INDUSTRIAL SUBSIDIES

Also by Colin Wren

ECONOMIC DEVELOPMENT POLICIES: An Evaluative Study of the Newcastle Metropolitan Region {with Fred Robinson and John Goddard)

Industrial Subsidies The UK Experience

Colin Wren Department of Economics University of Newcastle upon Tyne

First published in Great Britain 1996 by

MACMILLAN PRESS LTD Houndmills, Basingstoke. Hampshire RG21 6XS and London Companies and representatives throughout the world

A catalogue record for this book is available from the British Library.

ISBN 978-1-349-39733-4 978-0-230-37257-3 (eBuuk) DOI I 0.1057/9780230372573

First published in the United States of America 1996 by

ST. MARTIN'S PRESS, INC., Scholarly and Reference Division. 175 Fifth Avenue. New York, N.Y. JOO IO

ISBN 0-312-16016-X

Library of Congress Cataloging-in-Publication Data Wren. Colin. Industrial subsidies: the UK experience I Colin Wren. p. cm. Includes bibliographical references (p. ISBN 0-312-16016-X

) and index.

I. Subsidies-Great Britain. I. Title.

2. Industrial policy-Great Britain.

HD3646.G7W74 1996 338.94 I '02--dc20

©Colin Wren 1996

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Softcovcr rcpri m of the hardcover 1st edition 1996 978-0-333-65650-1

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Contents

List of Tables and Figures x

List of A bbreviations x i i

Preface xv

1 Introduction 1 The rationale for industrial subsidies 2 Defining an industrial subsidy 5 The book's structure 7

2 Industrial Assistance in Pre-War Britain 9 Early forms of intervention 9 Intervention for strategic purposes 11 Economic crises in the inter-war period 13 Government interventions in the early 1920s 15 Structural interventions and the Bank of England 17 The beginnings of regional policy 21 The origins of assistance to agriculture 24 Industrial subsidies in pre-war Britain 26

3 The Legislative Basis for Industrial Intervention (1940-63) 29 Wartime planning 29 Relocating industry 31 The encouragement of investment 33 Price guarantees for agricultural products 38 Industrial subsidies in abeyance 39 The end of the boom 42 Sectoral interventions 43 Unemployment and the development of regional policy 45 Assistance spending in the 1950s 48

4 The Expansion of Industrial Assistance (1960s) 52 The economic context 52 Towards a regional policy 52 The institutional framework 55 Interventions in the aircraft and shipbuilding industries 57

vn

V l l l Contents

Investment incentives Difficulties with investment grants Employment taxes and employment premiums Further protection for agriculture The growth of industrial subsidies

The Retrenchment and Reinvigoration of Industrial Subsidies (1970-4) The cutting of subsidies Industrial disengagement and the helping hand The policy reversal The new regional policy A framework for national assistance Administrative matters The arrangements for Northern Ireland European Community membership National state aids The revival of industrial assistance

The Heyday of Industrial Assistance (Late 1970s) Economic conditions Labour's industrial strategy Rescue operations The revised approach and sectoral interventions The development agencies The failure of regional policy Special employment measures Further investment and employment measures Shipbuilding The European Community contribution From regional to urban policy The Urban Programme Local authority financial assistance Technology support Assistance expenditure in the 1970s

Change and Continuity in Industrial Assistance (Early 1980s) The policy outline The review of industrial aid Unemployment

62 65 67 70 71

73 73 75 76 78 80 83 85 86 88 90

93 93 93 96 98

101 102 104 107 109 111 115 117 119 121 123

125 125 126 130

Contents IX

The enterprise measures 134 Urban measures 13 8 Constructive interventions 141 The framework for technology support 145 Steel rationalization 147 European Community funds 150 Modifying industrial support 153

8 The Recasting of Industrial Support (1983-Present) 154 Economic recovery 154 The elimination of the blanket subsidies 154 The revised regional policy 156 Collaborative research programmes 160 Redirecting technology support 164 Small firm advisory assistance 167 Regional aid from the European Community 169 Industrial closures and the 'blackspot' approach 171 Privatization 173 Effectiveness in urban policy 177 Rural development 181 Long-term unemployment 182 The 'enterprise initiative' 185 Inward investment 188 Reform of the structural funds 190 Programmes initiated by the Community 193 The European Commission and state aids 195 The withdrawal from industrial subsidies 197 Recent developments 199

