can be as much as 20 percentage points.

  A third alternative is provided by employment rates—the share of adults of working age who actually have jobs. This varies from below 60%, in substantial parts of North East England for example, to around 85% along the M4 corridor and in other parts of the South East.

  The point is that regional disparities in prosperity within Britain remain large. There is also only limited evidence that there has been any convergence over the last five years. The Government's own research (2) indicates that on some measures, such as GDP per head, the gap has actually been getting wider.

THE GOVERNMENT'S NEW REGIONAL POLICY

  The Alliance welcomes the priority that the Government now attaches to narrowing the differences in prosperity between the regions. However, the Alliance is concerned that aspects of what ministers have described as the Government's "New Regional Policy" remain problematic. Most of these concerns are shared by the academic community (3).

(i)   The role of devolution

  The most important concern is the evident confusion between devolution to the regions and regional economic policy. Regional economic policy—that is, policies to narrow regional gaps in prosperity—require targeted measures that discriminate in favour of the weakest areas. Devolution, on the other hand, is about a shift in decision making to the regions. In itself, devolution does not necessarily imply any discrimination in favour of the weakest regions or any convergence in their economic well-being. Indeed, if devolution were to imply that all regions were treated equally it would work against the objective of narrowing regional differences.

  It is not self-evident that devolving decision-making, initially to Regional Development Agencies (RDAs) and in future to Regional Assemblies, necessarily strengthens a region's ability to promote economic activity and new jobs. Decision-making becomes more sensitive to the local context, but what really matters is the scale of resources available to the devolved body and how the resources compare with those in other regions. Thankfully, the Government has seen the sense in skewing the budgets of the RDAs in favour of less prosperous regions. A further devolution of power, to Regional Assemblies, would almost certainly require a similar bias in funding in order to make much difference to regional patterns of growth.

(ii)   The importance of labour demand

  The key problem in most traditional industrial areas remains a shortage of jobs. The job destruction of the 1980s and early 1990s, in particular, blew a hole in many local economies which has still been only partially filled. However, there is a confusion within Government between the roles of labour demand and labour supply. In particular there is a view from the Treasury, echoed by the Department of Work and Pensions, that residual unemployment is simply the result of a skills mismatch between those who are out-of-work and the plentiful stock of vacancies (4).

  It is true that the workforce in most traditional industrial areas is less well qualified than for example in London and the South East. This is especially so in terms of the proportion of graduates in the population. However, to blame economic weakness on deficiencies in labour supply is to confuse cause and effect. Traditional industrial areas have over many years lost graduates and other skilled workers to other areas because they have been unable to offer a sufficient quantity and range of jobs. The low proportion of graduates in traditional industrial areas is in other words mainly a consequence, not a cause, of economic weakness. This weakness is unlikely to be resolved until their economies catch up with the rest of the country.

(iii)   The lessons of past regional policy

  Ministers have condemned previous regional policy as a "failure". In fact, there is overwhelming and well-respected evidence that past regional policies made a big difference. During the years of intensive regional policy in the late 1940s and again during the 1960s and 1970s, research shows that hundreds of thousands of jobs were successfully created in the assisted areas (5). At that time (rather like the present) full employment would have prevented much of this growth happening in the South instead. That the same assisted areas often continue to experience difficulties is more to do with the long-term decline of their original industries, such as coal, steel and heavy engineering. Furthermore, in so far as regional policy failed to make much difference in the 1980s and 90s this was mainly because it was less well-funded and given lower priority than in earlier years.

  There is plenty of good experience from the past on which to build. What works and what doesn't, and which policies are most cost-effective, is actually quite well understood. It is known for example that across-the-board subsidies to wage costs are relatively ineffective whereas discretionary capital grants are a useful and cost-efficient tool. The Government needs to build on this experience rather than dismiss all that has gone before.

(iv)   The productivity gap

  The most recent statement from the Treasury and Department of Trade and Industry (6) emphasises regional differences in productivity. The conclusion is that enterprise and productivity in the weaker regions need to be raised.

  Whilst this is a laudable goal, in fact differences in productivity between regions mostly reflect differences in inherited industrial structure, notably the concentration of high-productivity capital-intensive activities in some areas and of well-paid managerial and professional functions in others. In practice, productivity is not the key obstacle in weaker regions, and most firms find that they can operate efficiently in most locations across Britain. It is worth mentioning, for example, that Europe's most efficient car plant is in Sunderland, in the heart of a former mining and shipbuilding area. Even where closures do occur, the evidence shows that this has little to do with shortfalls in productivity or other cost handicaps in the places where they are located (7). Britain's traditional industrial areas are disadvantaged mainly because they have an insufficient stock of businesses, not because they are inherently inefficient locations.

(v)   The focus on neighbourhoods

  Substantial parts of the Government's regeneration policy now focus on neighbourhoods, generally defined at ward level. Examples include the Neighbourhood Renewal Fund, run by ODPM, and the proposed Enterprise Areas, under the leadership of the Treasury. The purpose of this neighbourhood focus often suffers from a confusion between community and social development on the one hand, which is certainly welcome, and economic regeneration on the other, which is mostly a rather different task.

  Where the underlying problem facing an area is a weakness in the local economy the neighbourhood scale is rarely the appropriate level at which to seek solutions. Typically, local labour markets operate over quite wide geographical areas, such as whole towns or sub-regions, with the result that the prime opportunities for assisting deprived residents often lie outside the wards in which they live. The focus on neighbourhoods, at the expense of their wider context, runs the risk of providing merely cosmetic interventions that fail to get to grips with underlying economic causes.

