293

THE CASE FOR AND PROBLEMS OF REGIONAL POLlCY IN EUROPE*

George.corman University of Reading

The removal of regional disparities is an important objective of economic policy in most developed nations. There remains the question, however, as to whether this requires government interven- tion through regional policy. It is argued in this paper that a case for regional policy can be made. This case is derived from Myrdal’s concept of ‘circular and cumulative causation’, and leads to the suggestion that regional policy can be justijied on grounds of economic ejiciency as much as of equity. The case is strengthened by the emergence and growth of the EEC, and the necessary characteristics of EEC regional policy are examined. It is shown that such a policy must be: flexible: consistent with and comple- mentary . to regional policies of individual member states: co- ordinating; wide-ranging in its policy instruments: financially strong; additional to member states’ expenditures. Without such a policy there will be strong barriers to the achievement of a healthy, integrated Community.

I. Introduction Analysis of the impact of space and location on economic activity is com- paratively recent in origin: the majority of the seminal works in this area have appeared in this century.? Similarly, the recognition of the possible persistence of disequilibria and of the need for governmental action to overcome such disequilibria had to await the advent of Keynes and the ‘Keynesian Revolution’. It should not be surprising therefore, that the combination of these two aspects of economic behaviour in the analysis of regional problems has occupied the thoughts of economists for not much more than three decades.

Nevertheless, it is probably fair to claim that the removal of regional dispari- ties is now an important objective of economic policy in most developed, and indeed, developing, nations. In addition, the EEC accepted from its inceptlon that there would be a need for policies intended to reduce existing, and prevent the emergence of new, regional imbalances within and between member nations. Thus in the preamble to the Treaty of Rome it is stated that member states are:

‘anxious to strengthen the unity of their economies and to ensure their harmonious development by reducing the differences existing between the various regions and by mitigating the backwardness of the less-favoured regions’ (Treaty of Rome, 1958). Just as there remains a debate as to whether Government should play an

* 1 am grateful to my colleagues in the Department of Economin at the University of Reading for comments on an earlier draft of this paper. Remaining errors are my Own.

TSee, for example, Weber (1929), Losch (1954), Hotelling (1929), Greenhut (1956) and Isard (1956).

294 GEORGE NORMAN

active role in attempts to influence the aggregate level of economic activity however, there remains the question as to whether there is in fact any need for regional policies. The alternative suggestion is that regional imbalances are merely indications of the need for adjustment, and that such adjustment will follow more or less automatically from the operation of market forces. The only justifications for regional policy then rest on either:

(i) a desire to speed the process of adjustment, or (ii) social, political, and environmental judgements based, perhaps, on

Section I1 of this paper is intended to indicate why this automatic mechanism may be deficient in a rather fundamental way. As a result, there may well be a case for regional policy based on economic efficiency grounds as much as on criteria of equity and justice.*

In section 111 this case for regional policy is applied to the EEC and some of the basic elements of the case are examined in an EEC context. Finally, section IV considers some of the difficulties to be faced in the definition of EEC regional problems, and in the formulation of an effective EEC regional policy.

II. The case for regional policy As was indicated above, the traditional case for regional policy is a mixture of social, political, environmental, and economic considerations. The central argument proposed by economists in favour of policy is that such a policy will aid Government in the pursuit of ‘equity’ and ‘efficiency’.

‘Of the many economic arguments that have been used to justify the existence of regional policies, the strongest are those of equity and regional unemploy- ment. Few would deny that unemployment causes severe costs to society and efforts must be made to deal effectively with the regional unemployment problem.’ (Armstrong and Taylor (1978) p. 145).t In examining this case we should first consider the contrary view that, at least

in terms of economic efficiency, regional policy is unnecessary, or at best a means of aiding automatic adjustment. This view is based on the neoclassical theory of the firm.$ Production is characterised by a constant returns to scale aggregate production function in which factors are smoothly substitutable. There is a homogeneous product, and perfect competition. In particular, there are no limits on information available to, and usable by, the labour and capital markets, factors are perfectly mobile between regions, and factor prices are perfectly flexible.

In its simplest form, the model suggests that the emergence of disequilibrium in a particular region, perhaps through unemployment caused by a change in tastes, will be associated with a reduction in wages in that region, and so an increase in the return to capital.§ Hence regional imbalance will be removed automatically by the migration of labour from low- to high-wage regions and the migration of capital in the opposite direction.

It should be noted that the model predicts only that interregional differences in factor payments and employment within a particular industry will be auto- matically removed. This does not imply that per capita regional incomes will be equalised. Provided that factors of production, in particular, capital and

* This is not to suggest, of course, that equity considerations are not of considerable import- ance in the working of an economic system, or that they can be ignored in the framing of regional policy.

t See also Stilwell (1972). $ For a discussion of this model in a regional context see Armstrong and Taylor (op. cit.). 8 From the linear homogeneity of the production function.

concepts of equity and justice.

THE CASE FOR AND PROBLEMS OF REGIONAL POLICY IN EUROPE 295

labour, are heterogeneous, and/or less than perfectly mobile between industries, then differences in resource endowments and industrial structure may be such that some regions will be endowed with high-wage sectors, and other regions with low-wage sectors. Nevertheless, the automatic nature of the adjustment process is stressed, and regional policy is seen merely as an aid to this adjustment.