9 Conclusions 203 The pattern of expenditure 203 Explaining subsidy expenditure 207 Lessons from the UK experience 210

Appendix: The Assisted Areas 215

Notes 219

Bibliography of Parliamentary Papers 230

General Bibliography 233

Index 242

List of Tables and Figures

Tables

2.1 Population and employment, 1851-1911 10 2.2 Spending on public works, 1910-38 18 3.1 Subsidies to agriculture, investment and local employment,

1946-59 34 3.2 Rates of assistance to capital, 1945-72 36 3.3 Employment by industry, 1948-60 40 3.4 The origins of post-war financial assistance, 1958-62 50 4.1 UK unemployment by industrial sector and region,

1957-69 53 4.2 Gross expenditure on aircraft assistance, 1962-71 58 4.3 Gross expenditure on shipbuilding assistance, 1962-71 61 4.4 Gross expenditure on national assistance, 1960-71 64 4.5 Gross expenditure on regional assistance, 1960-71 66 5.1 Gross expenditure on regional policy assistance, 1970-81 81 5.2 Gross expenditure on shipbuilding assistance, 1970-81 84 5.3 Grant equivalent expenditure on industrial subsidies,

1965-76 91 6.1 Expenditure on the sectoral schemes, 1976-86 100 6.2 Expenditure on the special employment measures,

1975-83 105 6.3 Sectoral incidence of assistance expenditure, 1972-80 112 6.4 UK spending under community structural funds, 1973-9 113 6.5 Expenditure on new technology measures, 1977-82 122 7.1 Spending on the special employment measures,

1982-91 132 7.2 Enterprise and urban policy measures, 1978-91 137 7.3 DTI support for industrial research and development,

1981-8 144 7.4 Industrial support in Northern Ireland, 1978-83 147 7.5 Community financial support in the UK, 1980-8 151 8.1 Gross expenditure on national assistance, 1980-91 157 8.2 Gross expenditure on regional measures, 1980-91 159 8.3 Gross expenditure on shipbuilding measures, 1980-91 176 8.4 Gross expenditure on industry assistance, 1980-91 178

x

List of Tables and Figures XI

8.5 Spending by the Urban Development Corporations, 1987-92 180

8.6 The pattern of DTI expenditure, 1979-86 185 9.1 Long- and short-run determinants of industrial

assistance 208 9.2 Costs and employment effect of regional policy 212 9.3 Job effect of regional policy instruments 213

Figures

2.1 Unemployment in the staple industries, 1923-38 14 2.2 Employment in the staple industries, 1920-38 15 4.1 Expenditure on industrial subsidies in the 1960s 71 5.1 Unemployment and inflation, 1969-76 73 6.1 Expenditure on industrial subsidies in the 1970s 123 8.1 The rise of the special employment measures, 1975-90 183 8.2 Expenditure on industrial subsidies in the 1980s 198 9.1 Expenditure on UK industrial subsidies, 1946-90 204 A.l The pre-war Special Areas 215 A.2 Assisted Areas, 1966 216 A.3 Assisted Areas, August 1982 217 A.4 Assisted Areas, August 1993 218

List of Abbreviations

AMC ATP BES BIS BOTAC BTAS BTG CADCAM CADMAT

CADTES CAP CAT CEP CoSIRA CP DA DATAC DEA DED DLG DSIR DTI EAGGF EAS EC ECGD ECSC EIB EIE ERDF ESF ESPRIT

EUREKA FCI

Agricultural Mortgage Corporation Advanced Technology Programme Business Expansion Scheme Business Improvement Scheme Board of Trade Advisory Committee Business and Technical Advisory Service British Technology Group Computer Aided Design/Computer Aided Manufacture Computer Aided Design/Computer Aided Manufacture and Test Computer Aided Design and Test Equipment Support Common Agricultural Policy City Action Team Community Enterprise Programme Council for Small Industries in Rural Areas Community Programme Development Area Development Areas Treasury Advisory Committee Department of Economic Affairs Department of Economic Development Derelict Land Grant Department of Scientific and Industrial Research Department of Trade and Industry European Agricultural Guidance and Guarantee Fund Enterprise Allowance Scheme European Community Export Credits Guarantee Department European Coal and Steel Community European Investment Bank English Industrial Estates European Regional Development Fund European Social Fund European Strategic Programme for Research in Information Technology European Research Co-operation Agency Finance Corporation for Industry

