The abolition of the English regional development agencies (RDAs) throws into question, once again, the future framework of sub-national economic development and business growth in England. For potential foreign investors, the next few years could prove something of a hiatus while new structures emerge and old relationships disappear. Or it could offer boundless opportunities as the English economy, unfettered by bureaucracy, undergoes a renaissance with foreign investment surging.

The UK coalition government’s decision to axe the RDAs came as no great surprise, having been widely trailed by leading Conservative politicians in the long lead-up period to May’s general election. Moreover, the Liberal Democrat coalition partners had also expressed serious reservations about the effectiveness of the current structures.

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Why axe the RDAs?

Yet questions remain. Why is the coalition government doing this, for what purpose and why so early in the life of the new government? Is the object to improve economic efficiency and delivery, or is it simply a supplementary way to reduce public expenditure? If it is the latter, there are those who argue that this may prove to be one of the more short-sighted policy initiatives ever undertaken by a UK government.

This is not, however, to disagree with the view that the RDAs themselves were in severe want of reform. In any large organisation, it is easy to find out-of-context examples to justify a particular perspective, but anecdotally and on a personal basis, for many small and medium-sized enterprises (SMEs) the RDAs came across less as partners and more as colonial administrators looking after an imperial district and keeping the natives happy. 

The coalition government’s stated intention is to “sweep away an entire layer of unelected government” and potentially save up to £2.3bn ($3.6bn) a year  – in itself a savage indictment of the previous government’s decision to establish RDAs, and its efforts to improve the economic competitiveness of the nine English regions and narrow regional disparities. Indeed, after costing a cumulative £15bn since their establishment, critics such as The Taxpayers’ Alliance have argued that the regions actually performed better in terms of business and employment generation in the seven years before RDAs were created.

Alternative proposals

While the coalition government is expected to reveal its detailed proposals in a white paper later this year, it has already announced that a new form of partnership, between local government and local business, will be established. It is, however, up to councils, or groups of councils and local business, most probably chambers of commerce, to establish local enterprise partnerships (LEPs). There is considerable ambiguity over the role and nature of LEPs. Local councils will propose the geographic extent of the LEPs, and probably which business groups to approach to provide commercial input. In England, chambers of commerce are membership organisations based on areas, comprising only a segment of the business community.

Other business groups, representing different sizes of companies and sectors, include the Confederation of British Industry, the Institute of Directors and the Federation of Small Businesses and are among a plethora of entities vying to be the voice of business – but none of which encompass the totality of private enterprise. A number of these bodies have become reliant, if not dependent, on RDA grants and commissions, and may seek to maintain these transfers under the LEP regime.

Despite the UK government’s 'Big Society' proposals, and their real value added potential, a role has yet to be ascribed to the voluntary and co-operative sectors. Health bodies and educational entities, such as universities and tertiary colleges, which provide the bulk of vocational training, will in an unspecified way be linked to the LEPs. A key, if not telling, critique of the RDAs, not least by the present government, was their lack of democratic accountability, yet it is difficult to discern how the proposed LEP structures will address that issue.

In correspondence to local governments, formally offering them a role in LEPs, the coalition government stated that a number of RDA functions will revert to Whitehall, the London centre of the UK government. These include “inward investment, sector leadership, responsibility for business support, innovation, and access to finance, such as venture capital funds, while others will be scrapped, such as regional strategies”.

Much of the staffing of RDAs comprised seconded or transferred public servants, who moved when their functions were supposedly 'devolved'. It is more than probable that many of these officers will move back nationally – with the added incentive that having received relocation incentives to move to the regions, they will now receive relocation incentives to move back to Whitehall and its environs – London-costings and all. The J-curve impact could be quite enormous, unless of course local offices of the various Whitehall departments are re-established in their pre-1994 form – that is, prior to the establishment of regional government offices by the previous Conservative administration. These regional government offices were intended to overcome the then recognised chaos in government delivery at regional and local level.

The RDAs were originally financed through the Single Programme Budget, which brought together funds from at least six government departments – initially these comprised the Department for Business, Enterprise and Regulatory Reform (BERR); Communities and Local Government (CLG); the Department for Innovation, Universities and Skills (DIUS); the Department of Environment, Food and Rural Affairs (DEFRA); the Department of Culture, Media and Sports (DCMS); and UK Trade and Investment (UKTI). These ministries have subsequently been merged, restructured, abolished, resurrected and disaggregated over the past decade, distorting reporting lines for RDAs to national government. It is not clear which programmes currently administered by the RDAs will be transferred back to Whitehall or abandoned.

Mission creep

One aspect of the lack of democratic accountability was mission creep, in which RDAs were progressively accumulating more and more responsibilities – an elected body would surely have ensured each devolution of additional responsibilities was accompanied and enabled by effective resourcing. For example, in 1997 the RDAs were responsible for five areas (economic development and regeneration; business efficiency, investment and competitiveness; employment promotion; skills development; and sustainable development), but by 2006, they were responsible for a further 16 areas. The scale and intensity of this mission creep must have ensured that there was little time to adequately integrate the new tasks into the bureaucratic process, while giving Whitehall every opportunity to send difficult or problematic tasks to the regions.

While it is anticipated that LEPs will provide the strategic leadership in their areas to set out local economic priorities, London will be an exception. The powers of the abolished Government Office for London, as well as RDA responsibilities, are to be transferred to the London mayoral administration with additional special measures undertaken to support the capital as it prepares for the 2012 Olympic Games.