Clearly, there are several limitations inherent in this (admittedly simplified) neoclassical approach, which also characterise more complex versions of the model. Firstly, factor markets adjust much less perfectly than is implied above. Factors, in particular capital and labour, are regionally mobile to at least some extent, but the assumption of perfect mobility in response to a price/quantity signal is probably an over-estimate. Factor prices, especially payments to labour, tend to adjust slowly and to exhibit some degree of downward rigidity. The increasing tendency towards national bargaining will further weaken the impact of the price signal of regional imbalance. Finally, the information available to factor markets is often imperfect. Capital markets, for example, tend to be centralised in the more prosperous economic regions of a particular country,* and this may give rise to a tendency for savings in the peripheral areas to be channelled into the prosperous regions. If these capital markets operate with a bias, or with imperfect knowledge of investment opportunities in the peripheral regions, there may well be no subsequent return flow of funds to these regions (Morgan, 1973). Economic efficiency arguments in favour of regional policy would then be based on the need to overcome the imperfections, and particularly lack of information, in labour and capital markets. If we further accept the suggestion that capital may be more mobile regionally than labour, policy should perhaps be aimed at influencing the current and future location decisions of firms rather than individuals.

The second major limitation of the neoclassical model is the assumption of constant returns to scale. This assumption is open to question, particularly in the light of recent work by Pratten (1971) and Scherer (1976). But if manu- facturing is characterised by increasing returns to scale, at least over the relevant scale ranges, Euler’s Theorem no longer holds, and high wage regions may also generate high returns to capital. This has serious implications for the neoclassical adjustment mechanism, since that mechanism relies on counter-balancing movements of capital and labour.

In addition, as Kaldor (1970) points out, the concept of economies of scale lies at the heart of the Myrdal (1957) principle of ‘circular and cumulative causation’. This principle has a number of dimensions. Firstly, as we have indicated, the existence of a production function which exhibits increasing returns to scale gives rise to the possibility that high wage regions may also generate high returns to capital. Migration of capital and labour will then be in the same, rather than in opposite, directions, and may give rise to further increases in labour and capital returns in the high wage regi0ns.t

It might be argued that this process ought to give rise to a divergence in incomes per head between ‘rich‘ and ‘poor’ regions, but that such a divergence has not taken place, at least in the United Kingdom - see Table 1.

Such an argument ignores two points however. Firstly, the data refer to a period in which regional policy has been actively pursued in the United Kingdom. To the extent that the cumulative process discussed above is reversed, there will also be a reversal in the divergence of incomes per head. Secondly, we have seen in the United Kingdom in the last decade a growing incidence of national bargaining in both public and private sectors. Such national bargaining can be

~ ~~

* NO ‘cause and effect’ is being suggested here. t Note that ,this argument is supported by and supports the analysis by Morgan (op. cit.) if

the capital markets are located in high-wage regions.

296 GEORGE NORMAN

Table 1 Personal income per head (UK = 100)

REGION

North Yorkshire and Humberside East Midlands East Anglia South East

South West West Midlands North West England Scotland Wales Northern Ireland

Greater London Rest of South East

1973 1976 ~

89 .O 92.3

93 4 95.2

96.7 94.3 95.3 94.0

113.9 112.2 123 *3 122.6 107.6 104-8 97.0 94.9 99.3 98.3 95.9 96.4

102.3 101.6 92 -8 95 *8 89.7 91.6 75.7 80.6

Source: Central Statistical Ofice, Regional Statistics, vol. 14.

expected to lead to a convergence in interregional income differentials, but does, of course, have implications for competitiveness in the peripheral regions. I n particular, the effectiveness of regional policy may be undermined.

The second dimension of ‘cumulative causation’ is described as follows by Kaldor (op. cit.):

‘(As) communication between different regions becomes more intensified (with improvements in transport and in marketing organisation), the region that is initially more developed industrially may gain from the progressive opening of trade at the expense of the less developed region whose development will be inhibited by it’ (p. 340). To some extent this dimension of Myrdal’s principle logically precedes the

first dimension, since the first dimension assumes the existence of certain high- wage regions, while the second indicates why such regions might emerge, and then continue to grow.

This second dimension has been illustrated in Norman (1977). Consider two regions, A and B, each with an agricultural sector expressing a demand for output from an industrial sector. Assume further that, as a result perhaps of climate and other conditions, the agricultural sector in region A is larger than that in B. The industrial process has as output a single, homogeneous product for which demand by agricultural producers is price inelastic.* There are economies of scale throughout the feasible range of industrial output, this range being greater than the combined demand at A and B. Production conditions in the industrial sector are assumed to be identical in the two regions.

Figure 1 can be used to illustrate the location decisions of industrial producers. Total demand is given by OAB, demand at A is OAA and at B is OBB (= AB). Average production costs for industrial production in A and B are APA and APs respectively,? with origins OA and Oa. We assume that all production in A up to OAA is SUDDlied to A and incurs no transoort costs. Production in excess of OAA is suppliea’to region B. The unit costs oftransport for production at A are then OAA D.

