The Taxpayers' Alliance would like the regional development agencies abolished. M Institute co-founder Jyoti Banerjee studies their report - he likes their data but disagrees with their recommendation.
This month a report from the TaxPayers’ Alliance claims that the £15 billion spent on the Regional Development Agencies since their creation in 1999 has been a total waste as the RDAs have contributed absolutely nothing to the economic performance of the regions in the UK. The TPA report has three main planks of evidence: 1) The RDAs were created to improve the performance of the regions, particularly those outside London and the south-east. In 1992, London and the south-east contributed 36% of the UK economy, a figure that has grown (in the wrong direction) to 48% in 2006. 2) Employment across the country grew by 9.5% between 1995 and 2000, while it only grew by 3% between 2000 and 2005. 3) Regional inequality worsened: apart from London and the south-east, England’s regions grew faster before the RDAs were around, compared to the seven years after. To add to this lack of performance is a long account of RDA waste. For example, 39 RDA bureaucrats earn over £100,000 a year, one part-time RDA chairman had a travel expense bill of over £50,000 in a single year, and one RDA managed to spend £20,000 sending some of their team to a film festival in Dubai.
RDAs: yes or no?
The TPA’s recommendation is a simple, if predictable, one for a tax lobby: abolish the RDAs and use the freed budget to cut the tax rate for small business. The 2009-10 budget allows for £2.19 billion to fund the RDAs. This scale of tax cut would generate a 4% rate cut for small businesses, from 22% to 18%.
According to the TPA, the tax cut would “create new jobs, boost existing businesses, make life easier for people starting business and give the regions an economic leg-up: exactly what the RDAs were meant to do and have failed to achieve.”
Does it make sense? Before discussing the implications of the TPA report, it should be pointed out economics is a tough school for data analysis. Just because London grew faster, than the regions, for example, does not mean that the RDAs failed in their task. It could be that the inequality between London and the south-east versus the rest of Britain could have been even worse than it is, were it not for the RDAs. Okay, I don’t quite believe that – but we have no way of knowing. The economy is not a lab experiment, and we cannot reverse the creation of the RDAs to see if anything would have been different without the RDAs.
The data from TPA is really useful to see, and should be used as a weapon against waste in government, but it does not prove the case for the abandonment of the RDAs. Here’s why. Economic growth for a nation is all about growth in the regions. The countries that seem to be glowing green with growth, such as China, India, and Brazil, are doing so because they have regions that are growing out of their skins. It isn’t China that is growing, it is the regions of Dalian, Beijiing, Shanghai, Zhejiang and Guangzhou that are growing. In India, the growth is driven from the metros of Mumbai, Bangalore and Hyderabad. In much of the rest of India and China, poverty is still a huge problem. But these fast-growing regions, and those in the west, share a common theme: they have figured out their performance edge and use it to drive inward investment.
By the way, all the top growing regions have great inward investment. A potential investor may look at many sites around the world for their next investment. But the top decision-makers just look at a short-list of three to five names. So if the investment is in software, then Bangalore will be on the short-list. When I talk to Silicon Valley VCs, they tell me that if a software company wants their money, they have to base their operations in Hyderabad or Bangalore, but not the US. So the question the investor asks is not “Why Bangalore?” but “Why not Bangalore?” The story is similar when it comes to CRM (Ireland), BPO (Holland in Europe, otherwise India) and electronics (Shanghai / Guangzhou).
If a British region wants to compete with these growth powerhouses, it cannot do so without overt strategies. This is not going to happen by chance, nor by the workings of an invisible hand driven by a tax cut. But we need regional authorities that supply the basics that growing companies need: excellent infrastructure, strong and credible branding for the region on a global basis, and the removal of the growth hurdles that companies face.
Of course, the RDAs have created their regional economic strategies to deliver regional growth. But it is a sign of their weakness that, according to the Institute of Chartered Accountants in England and Wales, over 85% of British companies are unfamiliar with their own RDA, let alone their regional economic strategy. Britain’s best growth performers are its medium enterprises – but RDAs don’t engage with these companies. So the Taxpayers’ Alliance is welcome to push its agenda of lower taxes. But let’s not do it by chucking away the RDAs. Sure, we don’t want their waste. But Britain’s regions need them to perform properly, with a particular focus on growth performers in their region. It will be no surprise to me if those growth performers turn out to be medium enterprises.
Want to read more about how regional growth performance should work? Check out an earlier post from this blog, Growth in the regions.
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