Xll

List of Abbreviations X l l l

FMS Flexible Manufacturing Systems GICP General Industrial Collaborative Projects IA Intermediate Area ICFC Industrial and Commercial Finance Corporation IDAB Industrial Development Advisory Board IDC Industrial Development Certificate IDE Industrial Development Executive IDOP Integrated Development Operations Programme IDU Industrial Development Unit ILIS Innovation Linked Investment Scheme IRC Industrial Reorganisation Corporation JCP Job Creation Programme JFIT Joint Framework for support in Information Technology JRS Job Release Scheme LDDC London Docklands Development Corporation MAP Microprocessor Application Project MISP Microelectronics Industry Support Programme MSC Manpower Services Commission NEB National Enterprise Board NEDC National Economic Development Council NCI New Community Instrument NPCI National Programme of Community Interest NRDC National Research Development Corporation NSA National Selective Assistance ODP Office Development Permit PPDS Product and Process Development Scheme RDA Rural Development Area RDG Regional Development Grant RDO Regional Development Organisation REG Regional Enterprise Grant REP Regional Employment Premium RIG Regional Investment Grant RIN Regional Innovation Grant RSA Regional Selective Assistance RSSL Recruitment Subsidy for School-Leavers SALAC Special Areas Loans Advisory Committee SARA Special Areas Reconstruction Association SDA Scottish Development Agency SDA Special Development Area SEFIS Small Engineering Firms Investment Subsidy SFES Small Firm Employment Subsidy

X I V List of Abbreviations

SIB SIRGS SMART SMETAS

SPUR STAR

STEP STWCS TES TOPS TSTWCS UDC UDG URG WDA WEP WEEP YES YOP YTS YWS

Shipbuilding Industry Board Service Industry Removal Grant Scheme Small Firms Merit Award for Research and Technology Small and Medium-sized Enterprises Technical Advisory Service Support for Products Under Research Special Telecommunications Action for Regional Development Special Temporary Employment Programme Short-Time Working Compensation Scheme Temporary Employment Subsidy Training Opportunities Programme Scheme Temporary Short-Time Working Compensation Scheme Urban Development Corporation Urban Development Grant Urban Regeneration Grant Welsh Development Agency Work Experience Programme Work Experience on Employers' Premises Youth Employment Subsidy Youth Opportunities Programme Youth Training Scheme Young Workers Scheme

Preface

Like a good fashion, industrial subsidies have fallen out of use and few will admit to ever having liked them. In their heyday these subsidies extended to virtually every area of industrial and economic policy, but, as we know, they were cut back in the 1980s as the government sought to disengage from industrial intervention. The time is ripe for an appraisal, and in this book we review the United Kingdom experience of industrial subsidies. There are two main reasons for this. First, while there exist numerous accounts of industrial subsidies as practised in the UK context, there has been as yet no attempt to tackle the subject of industrial subsidies in the round. Studies focus on the application of the subsidies to different areas of policy - such as national economic growth objectives, stability purposes, support for ailing companies and national champions, spatial development, direct labour market interventions and sectoral adjustment -but almost treat these as distinct topics. Part of our purpose is to draw these disparate accounts together, since it is often the case that the application and expansion of subsidy in one area of policy can best be seen in the light of past and ongoing efforts in other areas, so that the different interventions often serve as complements or substitutes for one another,

As a second reason for writing this book it is equally clear that existing commentaries on industrial subsidies almost exclusively focus on the 1960s and 1970s, when the subsidies were applied most intensively. Part of our purpose is to examined the origins of this assistance, so that we trace the development of industrial intervention back to the First World War and before, and to consider the withdrawal from industrial support in the 1980s, which similarly has been something of a neglected area. Contrary to popular belief, small-scale subsidies continue to operate, and include financial assistance to particular firms, such as small firms; to certain industries, such as civil aviation; and for some technologies, such as information technology. It seems useful to have a single and wide-ranging account of the UK experience of industrial subsidies, but given the broad scope of the book we are unable to give full attention to all the related evaluative material, although the extent to which much of this subsidy was, and perhaps remains, unevaluated is remarkable. Nevertheless, if industrial subsidies should ever come back into fashion, then it is hoped that this book can provide a better appreciation of the UK experience of this policy instrument.

xv