* This assumption is for simplicity only. 7 These are long-run, or ‘planning’ curves: we are assuming a situation in which there is no

preexisting capacity and no uncertainty about demand conditions. The unit transport cost function has the form t A s ~ / ( A + x ) , where I,,,, is the cost of trans-

pofting one unit of output from A to B, x is the amount transported from A to B, and A IS demand at A.

THE CASE FOR AND PROBLEMS OF REGIONAL POLICY IN EUROPE 297

The unit costs of meeting demand OBB by production in B are given by BB' compared with (production and transport) costs BT if B is supplied from A. Clearly, industrial production at A will undercut production at B so long as BT < BB'.

Figure 1 Locational choice for industrial production

cost \ cost A cost

B'

A OA

T

D

cost

O B

The possibility that production will be concentrated at A rather than

(i) the lower is the elasticity of production costs with respect to scale over

(ii) the lower are transport costs BD, (iii) for any given production cost elasticity, the greater the ratio of production

(iv) the greater the difference in demand between the two regions. It should be noted that, as Kaldor points out, the relationship between

production and transport costs is not sufficient to determine whether industrial production will be more or less concentrated. The absolute level of demand and its spatial distribution will be important determinants of industrial location and concentration.

It should also be noted that this second dimension of Myrdal's principle of cumulative causation is not necessarily inconsistent with an economically efficient distribution of economic activity. If the story presented above is complete, then regional policy intended to prevent industrial concentration will also cause a loss of productive efficiency.* Justification for regional policy must be based solely on considerations of equity.

But the story presented above is not necessarily complete. Taken to its conclusion it would predict ever-increasing agglomeration of activity in a few locations, giving rise to external as well as internal economies: reduced pro- duction costs through proximity to intermediate product producers, development of particular labour skills, development of an infrastructure of support service activities, etc. As von Boventer (1975) points out, however, there may also be attendant external diseconomies, both in the growing regions and in the lagging regions. In the growing regions we shall see increasing pressure on space,

disaggregated to A and B will be greater:

the scale range (O.,A,OAB),

costs at output level OAA to transport rate f A B ,

* The similarity between this analysis and the analysis of the advantages of monopoly based on scale economies should be noted.

298 GEORGE NORMAN

infrastructure, social services, housing, etc : witness the pressure on office rents in the City of London. The lagging regions on the other hand, will experience excess capacity in existing infrastructure, under-utilisation of some existing social services and pressure on others.

Clearly, these external diseconomies will be internalised to some extent : increased congestion, and increased demand for resources in the growing region will be reflected to a degree by the price mechanism and may eventually impose a limit on the level of in-migration of resources. This may, as von Boventer suggests, give rise to some diffusion of activity from the high-growth regions.* Two points should be noted however. Firstly, there is no reason to believe that the diffused activity will flow to the peripheral regions: there may merely be decentralisation of activity within the high growth regions. Secondly, private responses to the external diseconomies noted above will not take into account the full social impact of these diseconomies. As a result, the process of concentration is likely to proceed further than is socially desirable, i.e. further than economic efficiency would dictate. The second dimension of Myrdal’s principle may therefore generate an efficiency argument for regional policy, in addition to the equity argument noted above.

It would appear that a case can be made for a regional policy intended to encourage depressed peripheral regions, and based on economic efficiency grounds as much as on concepts of social justice. The question to which we now turn is whether the emergence and growth of the EEC lends weight to this case.

111. The case for regional policy within the EEC All of the arguments introduced above are relevant to the discussion of regional policy at the Community level, but a number of additional points should be noted.

The political dimension of the EEC cannot be ignored, and the existence of a dichotomy between rich and poor regions within the EEC will have a bearing on this political dimension. The long-term aim of the Community remains economic and political union. But as the Commission of the European Communities recognises :

‘it is an illusion to hope for the convergence of Member States’ economies so long as regional problems continue to weigh so heavily on certain economies. (An active Community regional policy is) not only desirable, it is now one of the conditions of European economic integration’ (Commission, 1977a). The movement towards economic and political union and, in particular, the

proposals for a European Monetary System (EMS) based on fixed exchange rates between member states in the Community introduces a further problem. In the absence of EMS, imbalances between member states can be alleviated to some extent by adjustment of the exchange rate, adjustment which in a floating exchange rate regime would tend to be automatic. EMS removes this particular p o k y option. There may be a need, therefore, to develop regional policy tools which involve some form of pseudo exchange rate adjustment. Kaldor (op. cit.) indicates that the UK experiment with Regional Employment Premium (REP) could be viewed in this light. But competition policy in the Community actively discourages continuing subsidies such as REP, preferring instead once-for-all subsidies such as investment grants.

TO the extent that the Community limits the range of regional policies which member states may use, as discussed above, the Community may intensify existing regional problems. But the Community may also intensify existing

* Consider, for example, the diffusion of office activity from Central London.