The asymmetry of the UK government’s regional policy is indeed quite striking: London, Scotland, Wales and Northern Ireland will continue to have significant devolution and financial support, while the eight remaining English regions will have to re-engineer and source funding independently, or not, as may be the case. This will have potentially serious implications for the direction of inward FDI flows, which will apparently remain a central plank of the government’s growth strategy, as the devolved administrations will retain the organisational capacity to attract international investors.

Measuring up

Accurately determining regional economic performance remains problematic. As a result, assessing the actual impact of RDAs, and whether the English economy benefited from their establishment, is similarly fraught with difficulty. Estimating the real performance of the Soviet economy was probably easier, with the proviso that there were fewer vested interests providing commentary. Calculating regional economic performance, in the absence of transparent and robust data at a regional level, remains an econometrician’s paradise, but a policy maker's nightmare.

The most commonly used measure, gross value added (GVA) provides some insight, but is a composite measure, reliant on a number of assumptions, statistical massaging of data periods and published sometime after the prevailing trends have shifted. Furthermore, GVA data is only nominally available, so it is only able to provide assessments of productivity in price terms and not volume terms. Disaggregating enterprise-level GVA data from company-level data is also difficult. As a result, GVA measures tend to overstate the contribution of the services sector and regions, such as London, where company headquarters are located.

It is often stated that London and the South East are the most productive and profitable regions, but much of this is based on anecdote rather than hard analysis. Until transparent regional data is available, this will remain the case. Prior to the break-up of Czechoslovakia, the Czechs adopted much the same attitude to Slovaks as London seems to adopt to the other English regions. Yet following the break-up, it was Slovakia that proved to be the more successful economy, illustrated by its ability to integrate more rapidly into the wider EU economy, federal data having masked the real contribution of the component parts of the Czechoslovak economy.

Nominally, regional economies have grown considerably over the past two decades since the 1990-92 recession in the UK. For example, for a region such as the West Midlands the growth in regionally produced GVA has been significant, with growth mirroring the performance of the overall economy. The problem for the RDAs, and indeed the regions themselves, is that to narrow the per capita income disparities, regional growth rates in regions such as the West Midlands need to be greater than that achieved nationally or better than the average growth rate.

As much as the RDAs would prefer, it is not possible to fully isolate their contribution to development of regional economies. RDAs are quick to quote data that for every £1 they spend, they generate £7.48 (in the case of Advantage West Midlands, the West Midlands RDA). This, however, is in terms of GVA, and is essentially an accounting measure and does not encompass the overall expenditure incurred. Much of that expenditure would have been made regardless, as it includes local government expenditure, national funding, European Regional Development Fund (ERDF) grants and other associated EU flows.

What can be said is that while RDAs have been in existence, regional economies have grown strongly. They have also been successful in articulating an image of their regions and, particularly but not exclusively during the credit crunch, have been able act rapidly and make key interventions. 

Avoiding past mistakes

As responsibility for economic development moves back up to Whitehall, and back down to English cities and towns, there must be serious concerns about past failures, in particular the ability and capacity of local authorities to work together, with increased parochialism as a potential consequence. There are numerous examples of only-in-our-backyard approaches and of failures of local governments to work together bilaterally, although there are also many positive examples.

Furthermore, at a national level, the UK government was fined £250m for irregularities in the performance of the 1997-2006 ERDF budget allocation, while last year a further £671m in EDRF funding available in 2009 was not requested, as the UK government did not have sufficient time to fill in the forms, in contrast to every other region of Europe, and notably the devolved administrations of Scotland, Wales and Northern Ireland, who heroically managed to find the resources to claim the additional funding. It is probable that England failed to claim as much as £2bn over the course of the recent ERDF programme, the result of lack of availability of match funding. These facets will obviously need to be addressed if the coalition government is to be successful in releasing the real potential of the English economy.

Comparative analysis of regional economic performance across the EU tends to suggest that it is the overall national framework, and naturally how well the constituent parts work together, that determines how successful regions perform. Regional development tends to reflect national priorities and, critically, inputs and resource access.

Generally, it has been argued that the UK regions perform better in terms of output growth and services employment, while their equivalents in Germany, France and Spain do better in manufacturing employment retention. This reflects the contrast between what can be seen as more interventionist approaches adopted in France and Germany, compared with the UK's (or more correctly England’s) more market-orientated approach.

Economic regeneration and expansion in Germany and France has tended to focus on regional diversification and productivity enhancements, whereas in the UK success is largely seen as the ability to attract inward investment. While manufacturing is seen as a key component of the economy in Spain, France and especially Germany, in the UK finance and the services sector, until more recently, were seen as the key economic drivers and manufacturing was something the UK did not specialise in – despite the fact it remains the sixth largest manufacturing exporter in the world.

If the UK coalition government is to succeed in rebalancing the economy, as it has stated, it may need to look at the industrial and manufacturing strategies of its EU rivals afresh. It seems to be ideologically opposed to the current US strategy of effectively nationalising, or ring-fencing, anything under stress – planes, cars, boats and banks. For the UK, simply abolishing the RDAs without articulating a coherent approach to rebalancing the economy may exacerbate negative trends. Furthermore, the income and productivity disparities that bedevil the UK are not simply the result of economic mismanagement by one administration, however many commentators would like to suggest it, but rather a more deep-seated malaise that needs to be addressed.

Paul Forrest is director of UK-based global capital and financial markets research firm Forrest Research.