1.  WHY THIS INQUIRY MATTERS

  1.1  SURF welcomes this opportunity to contribute to an inquiry that raises a key dilemma in the ongoing UK programme of devolution and regionalisation. At issue is whether, and if so how, it is possible to reconcile the Government's desire to reduce inter-regional disparities, on one hand, with its commitment to the general strengthening of governmental capacity in the devolved territories and the English regions and its specific support for regionally-determined economic development programmes, on the other. In short, where does regional policy feature in regional institutional and economic development?

  1.2  The fact that this enquiry is taking place shortly after reports in the national press trailed the Government's intention to tackle housing shortages in and around London through what would effectively be a linear New Town east of the capital demonstrates how topical it is. The fact that this media coverage neither contained nor provoked substantial discussion about the potential implications of a London fringe growth strategy for inter-regional disparities illustrates its importance. Below, by addressing key themes identified by the Committee, we argue that a new approach, based upon more overt inter-governmental support for realising the development potential of key metropolitan areas, would be more effective in limiting further growth in inter-regional disparities than are current and anticipated regional arrangements.

2.  THE IMPORTANCE OF REDUCING REGIONAL DISPARITIES IN PROSPERITY

  2.1  Three main arguments underpin the rationale for limiting and reducing inter-regional disparities. The first, apparent in the logic of conventional regional policies, is simply that it is socially equitable and promotes national solidarity. The assumptions underlying regional policies—based upon restricting growth in stronger regions and encouraging employment providers to locate in weaker ones—were that a more even regional spread of employment would lead to more equal income distribution and so ensure that citizens' quality of life reflected individual abilities and aspirations rather than the characteristics of the region in which they lived. These policies did not achieve their redistributive aims very effectively because the "branch plant syndrome" they encouraged meant that firms—overwhelmingly manufacturers—which located in weaker regions proved particularly vulnerable to recession and corporate rationalisation. This outcome does not negate the principles upon which they were based. However it has meant that two alternative justifications for reducing inter-regional disparities have been employed more recently which are more consistent with the concerns of current policy to promote the economic competitiveness of all UK nations and regions simultaneously.

  2.2  One is that balanced regional economic "weight" and growth serves national competitiveness better than large disparities between regions. Effective national economic management, on this view, is impossible if regions with high economic growth, rising incomes, a high cost of living (particularly in terms of housing prices), labour shortages and heavy pressure on transport infrastructures exist alongside others characterised by low growth, lower incomes, a lower cost of living (and in some areas a collapse of property values), relatively high unemployment and under-utilised infrastructure. The classic illustration of how regional disparities prevent optimal economic management is the way UK interest rate rises have been employed to prevent "overheating" in southern regions of England and offset national inflationary pressures, only at the cost of damaging the export performance of firms based in under-performing regions where no similar pressures exist.

  2.3  The other key argument is that the quality of life in favoured regions can only be maximised if inter-regional disparities are reduced. We often hear the opposite; that high levels of social exclusion in London, for example, make growth strategies for the capital just as necessary as they are in less economically dynamic cities and regions. An alternative analysis, however, is that what drives social exclusion in the capital is its disproportionate attractiveness to UK and overseas migrant workers, and hence the high level of competition within the labour market, whereas in under-performing regions it is more a reflection of absolute shortfalls in employment opportunities. This analysis supports the view that buoyant economies in peripheral regions would represent a more reliable, longer-term solution to social exclusion in both low and high growth regions than does a strategy for job creation in areas where competition in the labour market is already at its fiercest. The advantages of helping reduce labour market pressures in favoured regions by encouraging higher growth in less favoured ones would also be felt in environmental terms, for example by reducing pressure for new green-field housing provision and containing the stress on communications infrastructures.

3.  WHAT CAN BE ACHIEVED WITH CURRENT AND PROPOSED POLICIES?

Inter-regional disparities under the status quo

  3.1  When examining the regional effects of current policies it is important to distinguish between overt regional strategies—broadly defined by the efforts of Regional Development Agencies (RDAs), non-statutory Regional Assemblies (RAs) and Government Offices for the Regions (GORs)—and the much broader range of "implicit regional policies" that have an impact upon regional development prospects. The resources flowing into regions through the latter—eg spending on education, transport, housing, health, the arts, culture, sport, business support and research and development—dwarf those administered by regional agencies. However regional variation in mainstream public investment, let alone its differential impact upon regional development prospects, is rarely considered. What is often missed, therefore, is the way that implicit regional policies can fail to support, and even contradict, formal regional development goals and attempts to reduce inter-regional disparities.