THECASE FOR AND PROBLEMS OF REGIONAL POLICY IN EUROPE 299

regional problems in other ways. The Community has given guidance, not only on the type of regional policies which should be used, but also on their size. This latter form of guidance has not as yet had much effect, but the potential exists and must be recognised. In addition, the existence of the Community will have adverse implications

for what have been termed disincentive schemes.* The United Kingdom, for example, has had as a central plank in its regional policy ‘package’ a system of Industrial Development Certificates (IDCs) designed to limit and redirect expansion schemes by firms in the more prosperous regions. Moore and Rhodes (1976) point out that :

‘IDC controls have been the cornerstones of regional policy (in the UK) in that they have been the most effective regional policy instrument’ (p. 25).

Jarrett (op. cit.) notes that disincentive schemes are also important elements of regional policy in France, Italy, and in the Netherlands.

Such schemes rely for their effectiveness within any member state on the controlled firm choosing an alternative location within that member state. Freer capital mobility within the Community, without any accompanying co-ordination of regional policies between member states, may result instead in the relocation of the firm to a prosperous region of another member state.? To the extent that this occurs, regional policy is considerably weakened in its effectiveness.

Much of the discussion in section I1 relies on an implicit distinction between ‘centre’ and ‘periphery’, where ‘central’ areas are those exhibiting relatively high levels of employment, output per head, incomes etc., and ‘peripheral’ areas are those which, in the absence of offsetting regional policies, would exhibit low levels of employment, severe out-migration of economically active population, low output per head, etc. As can be seen from Figure 2, the distinction between centre and periphery can be viewed in a geographical light: the centre for the United Kingdom is generally felt to cover the South East, the Midlands, East Anglia, and part of the South West.

For the Community, the distinction between centre and periphery is more extreme than any single member state. Firstly, the geographical distances in- volved are much greater: Scotland, Northern Ireland, and Southern Italy are more distant from the ‘centre’ of the Community than from the ‘centre’ of the United Kingdom or Italy. Secondly, the dominance of the ‘centre’ of the Com- munity is likely to be enhanced. As can be seen from Figure 3, the regions within the Community which we might take to be the dominant, fully-employed regions, tend to form a cohesive geographic unit. Such a concentrated market is likely to pose problems for growth in the peripheral regions of the United Kingdom, Ireland, France and Italy. Firstly, central locations in the Community will be increasingly attractive to industries serving the whole Community, particularly as a consequence of the removal of tariff barriers and other controls on capital mobility - see Clark, Wilson and Bradley (1961). Secondly, the central region contains many of the major urban concentrations in the Community (see Figure4) and so will introduce additional internal and external economies to agglomer- ation of industrial and other activity.

As a result, we might expect, within an EEC context, to find some weakening of those forces which von Boventer (op. cit.) felt would lead to modification and reversal of the cumulative causation principle.

See Jarrett (1975). t This type of reaction can already be seen in the activities of multinational enterprises.

Research by Dunning and Norman (1979) has identified some tendency for multi- national enterprises to overcome national restrictions on their activities by threatened, or actual, movement of their activities to other countries.

300

Figure 2 Areas eligible for regional assistance - United Kingdom

GEORGE NORMAN

SOWCB: CSO Regional Statistics, vol. 14

THE CASE FOR AND PROBLEMS OF REGIONAL POLICY IN EUROPE

Figure 3 Areas eligible for assistance (1973) ‘The Thomson Map’

.lo=

30 1

302

Figure 4 Major conurbations (1970)

-0:

GEORGE N O W

Source: Eurostat: social indicators for the Community

THE CASE FOR AND PROBLEMS OF REGIONAL. POLICY IN EUROPE 303

The EEC not only heightens the spatial distinction between centre and periph- ery; it can also be expected to embrace regions exhibiting wider economic disparities and with more heterogeneous regional problems. Figures 5(a) and (b) indicate that the range of GDP per capital and of unemployment rates are far greater for the Community than for any one member state. Similarly, depressed regions in any one member state tend to exhibit basically similar problems: the United Kingdom has a preponderance of depressed industrial areas, whereas in Italy there are many depressed agricultural areas. The EEC as a whole contains both types of problem regions.

It would appear therefore, that the economic case for regional policy is strengthened when placed in a Community, rather than national context, but that the problems to be overcome are greater.

IV. Problems in the formulation of EEC regional policy We have indicated in section I11 that the EEC faces more severe, and more heterogeneous regional problems than any one member state. Similarly, the Community may intensify existing regional problems, both by its existence, and by the codlicts which may arise between the Community and individual member states. As a consequence, formulation of an effective regional policy is likely to be a particularly difficult task.

Before turning to a discussion of the properties which a Community regional policy should exhibit, we should consider a more fundamental question. How do we define a ‘problem region’?

Any attempt to answer this question requires that we classify regions accord- ing to some set of characteristics. But so long as there are two or more independent characteristics no unique classification can be expected in the absence of some weighting scheme: this is illustrated in Figures 6(a) - (d).