THE PRIORITIES FOR ACTION

  The Alliance and the Government agree that market forces alone will not bring about convergence in prosperity between the regions and sub-regions of the UK. Without a re-invigorated regional policy, continuing labour market imbalances and continuing out-migration from less prosperous areas can be expected, which in turn will fuel further congestion and pressure on land and infrastructure in parts of the South.

  Over the last 18 months the Alliance has reviewed the options for a stronger UK regional policy, including at a major Alliance conference organised in London. The Alliance concluded in June 2002 that action on five fronts should be the immediate objective:

—  Increased spending on and easier access to Regional Selective Assistance (RSA). RSA is the principal remaining form of financial assistance to firms to create or protect jobs in assisted areas. Current spending on regional aid to firms is well below the levels of the 1970s and 80s, and far below the levels in EU countries such as France, Germany and Italy. The leeway within EU state aid rules needs to be exploited to provide more generous assistance. The restrictions on RSA availability also need to be eased to give far stronger signals to potential investors.

—  A step change in the resources available to RDAs. The Government has made a start in this direction, but most of the English RDAs' budget still consists of spending that was carried forward from existing programmes. The RDAs have been given an exceptionally ambitious agenda and they need the resources to deliver. The additional resources also need to be targeted on the most disadvantaged regions.

—  A successor to Enterprise Zones. EZ's have proved very useful in steering investment into the most difficult areas that otherwise would have been by-passed, but the remaining EZs are all due to expire by the middle of the decade. A successor tool is needed to take on this key role, especially in relation to tax incentives. The Enterprise Areas proposed by the Chancellor fall well short of what is needed. The Alliance will shortly be tabling proposals for a successor to Enterprise Zones, including around 40 potential candidate sites.

—  Action on basic infrastructure, including greater powers for local authorities to allow them to take effective and co-ordinated action. Good road and rail links, prepared and serviced sites, and new and refurbished premises are pre-conditions for most job creation. The proposed reforms to local authority finance will extend the flexibility available to a minority of highly-rated English local authorities but the majority will still face severe constraints on their ability to engage in major economic regeneration schemes.

—  A replacement for the Partnership Investment Programme . This provides gap-funding for property development that would not otherwise go ahead, which includes the speculative development of industrial and commercial premises in most older industrial areas. ODPM is steering through a series of limited replacement programmes that fit within EU state aid rules but a more comprehensive solution is required. The Government's current efforts to raise this issue with other EU member states and the European Commission are welcome and should be encouraged.

  In addition, the Alliance is acutely aware that reforms to EU Structural Funds beyond 2006 pose a big threat to the UK. At present nearly £1 billion a year comes to the UK's regions in the form of Objective 1 and Objective 2 regional aid. Most of this goes to the traditional industrial areas covered by Alliance member authorities.

  The UK Government has not yet adopted a position on the future of EU regional policy, though preliminary discussions are well underway in Brussels and negotiations can be expected to start in earnest by 2004. It is especially important that the Government secures a good deal for the UK, and in particular for the traditional industrial areas at risk of losing out. The Alliance has recently published proposals on an appropriate negotiating position for the UK (8). A key part of this package should be to give the UK and other member states the flexibility to pursue a strong domestic regional policy of their own, in part to make up for any losses in EU funding, including the provision of aid to areas falling outside those assisted by the EU itself.

CONCLUDING REMARKS

  The Alliance for Regional Aid regards the current disparities in regional prosperity as neither acceptable nor inevitable. However, while the Government's renewed emphasis on narrowing regional differences is welcome, there is still some significant way to go in bringing forward policies that will genuinely deliver this objective.

  The persistence of large regional disparities is especially disturbing because with parts of the South now at or near full employment there is little scope for reducing joblessness in other parts of the country through traditional macroeconomic policy. The fear is that further stimulus to the national economy will simply fuel inflation by exacerbating labour shortages in the South.

  Increasingly, therefore, regional policy is the key to full employment in the economy as a whole. If a greater proportion of growth is concentrated in the regions and sub-regions where there continues to be labour market slack, output and employment in the national economy will be higher than would otherwise be possible. To some extent, indeed, regional policy will pay for itself through additional output and tax revenue.

Alliance for Regional Aid

January 2003

  (1)  C. Beatty, S. Fothergill, T. Gore and A. Green (2002) The Real Level of Unemployment 2002, CRESR, Sheffield Hallam University.

  (2)  HM Treasury and Dept. of Trade and Industry (2001) Productivity in the UK—the regional dimension, HM Treasury, London.

  (3)  Regional Studies Association (2001) Labour's New Regional Policy : an assessment, RSA, Seaford.

  (4)  HM Treasury (2000) The Goal of Full Employment : employment opportunity for all throughout Britain, HM Treasury, London.

  (5)  B. Moore, J. Rhodes and P. Tyler (1986) The Effects of Government Regional Economic Policy, DTI, HMSO, London.

  (6)  HM Treasury and Dept of Trade and Industry (2001) op.cit.

  (7)  S. Fothergill and N. Guy (1991) Retreat from the Regions : corporate change and the closure of factories, Jessica Kingsley/RSA, London

  (8)  Alliance for Regional Aid (2002) The Next Round of EU Regional Policy : a road map for Britain, Alliance for Regional Aid, Barnsley.