Devolution

Clarifying subsidiarity might seem a demanding exercise, but it pales into insignificance when set against the problem of uneven development. Social and economic disparities in the EU, stubbornly wide as they are already, are set to become even wider with enlargement. It is useful to distinguish between two different types of disparity - symptoms (like unemployment and low gross domestic product per capita for example) and drivers (like research and development, skills, infrastructure and social capital, ie the norms and networks of trust and reciprocity which facilitate cooperation and coordination). In recent years the European Commission has sought to address not just the symptoms but also the drivers, hence the launch of support programmes like the Regional Innovation Strategies programme (Henderson and Morgan: 2001). But is it reasonable to suppose that regional action can resolve or ameliorate the economic problems of less favoured regions (LFRs) in the EU? Five presentations on regional economic development touched on this question from a number of different angles.

In the first presentation Michael Dunford (Sussex University) addressed the subject of Catching Up or Falling Behind? Regional Trajectories in the New Europe, in which he contrasted two different scenarios. The dominant tradition in economic geography was neo-classical theory, which suggested that regions would 'converge' over time as capital moved to under-developed regions looking for a higher return and labour moved to developed regions in search of jobs. In contrast, he said, the work of Paul Krugman had demonstrated the power of scale economies, which makes for cumulative causation and this is associated with divergence not convergence between regions. In Dunford's view the data on income, productivity and employment suggested that the gaps between regions are growing, with the strongest regions pulling ahead and with some LFRs doing much better than others. The data on productivity and employment suggested a dilemma for LFRs: regions with a relatively high employment rate tended to have a low productivity rate and vice versa. In other words LFRs which showed good progress on productivity were condemned to live with lower employment levels because the rate of growth was not fast enough to re-employ those who had lost their jobs from productivity changes.

Why was the growth rate lower in LFRs? His answer was that the milieu for growth was very different between core and peripheral regions: in the core regions the industrial economy is reinforced by a wide array of advanced services and an occupational structure which is biased towards upper end jobs, the opposite of which tends to be the case in peripheral regions. These sectoral and occupational structures allow core regions to specialise in high value chains, whereas peripheral regions tend to be trapped in low value chains, and these trajectories create a certain path-dependence from which it is difficult to escape.

Dunford conceded that this scenario left little room for regions to change their deep-seated economic trajectories. In fact he stressed the role of central government, rather than regional government, in redressing inequality through re-distribution policies such as taxation and transfer payments. As we shall see in section four, egalitarians tend to oppose the devolution of fiscal powers because, in their view, centrally-located fiscal authority is deemed to be the best suited for re-distributing resources in an equitable manner.

In the second presentation Brian Morgan (Cardiff Business School) examined the theme of Regional Policy and the Small and Medium-Sized Enterprise Sector, in which he two questions: why focus on SMEs and what, if anything, could Regional Development Agencies (RDAs) do to help this sector? Drawing on survey evidence of SMEs in the EU he argued that SMEs were important for a number of reasons:

They offer 'first job' opportunities to young people
They are embedded into the local economy;
New firms can be important for job creation;
But only 20% of start-ups grow to 5 employees, and only 2% grow to 50 employees, therefore this signalled the importance of growing existing firms.

SMEs in less favoured regions, he argued, tend to lag behind their counterparts in core regions on a whole series of indicators, including skills development, export orientation and the application of information and communications technology. But what could RDAs do to help? RDAs could play a genuinely useful role in addressing each of the above deficiences in skills, exporting and ICT applications. Perhaps the two most important role for RDAs are: to help SMEs to gain access to finance, one of the major constraints on growth, and to help SMEs to innovate in conjunction with like-minded SMEs, through innovation networks for example.

The third regional development session was devoted to The Performance of Small States on the Periphery of the EU, presented by John Bradley of the Dublin-based Economic and Social Research Institute, who used the Irish experience to illustrate his arguments. He began by saying that the extraordinary growth of the Irish economy over the past ten years was not due to any single factor, be it liberalisation, foreign investment, the state, or EU Structural Funds. Among the factors which he saw as important were the following:

• Openness to the full rigours of international competition was a necessary, but not sufficient condition for economic success;

• The pursuit of policies to promote a steady build-up of the quality and quantity of skills in the workforce;

• The growth of a more competitive Irish business sector through improved management, quality marketing, better services, lower utility costs and more systematic linkages;

• The provision by government of a stable domestic macroeconomic policy environment, where 'stop-go' budgetary changes did not disrupt business planning;

• An initial clustering of similar industries (often foreign-owned in high technology areas such as computer equipment, software and pharmaceuticals) supported by local suppliers of specialised inputs subject to economies of scale;

• These clusters generate a local labour market for skilled workers which facilitated the growth of the cluster. At this stage the training and human resource policies of the Structural Funds played a crucial role in ensuring an elastic labour supply;

• Finally, a consensual process of social partnership helped to ensure that growth was not choked-off by industrial unrest.