An attempt was made in Commission (1973) to detail those criteria which a region should be required to satisfy before being eligible for assistance. Firstly, there were two general criteria:

(i) the areas must already be benefiting from the regional policies of member

(ii) the areas must have a GDP per head less than the Community average. In addition, each problem region had to exhibit at least one of the following characteristics :

(a) heavily dependent upon agriculture and possessing few manufacturing

(b) heavily dependent upon declining industries such as coalmining or textiles ;

(c) suffering persistent under-employment due to fundamental structural

Through a process of combining these criteria and applying threshold values, three sets of problem regions, corresponding to characteristics (a), (b) and (c) above, were identified, and were aggregated to form the ‘Thomson Map’ illus- trated as Figure 3.

Unfortunately, the 1973 proposals were never fully implemented in the establishment of the Community Regional Development Fund. The 1975 regulations establishing the Fund used the much simpler formula that areas eligible for assistance should be those areas already benefiting from regional policies of member states. This had three detrimental effects. Firstly, it intro- duced a lack of consistency between member states in the definition of areas eligible for assistance. Secondly, the Community lost a great deal of flexibility

states of the Community, and

activities; or

or

problems.

304 Figure 5 (a) Index of GDP per capita in the EEC (1970)

@) Regional unemployment in the EEC (1974) -

. :: :: i :'. 2 3.

-- - .'

0.

. .

GEORGE NORMAN

France 1

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200

150

100

50

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Germany i :

U.K.

%

France I r_l

1 1 1 .. u Germany I

0 1 U.K.

Notes: Each dot represents a region; dashed lines represent country averages. Sources : Eurostat, Regional Accounts: Economic Aggregates, 1970.

Eurostat, Regional Statistics: Population, Employment and Living Standards, 1973-74.

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THE CASE FOR AND PROBLEMS OF REGIONAL. POLICY IN EUROPE 307

and power in that it was not able to schedule and de-schedule areas eligible for assistance from the Fund. Thirdly, the generalist character of the 1975 proposals made it very difficult to identify the type and degree of problem being suffered by a particular region.

These comments, and the discussion in section 111, point to a number of characteristics which an effective Community regional policy will need to exhibit, no matter how ‘eligible areas’ are defined.*

Firstly, the policy must beflexible, both in terms of the areas scheduled for assistance, and in terms of the degree and type of assistance to be offered. The Community faces many and varied regional problems. In addition, as it grows and develops it is likely to intensify existing, and‘introduce new, regional problems. Community policy needs to be able to react quickly to such changes.

Secondly, Community regional policy needs to be consistent with, and complementary to, regional. policies of individual member states. We have already seen that there is an occasional conflict between regional policies used by member states and competition and other rules of the Community. As a result, the Community may intensify existing regional problems by limiting the effectiveness of member states’ policies. There is a need, firstly to minimise the codict between different policy objectives, and secondly for the Community to support those policies of member states which are acceptable under Community rules.

Thirdly, it is essential that the Community ca-ordinates regional policies between individual member states. In the absence of such a role, there is some danger that member states will bid competitively for external capital investment, e.g. offer selective, and perhaps substantial, investment inducements to incoming multinational companies. Similarly, we noted in section III that disincentive schemes occupy a central role in some member states’ regional policies, but that the effectiveness of such schemes may be eroded by the ability of firms subject to control to move to another country within the Community. There is a clear need for the Community to co-ordinate the various national disincentive schemes.

‘Otherwise one Community aim - to enable industry to benefit fully from the single market - can only frustrate another Community aim - to help its less favoured regions.’ (Jarrett, op. cit., p. 386).

Finally, the move to EMS poses problems for nations within the Community similar to those faced by regions within a particular nation. In particular, currency devaluation is effectively removed as a policy option for a depressed region. Thus, just as regional policies in a nation must be handled at the national level, so regional policies in a Community with what amounts to a common currency must be handled, to some substantial degree, at the Community level.

One conclusion which can be drawn from the above discussion is that Community regional policy, if it is to be effective, must be wide-ranging in its poIicy instruments. For example, concentration on purely financial inducements is unlikely to be sufficient to deal with either the range or severity of existing and future regional problems. Experience in the United Kingdom, for example,t has shown that such inducements - the ‘carrots’ of regional policy - must be supported by a system of controls, or disincentives - the ‘sticks’ of regional policy. There is no reason to believe that this will be any less true at the Community level. In addition, for the system of Community inducements to be effective, they

* When I circulated this section for comment, my attention was drawn to the almost identical

t Moore and Rhoda (op. at.). conclusions reached by.Armstrong (1978).

308 GEORGE NORMAN

must involve substantial transfers of resources. The commitment to a large Regional Development Fund has, however, been lacking in the Community, as can be seen from Table 2. Not only is the Fund small with respect to the total Community budget, it is also small with respect to expenditures by individual member states. For example, the United Kingdom received some €61 million from the Fund in 1977, but the United Kingdom spent an estimated f700 million on regional policy during 1976-77 (Trade and Industry, 23rd September, 1977).

Table 2 EEC budget commitments, 1977 and 1978

PERCENTACEOF PERCENTAGE OF PERCENTAGE OF CHANGE TOTAL COMMITMENTS TOTAL COMMITMENTS

1971 1978 1977-78

(A) Intervention appropriations Agriculture Social Regional Research, energy, industry, transport Development cooperation

03) Oiher appropriations

7261 72.28 5.10 4.67 3.88 4.57 2.69 2.50

3 .OO 4.40

12.72 11 -58

+23.15 +13.07 +45.87 + 14.87

$81.39

~~

Source: Commission of the European Communities, EIeventh General Reporf on the Activities

This criticism would be less valid if we could argue that the Regional Develop- ment Fund is supplemented by expenditures under the Common Agricultural Policy (CAP). Indeed,

‘the Agricultural Fund has the potentiality to be the biggest regional fund of all’ (Commissioner George Thomson, 1976).

