regional policy


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regional policy

A policy concerned with promoting a balanced distribution of industrial activity, employment and wealth as between the various geographical areas of a country. The main thrust of regional policy in most countries is to ensure a fairly even spread of industry around the regions, so as to rectify or prevent economic decline, to rectify or prevent economic decline, UNEMPLOYMENT and low levels of PER CAPITA INCOME in some regions while avoiding congestion problems in more prosperous ones. A particular emphasis of regional policy is the regeneration of impoverished regions by encouraging new firms and industries to locate and invest in these areas (the so-called ‘inward investment’ approach to the regional problem). The rationale behind this approach is that the problems of the depressed areas stem largely from overspecialization in industries which have gone into decline (for example coalmining in South Wales, shipbuilding in North East England) rather than from any fundamental economic disadvantage. Accordingly, what is required is a diversification of the industrial base of such areas so as to provide new employment opportunities which, in turn, by increasing spending in the region, will help to create further jobs in, for example, local component suppliers, retailing and financial services.

The ‘inward investment’ approach to regional policy is implemented in three main ways: the provision of financial inducements (investment grants, tax and rent relief etc.) to firms prepared to locate in designated assisted areas to offset investment costs, together with other payments to cover, for example, retraining expenses; the use of physical controls on factory and office buildings to prevent firms from expanding in non-designated areas; investment by the government in improved road and rail communications and local amenities to increase the general attractiveness of these regions to potential investors. Critics of this approach to regional policy argue that directing firms to locate in areas which they might not otherwise have chosen to go to and subsidizing these activities might impair their efficiency. However, there is little evidence to suggest that this has been the case.

A possible alternative approach, that of encouraging labour migration out of depressed regions, has not found favour; not only does it tend to accentuate the problems of the depressed areas themselves (loss of skilled workers, reduced local spending etc.), but also it creates added difficulties for ‘receiving areas’, particularly if they are already overburdened with respect to housing, schools etc.

UK regional policy has as its main aim the reduction of disparities in unemployment between the regions and also the regeneration of smaller localities suffering particularly acute unemployment problems. To this end the government, through the DEPARTMENT OF TRADE AND INDUSTRY's (DTI), SMALL BUSINESS SERVICE (SBS), the BUSINESS LINK network and the REGIONAL DEVELOPMENT AGENCIES (RDA) offers financial aid and other services to firms located in, or who are prepared to establish new plants and offices in, the areas designated as ‘assisted areas’. Until recently the main areas qualifying for support were the development areas (large areas suffering from very high levels of unemployment, such as the North East of England); intermediate areas (smaller areas suffering from more moderate levels of unemployment, such as parts of South Yorkshire); enterprise zones (particular small areas suffering acute unemployment problems, such as Merseyside). These have now (2000) been replaced by the EUROPEAN UNION (EU) ‘assisted areas’ framework which is aimed at establishing a comparable regional aid system across all 15 EU member states. While unemployment remains an important consideration, under EU policy the main criteria for designating an assisted area is a (GDP) PER CAPITA INCOME level which is below 75% of the EU average.

In the UK the main assisted areas are ‘Tier 1’ areas (mainly former ‘development areas’) and ‘Tier 2’ areas (mainly former ‘intermediate areas’ and ‘enterprise zones’). The government has proposed a number of areas for assistance (still under review by the European Commission). Proposed Tier 1 areas are Cornwall and the Scilly Isles, Merseyside, South Yorkshire, West Wales and the Valleys, together with the whole of Northern Ireland. Proposed Tier 2 areas totalling some 1550 smaller localities are 79 from the East of England region; 133 from the East Midland region; 44 from the London region; 228 from the North East region; 144 from the North West region; 440 from Scotland; 129 from the South East region; 20 from the South West region; 51 from Wales; 197 from the West Midlands region and 91 from the Yorkshire and Humber region. Regarding Tier 2 submissions, the European Commission's preferred policy is to support ‘clusters’ of adjacent localities providing sufficient ‘critical mass’ for industrial development rather than isolated localities.

In addition, a ‘Tier 3’ of assisted areas has been designated which covers areas of ‘special need’ (for example, coal fields and rural development areas).

The application of the new Tier structures is subject to an overall population requirement; specifically for any country the number of persons residing in the assisted areas should not exceed more than 28.7% of the total population of the country.