  3.2  A good case in point is spending on the development of the science base. The latest figures (for 2000) show that London and the South East receive 49% of direct Government funding and 47% of moneys routed through universities in this area compared, for example, to parallel figures of 3% and 10% in the less affluent North West. This imbalance can be defended on the basis that funding is allocated to institutions that have the relevant skills and expertise, irrespective of their regional location. That argument sits oddly, however, with decisions that effectively move scientific expertise and capacity between regions. The recent Government decision to support the building of the next generation synchrotron (particle accelerator) facility in Oxfordshire rather than in the North West, where the current facility is based, for example, effectively rewarded a favoured region at the expense of a less favoured one. The regionally skewed nature of public funding for science is also difficult to square with the pattern of private sector expenditure, where the percentage share in the North West (13%) compared to London and the South East (35%) is substantially more balanced in terms of spending per capita.

  3.3  If a similar exercise were performed for other national expenditures that support regional competitiveness—as opposed to less directly productive spending, for example on welfare transfer payments—it is highly unlikely that the evidence would support the view that Government funding patterns help redress inter-regional imbalances. If this were a factor in decision-making it is difficult, for example, to see how London would have become the only serious candidate for the national football stadium or a potential Olympic bid. The more important points, however, are that (a) major expenditures are not routinely interrogated for their potential regional impacts, and (b) by comparison, the impacts that overt regional policy resources can have on headline figures such as regional GDP share are minimal.

  3.4  This is not to argue that overt regional strategies are not effective in their own terms. Other evidence to this enquiry will doubtless comment in detail upon their successes. What is open to question, however, is whether the current regional policy regime could ever realistically have been expected to contribute, even in those limited terms, to the reduction of inter-regional disparities. Whilst the original allocations to RDAs, for example, were built upon previous spending programmes that took account of varying levels of need within regions, the principle underlying their creation was to enable each region to promote indigenous growth and secure inward investment more effectively. The differences in their resource bases, in our view, do not begin to compensate for the varying degrees of difficulty RDAs face in improving regional economic performance. As a result RDAs compete, but not upon anything resembling a level playing field, and their net effect is always likely to contribute, at the margin, to growing inter-regional differences.

Inter-regional disparities under future arrangements

  3.5  The current, overt regional policy regime, of course, is set to change as further functions are decentralised to the regions and the option of stronger elected regional assemblies becomes available. These changes alone, however, are unlikely to have a significant effect on inter-regional disparities for three principal reasons. First, and most obviously, the biggest potential change may not happen. The creation of elected regional assemblies depends upon regional referenda which, given that they necessarily trigger the removal of a tier of local government, are by no means certain to be successful. Second, even assuming that at least some referenda produce a positive decision, the resources that elected regional authorities will inherit are limited. They will become responsible for RDA allocations, European regional programme resources that will shrink rapidly upon the accession to the EU of eastern European countries, and regional public housing expenditures. Beyond this, their impact will depend upon the influence that regional strategies have upon the policies and priorities of regional non-departmental public bodies.

  3.6  Thus elected regional assemblies in England will, at least in the short term, be relatively weak bodies. It is impossible to specify in advance what the implications will be for comparative regional economic performance. The third reason for caution about the impact of future changes in England, however, is that comparable European experience with the development and operation of what are invariably stronger regional authorities does not suggest they have had a positive effect upon the narrowing of regional differentials. The Italian experience, for example, suggests that, if anything, regional government has been more effective in the stronger than in the weaker performing regions. In Spain, the staggered process of regionalisation that provides the model for the likely pattern of development in England similarly has not been associated with a levelling up of regional economic performance. The French experience is also cautionary if judged by regional GDP figures, where the evidence suggests a continued strengthening of the position of the Paris region. If measured by regional income growth and differentials, however, there is a more positive pattern, based upon strong economic growth amongst regional capitals outside Paris.

  3.7  The French model provides the best evidence currently available that the power of the public sector can be mobilised in support of regional economic innovation and growth and in limiting the market-driven widening of regional differentials. It is imperative to understand, however, that the creation of French regional authorities provides only a minor part of the explanation. Much more important, and of particular significance to future approaches in the UK, have been:

—  The programme of decentralisation that has progressively strengthened the autonomy of French local authorities since the early 1980s,

—  Sustained investment in public services, representing a higher share of national GDP than in the UK, and

—  The long history, dating back to the 1960s, of overt and co-ordinated national government investment in regional capitals.