Unfortunately, there seems to be very little consistency between the CAP and the Regional Development Fund. It has been suggested for example, that the Guarantee Section of EAGGF tends to be regressive in regional terms (The Times, 6th January, 1977), while the much smaller Guidance Section has not had the bias in favour of depressed regions which might be expected - see Table 3.

These shortcomings of EAGGF appear to have been recognised by the Community:

‘the less favoured regions with inadequate agricultural structures have not, by comparison with other regions, received Community financial assistance in proportion to the gravity of their structural problems’ (Commission, 1977 b).

It is not yet clear, however, whether the apparent regressive bias in the CAP is being reduced.

Finally, the Community must ensure that regional incentives available either from the Regional Development Fund or through the CAP are additional to funds made available by member states, and not used as a substitute for such funds. Measures to ensure such additionality are contained in recent Community proposals and are crucial to the future success of Community regional policy.

V. Conclusions The economic justification for regional policy remains the subject of, occasionally fierce, debate. We feel, however, that the case outlined above is sufficiently

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90

22.4

80

-

-

-

Tab

le 3

Expenditures

of E

AG

GF

and

Euro

pean

Dev

elop

men

t Fun

d 19

77 ('

000

U.C

.)1

RE

GIO

N

EA

GG

F E

RD

F R

EG

ION

E

AG

GF

ER

DP

8,61

8 It

alia

79

,082

3,

877

Nor

d O

vest

2,

720

4.74

1 Lo

mba

rdia

2.

636

-

6,57

6 42

,847

7,

300

11.1

41

109

1,85

0 5,

037

3,47

7 1,

765

6,51

1 4,

482

1,175

70

.856

1,70

7 5,

211

8,088

22

,506

16

,265

8,9

85

6,03

7 30

,138

-

-

Nor

d Es

t Em

ilia-

Rom

agna

C

entr

o La

zio

Cam

pani

a A

bruz

zi-M

olis

e Su

d Si

cilia

Sa

rdeg

na

Luxe

mbo

urg

Ned

erla

nd

Noo

rd-N

eder

land

O

ost-N

eder

land

W

est-N

eder

land

Zu

idw

est-N

eder

land

Zu

id-N

eder

land

U

nite

d K

ingd

om

Nor

th

Yor

kshi

re a

nd H

umbe

rsid

e Ea

st M

idla

nds

East

Ang

lia

Sout

h W

est

Sout

h Ea

st

Wes

t Mid

land

s N

orth

Wes

t W

ales

Sc

otla

nd

Nor

ther

n Ir

elan

d

13:2

69

15.8

13

11,8

73

3,59

4 2,

659

1,83

9 15

.905

4,

233 68

1 1

,420

5,

503

1,77

0 2,

599 95

1,

453

27,3

57

352

2,49

4 2,

291

4,81

9 2.

622

1.55

1 2,

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550

341

4.13

6 5,2

53

-

Sour

ce: S

tatis

tical

Offi

ce o

f th

e Eu

rope

an C

omm

uniti

es; r

eprin

ted

in C

.S.O

. R

egio

nal S

tatis

tics,

vol

. 14.

* E

urop

ean

units

of

acco

unt.

310 GEORGE NORMAN

strong to justify the concern now being expressed with respect to Community regional policy.

The Community embraces a number of nations with long histories of regional problems and is likely, in the absence of countervailing measures, to intensify these problems. There is therefore a need for a Community regional policy. The characteristics which such a policy should exhibit have been discussed; they can be summarised as follows:

Flexibility: to allow identification of type and degree of,regional problem, and to facilitate scheduling and de-scheduling of problem regions. Consistency and complementarity: to reduce conflict between member states and between the Community and individual member states. Co-ordinating: to avoid, in particular, the erosion of the effectiveness of disincentive schemes. Financially strong: to ensure that sufficient resources are devoted to what constitutes a major, and deep-seated problem. Additionality: to ensure that member states do not use Community resource transfers as a substitute for their own expenditures on regional policy. have not considered existing regional policy proposals in the EEC in any

detail. There is no doubt that these proposals have evolved substantially since 1952, and even since 1975 - see for example Armstrong (1978). Nevertheless, there remains a considerable distance to travel in policy formulation as much as in policy implementation. It must be recognised that a healthy, integrated Community - at both political and economic levels - will only be possible if there is a strong commitment to the reduction of disparities in economic opportunity between regions within the Community.

