Regional Policy post BREXIT

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1 Regional Policy post BREXIT David Bell, Stirling Management School University of Stirling

2 UK regional policy a historical perspective "UK regional policy has existed at varying levels of intensity for nearly seven decades. Throughout its existence, the overriding objective has been to provide economic help to the countries most heavily depressed or least well-off areas. A wide variety of policy measures have been used to create employment and thereby reduce unemployment in the areas with persistently high unemployment Jim Taylor and Colin Wren, Regional Studies, 1997 Strength of policy intervention has waxed and waned Influenced by EU not just Structural Funds (Cohesion Policy), but also state aid rules, public procurement etc.

3 Ratio UK unemployment disparities now relatively modest 7 Highest/Lowest Unemployment Rate NUTS 2 Regions IE DK FI SI SE PT NL BG PL EL ES SK UK RO HU CZ FR AT DE BE IT Source: Eurostat

4 Standard Deviation of Unemployment Rates April 1974 September 1975 February 1977 July 1978 December 1979 May 1981 October 1982 March 1984 August 1985 January 1987 June 1988 November 1989 April 1991 September 1992 February 1994 July 1995 December 1996 May 1998 October 1999 March 2001 August 2002 January 2004 June 2005 November 2006 April 2008 September 2009 February 2011 July 2012 December 2013 May 2015 October 2016 Regional labour market convergence? Standard Deviation of Regional Claimant Count Unemployment Rates Policy changes from one of finding employment/reallocating labour

5 Ratio But regional income differences massive. 9 Highest/Lowest GDP Per Capita NUTS 2 Regions HR SI FI PT IE SE NL AT DK EL ES PL DE IT BG HU BE CZ SK RO FR UK Source: Eurostat

6 EU Structural Funds allocated on the basis of income measure Intended to reduce spatial disparities across EU Structural funds allocated on the basis of GDP per capita in NUTS 2 regions For the current funding period NUTS 2 regions are either: "more developed" (with GDP per capita over 90% of the EU average) or "transition" (between 75% and 90%) or "less developed" (less than 75%) The NUTS classification an objective basis for the allocation of funds

7 Regional GVA Per Head 2015 Current UK Regional Aid Map

8 Spatial aggregation matters central limit NUTS 3 contrasts in GVA per head are much larger than NUTS 2

9 Spatial income disparity associated with support for Brexit Source: Brian Bell and Steve Machin Brexit and Wage Inequality

10 m Current UK receipts from EU based on clear criteria - largely directed to area-based policies 6,000 5,000 4,000 3,000 2,000 1, EAGF EAFRD ERDF ESF Other Receipts

11 Allocation of Structural Funds within the UK Made by Department of Business Innovation and Strategy Was challenged by local authorities that allocations not aligned with EU allocations High Court determined that DBIS had wide discretion to allocate to transition regions DBIS was entitled not to take into account the EU average GDP per capita measure, and was entitled to adopt the approach it did. Allocations within UK more opaque than those made by EU

12 Allocations within the home nations Home nations able to determine how funds allocated within their jurisdictions (subject to EU approval) e.g. within England DCLG determines priorities for ERDF Scottish Government, Welsh Government and Northern Ireland Executive do the same All of this has to be unpicked if funding structures change Prime Minister May has not guaranteed that Westminster would allow Scotland power over fisheries and agriculture despite Leave campaign promises.

13 Where next for EU Structural Funds policy in the UK? Mimic current EU support structures and levels of funding? Minimises loss aversion among current stakeholders But fit with existing initiatives not entirely clear Continue with broadly same funding but new support structures Opportunity to align with current area-based policy priorities Drop funding Reallocation to other priorities e.g. NHS

14 Post-Brexit Regional Policy Policy objective regional equity or national growth Transparent or opaque process question of degree Role of localism/devolution symmetric/asymmetric Capable of evaluation customised or uniform policy Integration with current area-based initiatives

15 The new industrial strategy regional implications Interventionist industrial policy inevitable has regional consequences Will benefit those regions with higher concentrations of successfully supported firms/sectors New industrial strategy broad brush Research and innovation Skills Infrastructure Finance Procurement

16 Industrial Strategy Green Paper areal implications All things to all men/women? That is why the Government is committed to a modern industrial strategy. Its objective is to improve living standards and economic growth by increasing productivity and driving growth across the whole country. So while regional disparities are especially high in the UK, change in the right direction is possible. Indeed, more than possible, it is essential because that is where much of the untapped potential of the British economy is to be found. Not clear how this links to agglomeration/localism strategy

17 Spend more on infrastructure - Planned infrastructure spend per capita 2,000 1,800 1,600 1,400 1,200 1, Using infrastructure to support rebalancing. As we develop and plan future rounds of infrastructure investment we will take account of the balance of spending per head between different regions. We will continue to prioritise the highest valuefor-money projects, as we seek to address productivity weaknesses across the country, and unlock the benefits of agglomeration economies Sources: HM Treasury (2016), National Infrastructure Pipeline Spreadsheet, Spring 2016 update; ONS (2016) Subnational Population Projections for Local Authorities in England; and ONS (2016) Census: WU01UK - Location of usual residence and place of work by sex

18 The Localism Agenda Cutting central targets on councils, Easing the burden of inspection. Breaking down barriers between councils, local charities, social enterprises and voluntary groups. Directly elected mayors Powers over business rates How does this sit with continuation of objective metrics for allocating regional support? What happens to areas that are incapable of pursuing an effective local strategy? welfare system provides only safety net?