Financial aid in the assisted areas is mainly in the form of Regional Selective Assistance (cash grants.) This is potentially available to all firms undertaking investments in the development and intermediate areas. Such aid, however, is discretionary – ‘selectivity’ requires that the investment project should have a good chance of paying its way, that assistance is vital for the project to go ahead (for example, without the grant the project could not go ahead at all, or only on a smaller scale), and that the project should contribute to both the regional and the national economy. A project grant is based on the fixed capital costs of a project and the number of jobs it is expected to create or safeguard. The amount of grant is negotiated for the minimum necessary for the project to go ahead on the basis proposed, up to a maximum ceiling of 30% of the project cost. This is obviously open to manipulation, but has been useful in enabling the development areas to attract foreign firms into the UK. It was the availability of a regional assistance grant that ensured the location of the Nissan car assembly plant in Washington, Tyne and Wear.

In addition, other grants and services are available to small firms including the ENTERPRISE GRANT SCHEME and training and consultancy through the SBS and Business Link.

Regional assistance is also available through the following:

a number of EU institutions including the European Social Fund, the European Investment Bank, the European Coal and Steel Community, and, in particular, the European Regional Development Fund (ERDF). The ERDF has provided cash grants for a broad spectrum of projects in areas of industrial decline, ranging from tourism infrastructure in Wales to a regional airport in Lorraine. Support for such projects remains important, but increasingly the emphasis has shifted towards assisting the least developed areas of the Union, – Greece, Portugal and parts of Ireland, Spain and Italy. In these areas the ERDF supports infrastructure projects such as roads, railways, electricity and gas distribution, and provides funds to modernize traditional industries and establish new ones.

The European Investment Bank provides loans for schemes and investment projects of regional significance as well as projects considered to be beneficial in promoting the economic integration of the Union; while the European Coal and Steel Community provides loans to projects in areas specifically suffering job losses from the rundown of the coal and steel industries. Loans available from these two institutions are for up to half the fixed asset costs of the project.

regional policy

a policy concerned with removing significant imbalances between the regions of an economy in respect of UNEMPLOYMENT rates and levels of INCOME PER HEAD. The main approach adopted is that of spreading industrial activity around the regions so as to avoid unemployment of labour and capital resources in the DEPRESSED AREAS and undue congestion in the more prosperous ones. A particular emphasis of regional policy is the regeneration of areas that have fallen into industrial decline by encouraging new firms and industries to locate and invest in these areas (the ‘inward investment’ approach, which involves taking work to the workers). The rationale behind this approach is that the problems of the depressed areas stem largely from overspecialization in industries that have gone into decline (for example, mining in South Wales, shipbuilding in North-East England, cotton in Lancashire, etc.) rather than any fundamental economic disadvantage. Accordingly, what is required is a diversification of the industrial base of such areas so as to provide new employment opportunities, which increases investment, boosting local spending and, via MULTIPLIER effects, increasing income levels.

The ‘inward investment’ approach to regional policy is implemented in three main ways:

  1. the provision of financial inducements (investment grants, low-interest ‘soft loans’, tax relief, rent- and rate- free factories, etc.) to firms prepared to locate in designated ASSISTED AREAS;
  2. the use of physical controls on factory and office buildings to prevent firms from locating to any great extent outside these development areas through the issue of industrial development certificates;
  3. investment by the government in INFRASTRUCTURE capital, particularly good road and rail networks and general amenities.

Critics of this approach to regional policy argue that ‘forcing’ firms to locate in areas that might not suit them and ‘subsidizing’ their activities might impair economic efficiency. However, there is little evidence to suggest this has been a serious matter.

In the UK, REGIONAL SELECTIVE ASSISTANCE is the main means used to provide help to firms investing in assisted areas. See also ENTERPRISE GRANT SCHEME.

A possible alternative approach, that of encouraging people to move out of depressed regions (the ‘taking the workers to the work’ approach), has not found favour because not only does it tend to accentuate the problems of the depressed areas themselves (the loss of skilled workers, reduced local spending and incomes, etc.), but it also creates difficulties for ‘receiving’ areas, particularly if they are already over-congested with respect to housing, schools, etc. See DEVELOPMENT AREA, INTERMEDIATE AREA, ENTERPRISE ZONE, EUROPEAN REGIONAL DEVELOPMENT FUND, STRUCTURAL UNEMPLOYMENT, DEINDUSTRIALIZATION, LOCATION OF INDUSTRY, FIRM LOCATION, INDUSTRIAL LOCATION, ADJUSTMENT MECHANISM, REGIONAL DEVELOPMENT AGENCY, EUROPEAN INVESTMENT BANK.

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