References Armstrong, H. W. (1978). Community Regional Policy: A Survey and Critique, Reg. Stud. 12,

Armstrong, H. W. and Taylor, J. (1978). Regional Economic Policy and its Analysis. Oxford:

Clark, C., Wilson, F. and Bradley, J. (1969). Industrial Location and Economic Potential in

Commission of the European Communities (1973). Proposals for a Community Regional Policy,

Commission of the European Communities (1977a). Guidelines for Community Regional Policy,

Commission of the European Communities (1977b). Second Report of the European Develop-

Dunning, J. H. and Norman, G. (1979). Factors Influencing the Locarion of Offices of Multi-

Greenhut, M. L. (1956). Plant Location in Theory and Practise: The Economics ofSpace. Chapel

Hotelling, H . (1929). Stability in Competition, Econ. J. 39,41-57. Isard, W. (1956). Location andSpace Economy. Cambridge, Mass: MIT Press. J m t t , R. J. (1975). Disincentives: The Other Side of Regional Development Policy, J. Common

51 1-528.

Philip Allan.

Western Europe, Reg. Stud. 2,197-212.

OfficialJournalof the European communities, OJ C86 and OJ C106.

Bulletin of the European Communities, Supplement 2/77, Brussels.

ment Fund, COM (77), Brussels.

national Companies, Report to the Location of Offices Bureau (unpublished).

Hill: University of North Carolina Press.

Market Stud. 13,379-390. 'f Kaldor, N. (1970). The Case for Regional Policies, Scot. J. Pol. Econ. 17,337-348. LBsch. A. (1954). The Economics of Location. trans. bv Woalom. W. H. from Die raumliche

Ordnungde; Wirtschafi (1940). New Haven, Conn: Yale Univkity Press.

ing Firms to Development Areas, Economica, 43,17-32. Moore, B. and Modes, J. (1976). Regional Economic Policy and the Movement of Manufactur-

Morgan, E. V. (1973). Regional Problems and Common Currencies, Lloyd Bank Review, No.

Myrdal, G. (1957). Economic Theory and Underdeveloped Regions. London: Norman, G. (1977). Pricing System, Distribution of Demand and Location, Reg. Stud. 11,

Pratten,. C. F. (1971). Economies of Scale in Manufacturing Industry. Cambridge: Cambridge

110.19-30.

183-1 89.

University Press.

THE CASE FOR AND PROBLEMS OF REGIONAL POLICY IN EUROPE 311

Scherer, F. M. et al. (1975). The Economics of Multi-Plant Operarion: An International Corn-

Stilwell. F. J. B. (1972). Regional Economic Policy. London: Macmillan. von Boventer, E. (1975). Regional Growth Theory, Urban Stud. 12,l-29. Weber, A. (1929). Alfred Weber's Theory of Location of Industries, trans. by Friedrich, C. J.

parisons Study. Cambridge, Mass: Harvard University Press.

from Uber den Standfort der Zndustrien (1909). Chicago: University of Chicago Press.

312 GEORGE NORMAN

APPENDIX

EUROPEAN COMMUNITY REGIONS (LEVEL 1)

6 Lummbourg

THE CASE FOR AND PROBLEMS OF REGIONAL POLICY IN EUROPE 313

Rbnmk LES ARGUMENTS FAVORABLES A LA POLITIQUE RGGIONALE EN EUROPE ET SES PROBLEMES

Mettre f in aux disparitks entre rkgions est un objectif important de la politique iconomique de la plupart des pays dkveloppks. Mais il reste toutefois une question, d savoir, la rkalisation de cet objectif rkclame-t-elle l’intervention gouvernementale au moyen d’une politique rigionale ?

Cet article avance des arguments en faveur de l’utilitk d’une politique rkgionale, arguments qui procident du principe de Myrdal de ‘causation circulaire et cumulative’ et conduisent d l’hypothise selon laquelle la politique rkgionale peut t r b bien se fonder, tant pour des raisons d’eficaciti iconomique que d’hquitk. Ces arguments sont d’ailleurs renforcks par l’kvolution et la croissance de la C.E.E. et l’auteur examine h ce sujet les caractkristiques essentielles de la politique rkgionale de la Communauti, politique qui selon lui doit prksenter les qualitks suivantes: Ztre souple; itre cohkrente et complimentaire par rapport aux politiques rkgionales des Etats membres respectifs; remplir un r61e coordinateur; avoir des moyens &application qui couvrent une gamme t r b ktendue; Ctre financisre- ment forte; s’additionner aux dipenses des Etats membres.

Spns une telle politique, l’hdijication d’une Communautk solide et bien intkgrie se heurtera d de tres gros obstacles.

Zusammenfassung DER GRUND FUR U N D PROBLEME DER REGIONALEN POLITIK IN EUROPA

Die Beseitigung regionaler Ungleichheiten ist ein wichtiges Ziel der Wirtschaftspolitik in den meisten entwickelten Lzindern. Die Frage bleibt jedoch, ob dies eine Regierungsintervention in Form von Regionalpolitik erfordert. In diesem Artikel wird dargelegt, dass wichtige Griinde f u r eine Regionalpolitik gezeigt werden konnen. Diese Griinde lassen sich herleiten aus Myrdals Konzept der ‘zirku- laren und kumulativen Verursachung’ und fuhren zu der Folgerung, dass eine Regionalpolitik aus Grunden der wirtschafilichen Efizienz und Gleichheit gerechtfertigt werden kann. Die Sachlage wird verstarkt durch das Entstehen der EG, und die notwendigen Charak- teristika der Regionalpolitik der EG werden untersucht. Es wird gezeigt, dass eine solche Politik folgendermassen beschaflen sein muss: flexibel, in Einklang mit und als Erganzung zur Regional- politik in den einzelnen Mitgliederstaaten, koordinierend, weitrei- chend mit ihren politischen Instrumenten, jnanzstark, zusatzlich zu den Ausgaben der Mitgliederstaaten. Ohne eine solche Politik wird es grosse Sperren bei der Zustandebringung einer gesunden, integrierten Gemeinschaft geben.