19 Current areal policy City Deals and Enterprise Zones City Deals First Wave Greater Birmingham Bristol City Region Leeds City Region Liverpool City Region Greater Manchester Newcastle City Region Nottingham City Region Sheffield City Region How do these relate to GDP per head differentials? City deals - Second Wave Black Country Bournemouth pool Greater Brighton Coventry and Warwickshire Greater Cambridge Greater Norwich Hull and the Humber Ipswich Leicester and Leicestershire Milton Keynes Oxford and Oxfordshire Plymouth Portsmouth and Southampton Preston, South Ribble and Lancashire Southend Stoke and Staffordshire Sunderland and the North East Swindon and Wiltshire Tees Valley Thames Valley Berkshire Enterprise Zones Aerohub Extension (Cornwall and Isles of Scilly LEP) Aylesbury Vale (Buckinghamshire Thames Valley LEP) Bristol Temple Quarter and Bath and Somer Valley (West of England LEP) Birmingham Enterprise Zone Curzon Street (Greater Birmingham and Solihull LEP ) Cambridge Compass (Greater Cambridge and Greater Peterborough LEP) Carlisle Kingmoor Park (Cumbria LEP) Ceramics Valley (Stoke and Staffordshire LEP) Cheshire Science Corridor (Cheshire and Warrington LEP) Didcot Growth Accelerator (Oxfordshire LEP) Dorset Green (Dorset LEP) Enterprise M3 (Enterprise M3 LEP) Enviro-Tech (Hertfordshire LEP) Great Yarmouth and Lowestoft Enterprise Zone Extension (New Anglia LEP) Greater Manchester Life Science (Greater Manchester LEP) Heart of the South West (Heart of the South West LEP) Hillhouse Chemicals and Energy (Lancashire LEP) Humber Enterprise Zone Extension (Humber LEP) Infinity Park Derby Extension (D2N2 LEP) Luton Airport (SEMLEP) M62 Corridor (Leeds City Region LEP) NE Round 2 (North East LEP) New Anglia (New Anglia LEP) Newhaven (Coast to Capital LEP) North Kent Innovation Zone (South East LEP) Tees Valley Enterprise Zone Growth Extension (Tees Valley Unlimited LEP) York Central (York, North Yorkshire and East Riding LEP)

20 Two final left-field points Policies from bottom up not consistent with policies from policies from top down Agriculture as a case study? Role of devolved authorities in negotiation will EU ask for them to be included? From the outset of the negotiations process, the EU, aware of the complexity of the jurisdictional landscape in Canada, requested that the provinces and territories be included, thereby ensuring EU access to their public procurement markets. Johnson, Pierre Marc, Patrick Muzzi, and Véronique Bastien. "The voice of Quebec in the CETA negotiations." International Journal 68.4 (2013):

21 Regional productivity disparities and weak growth

22 Not clear how this connects with the agglomeration agenda Theory and evidence suggests that allowing regional concentration of economic activity will increase national growth. As long as economies of scale, knowledge spillovers and a local pool of skilled labour result in productivity gains that outweigh congestion costs, the economy will benefit from agglomeration policies that aim to spread growth amongst regions are running counter to the natural growth process and are difficult to justify on efficiency grounds, unless significant congestion costs HM Treasury (2007)

23 FDI productivity spillovers region or industry? Positive correlation between a domestic plant s TFP and the foreignaffiliate share of activity in that plant s industry. Plant TFP of the foreign-affiliate share of activity does not affect TFP in that plant s region. 10 percent rise in foreign presence in U.K. industry raises the TFP of that industry s domestic plants by about 0.5 percent. Value per job appears to be less than per-job incentives governments have often granted. Haskel, J. E., Pereira, S. C., & Slaughter, M. J. (2007). Does inward foreign direct investment boost the productivity of domestic firms?. The review of economics and statistics, 89(3),

24 FDI Projects by Region to Number of projects in London and the South-East = 4,527 Number of projects in the rest of the UK = 4,290 But projects outside the South-East account for 63% of the new jobs created

25 Do institutions matter for regional development? local institutions is crucial for economic development and as a means of determining the returns of regional development policies, generating an institution-based general regional development strategy is likely to be undermined by the lack of definition of what are adequate, solid, and efficient institutions It also means empowering and giving more control of decisionmaking of the development effort to lower tiers of government and formal institutional organisations at the local level and being open to the reality that many different and even contrasting institutional arrangements may be needed in order to achieve sustainable development. Rodríguez-Pose, A. (2013). Do institutions matter for regional development?. Regional Studies, 47(7),

26 The Associational Economy: Firms, Regions, and Innovation the associational model, as a third way between state planning and market-driven approaches to development. The associational model correlates high capabilities in social interaction and communication, particularly in the forms of high trust, learning capacity, and networking competence, with the economic and social success of a firm. As the process of innovation becomes increasingly collaborative, this social capital can be decisive to the outcome. Because much collaboration involves tacit knowledge, that is, knowledge that has not been put into a tradeable or expressible form, successful collaboration requires personal interaction and shared experiences.