4.  LEARNING THE LESSONS OF PAST UK AND OTHER EUROPEAN APPROACHES

  4.1  During the last 20 years, the dominant approach to regional policy in the UK has shifted from a regime based largely upon central government's ability to engineer the redistribution of "footloose" economic activity between regions to one in which specific Government-supported regional institutions have been given responsibility for promoting indigenous development. In the process, we have begun to appreciate much more clearly the importance of using public sector policy tools to create the conditions in which market choices are influenced in less direct but more powerful ways and not to assume that those decisions can be changed fundamentally by planning constraints in some regions and public subsidies in others. At the same time, however, we risk losing sight of the arguments for trying to create balanced regional growth. The additional danger of the current regional policy orthodoxy is that too much faith is placed upon the independent capacity of existing and future regional institutions.

  4.2  SURF maintains that the future strengthening of regional institutions with key economic development responsibilities can be made consistent with a policy of at least limiting, if not also reducing, inter-regional disparities, but only if attention is paid to a far broader range of considerations than have played a part in policy debate so far. The most important of these, in our view, are that:

—  There is a pressing need to understand that the current tendency to adjust to imbalances created by market change will inevitably heighten inter-regional differentials and that an alternative strategy based upon actively shaping market decisions is the key to avoiding that outcome

—  The joint production and support of strategy frameworks by national, regional and local levels of government is crucial to the success of any new approach

—  The acceptance of responsibility by Government departments for the regional effects of major spending programmes is a prerequisite for establishing the basis of new, consensual inter-governmental approaches

—  The most promising starting point for any future attempt to promote balanced regional growth lies with recognising the renewed economic potential of key metropolitan areas and their capacity to lead a regional renaissance based upon the huge potential of urban knowledge economies, and,

—  Greater investment in understanding how that potential can be built upon, and how different levels of government can co-operate in creating the conditions that can guide private investment decisions in order to realise it, is urgently needed.

  4.3  In our view, the decentralisation of Government departments, public agencies and non-departmental public bodies to less prosperous regions can play a part in this process. It is important, however, that this does not simply reproduce the approach adopted in the 1960s and `70s, in which it seemed to be assumed that any such move would be of equal value to the cause of regional development. It is, of course, axiomatic that the transfer of administrative capacity and expertise out of the capital to one of the less privileged regions will have limited direct and indirect effects upon regional economies. However, more careful thought needs to be given to the types of functions that should be transferred in order to ensure that the result would be to generate the maximum feasible level of added value to the "receptor" region in terms of linkages and spin-offs to the relevant regional—or more likely metropolitan—economy.

  4.4  It should also be clear from the preceding discussion that we do not see the starting point for a new approach as being dependent upon making quick decisions about how much funding the less privileged regions would need to "catch up" with their more privileged cousins. Resources are critically important, but there are a number of intervening steps in the process described above that need to be completed before it would be possible either to "put a price" on limiting/reducing inter-regional disparity or, indeed, to demonstrate that it is a price worth paying.

5.  CONCLUSION

  5.1  To summarise, SURF's view is that:

—  Renewed attempts to limit and reduce inter-regional disparities are justified on the grounds of social equity, national solidarity, optimal national economic performance and improvements in the quality of life for the residents of all UK regions

—  Current overt regional policies and institutions are too weak to make a substantial difference to regional growth rates or inter-regional differentials

—  The introduction of democratically elected regional governments along the lines currently planned is unlikely to change that picture in the short term

—  The development of more powerful regional institutions in the longer term, on its own, is unlikely to favour the weaker-performing regions

—  Comparative evidence suggests that a substantial narrowing of the gap between the strongest and weakest regions is hard to achieve but the achievement of better economic performance by peripheral regions can be encouraged by a combination of:

—  The conscious, determined alignment of national, regional and local development strategies, supported consistently and over the long term by a broad range of national expenditure programmes

—  Measures to strengthen the autonomy of local as well as regional levels of government, and

—  Focusing upon the development potential of cities and metropolitan areas as the key to regional growth.

  *This memorandum was prepared by Prof. Alan Harding with support from Beth Perry (Peel Research Fellow) and Patrick Le Gale"s (CEVIPOF/CNRS Sciences Po., Paris), currently a University of Salford CAMPUS visiting research fellow at SURF. For more information on SURF, please see www.surf.salford.ac.uk.