DISCUSSION ON PAPER BY DR G. NORMAN M. C. WHITBY (OPENING THE DISCUSSION) This paper is to be welcomed for opening up a new area of interest to many members of the Society and it is particularly relevant at the moment. Two scenarios are possible. On

314 DISCUSSION ON PAPER BY G. NORMAN

the one hand, if the European Commission (EC) is successful in lowering the cost of CAP, they will find themselves with increasing funds available for other policies. This could lead to some pressure for expansion of non-agricultural policies and hence the need to develop channels for such new public funds. Alternatively if the EC is unsuccessful in reducing the cost of its agricultural policies, it may still choose to offset their adverse distributional impacts (particularly those borne by Italy and the UK, and possibly by Gemany) with compensatory policies. One possible instrument in such a redistributional thrust would be regional policies. The likelihood of the latter is underlined by the fact that we have heard, during this Conference, of the likely introduction of an Integrated Rural Development Scheme with EC support in the. Highlands of Scotland. Such a development underlines the importance attached to regional policies by the Commission.

However, we are starting from a modest Regional Fund, as is brought out in the papef, and it is therefore important that available money should be spent advantageously. TO this end we may note the study by MacKay and Segal(1976). These authors underline therather wasteful nature of regional policies implemented by broad instruments such as the Regional Employment Premium. Such blanket measures are unselective and support the inefficient and the efficient firms side by side. MacKay and Segal list seven individual ways in which the selectivity of regional measures can be increased with advantage. These could be summed up in the general proposition that the intention should be to make the maximum contribution to incomes within the depressed region, consistent with a minimal reduction in incomes in other regions. For this reason most of the measures suggested would use the strength of local linkages with the economy to ensure that local injections of cash are spent within the region.

The paper raises an interesting area of work in the context of defining regional boundaries. This is important as the definition of boundaries can directly determine the effectiveness of the policy. Flexibility is important because the difficulties of redrawing boundaries, once they have been defined, are well known, not least to those who have followed the djscussions on the boundary of Hill Farming and Livestock Rearing Acts Policies in the UK. It is notable that the EC was unable to confront the issue of defining the boundaries for regional policies and simply chose to use the existing boundaries in member states. This is parallel with the situation that has arisen in defining the boundary of Less Favoured Areas, where the UK government has retained the old Hill Farming and Livestock Rearing Act areas broadly intact. However it is notable that there is current discussion about the possibility of extending these areas.

With a comparatively new policy area we should ask ourselves what contribution we might make, as agricultural economists. Can we assist in the problem of drawing boundaries? The massive data base of the agricultural census offers scope for extending the work of Willis (1973) on classifying parishes using modern taxonomic techniques. This work enabled him to classify 168 parishes within the boundaries of the old North Pennines Rural Develop- ment Board to one of three possible development categories. He defines these as ‘agriculture’, ‘industry’ and ‘service-recreation’. Such work could easily be extended to identify clusters of parishes with particular attributes which are relevant to the criteria of the policy in question.

Another possible contribution would be in the development of techniques and criteria of appraisal which will enable identification of the types of policy instrument likely to have most regional impact. Here we have just completed a study at Newcastle on the Development Commission Factory Programme in the Eastern Borders in which we have tried to develop relevant criteria for judging project success. This has been an ex post appraisal and, since the objectives of the project were not clearly defined in advance, it has proved difficult to state whether the objectives have been achieved or not. This seems to be an area where co-operation between economists and policy-makers is long overdue.

Finally, I have one quibble with the author; on page 299, he refers to the effect of the EC in weakening the disincentives available within a member state for implementing regional policy. This falls into the trap of nationalist thinking on a matter of EC policy. It may indeed be a disadvantage to individual countries if multinational firms, when constrained by policy disincentives, are likely to relocate within another EC member. Yet a Federalist point of view would urge that it is vital that the disincentives applied should be harmonised across member states SO that firms will take their location decisions, not on the basis of national boundaries, but on the basis of optional economic contribution to the group of member states. Under such a system, adverse moves from one member state to another should be offset by favourable moves in the opposite direction and the ‘efficiency’ of the group of states would be enhanced by the existence of an effective federal regional policy.

References MacKay, R., and Segal, L. (1976). United Kingdom Regional Policy, the Northern Region

and the EEC. University of Newcastle upon Tyne Discussion Papers in Economics, 17. Willis, K. G. (1973). Economic Policy Determination and Evaluation in the North Pennines.

Agricultural Adjustment Unit, Monograph 3, University of Newcastle upon Tyne.