Comparing the various 'models' which might be followed by the transition countries of central and eastern Europe, Bradley examined the scope and limits of the 'Irish model', particularly with respect to the role of foreign direct investment (FDI). The 'Irish model' of FDI-led growth appears superficially attractive, because it facilitates a massive transfer of technology and affords ready-made access to global markets. A downside of the strategy is that the early stages of FDI-led growth tends to be associated with very high labour productivity, hence the risk of 'jobless' growth, which is what happened in the early stages of Irish convergence.

Another characteristic of the 'Irish model' is that it produces a dual economy: a high-technology, foreign-owned export-oriented modern sector and a more traditional, locally-owned sector oriented towards the domestic market. If wage growth in the modern sector destabilises the traditional sector, then this strategy becomes a zero-sum game he argued. Finally, he asked whether it was feasible for transition countries to emulate the Irish experience. While there were some elements which could be transferred, like the emphasis on human capital and infrastructure for example, he thought the Irish experience of FDI was less transferable for a number of reasons (eg Ireland enjoyed 'first mover' status in the early 1960s and this could not be reproduced today and it was also able to practice an industrial policy which distorted competition in its favour by applying a zero rate of corporation tax on exports, an option which is no longer open to EU members).

A lively debate ensued about the nature and implications of the 'Irish model' for small countries and regions in the EU today. While many Irish commentators portray Ireland as being akin to a region in the EU, it was pointed out that some of the key policies which helped to transform the Irish economy were rendered possible by the fact that it was a national state and not a region (eg the decision to invest heavily in education and training and the decision to apply a zero rate of corporation tax to attract FDI). Overall, though, there was general agreement that there was a modest but important sense in which small countries and regions could help to shape their destinies with the right combination of policies - in other words that they were not simply the powerless victims of circumstance.

The fourth presentation on the regional development theme was given by Stephen Fothergill (Sheffield Hallam University), who began by reminding the audience that he was speaking in a dual capacity - as an academic analyst and as a political campaigner, since he was a founding member of the Coalfield Communities Campaign and the Alliance for Regional Aid, both of which aim to lobby for regional aid for deprived coalfield communities in the UK. Addressing himself to the Priorities for the European Structural Funds he said there were five key challenges for the present programme, which runs from 2000-2006. He argued as follows:

• Economic and Monetary Union: EMU signalled a major loss of flexibility at the national level because monetary policy had been transferred to the European Central Bank. This was compounded by the weaknesses of other compensatory mechanisms, like migration flows and the absence of automatic fiscal stabilisers at the EU level.

• Enlargement: the relative poverty of applicant states meant there would be a gradual loss of Objective 1 status in the existing member states because the current eligibility threshold (namely 75% or less of the EU's average GDP per capita) would fall to around 64% with enlargement, thus triggering an eastward shift in allocation of Structural Fund resources, a trend which posed big adjustment problems for the LFRs of the existing Union.

• Simplification: the Structural Funds are belatedly being simplified, with the Objectives reduced from seven in number to three and Community Initiatives reduced from 13 to four, and these changes should reduce bureaucracy.

• Concentration: despite the need to concentrate aid on the neediest, over 50% of the EU population had become eligible for assistance, thus diluting the effect of the Structural Funds. Although the population coverage has been reduced, greater concentration erodes political support for EU regional policy because fewer people will benefit from it.

• State Aid: since regional aid is classified as a state aid, and since the EU is trying to reduce these aids, there is growing pressure from the Commission to merge the EU and Member State maps of assisted area status. This should be resisted, he argued, otherwise regions which lose their EU regional aid status will automatically lose their domestic regional aid status too.

It can be argued that it is not fair to criticise the EU for not developing more automatic fiscal stabilisers (ie mechanisms to redistribute resources from richer to poorer areas) since this was largely a national competence and there had to be more solidarity within Member States. As the former EU Commissioner for Regional Policy, Monica Wulf-Mathies, once put it: "Solidarity in the Union begins at home".

Was this approach in effect to call for the 're-nationalisation of regional policy' in the EU? Professor Fothergill objected to the term because it smacked of British Euro-scepticism, but he did think that there should be a process of 'de-coupling' of domestic from EU regional policy if poor regions in the EU 15 were to be protected from the Commission's campaign against state aids.

Another controversial theme concerned Fothergill's critique of EMU, which a number of participants found unconvincing. The entire sub-text of Fothergill's position was that EMU was a negative development. However, it is also felt that EMU offers opportunities as well as threats, though only time would tell how it would work in practice.

The final presentation on the development theme concerned Regional Credit Ratings and was presented by Monica Richter (Standard and Poor's). Why should local and regional authorities bother to get rated in the first place? There are many reasons to get rated including:

To date there were some 4000 ratings in the public sector worldwide, mostly in the US. The number of public sector ratings in Europe was just 150, thought this was expected to grow as the benefits of rating became more widely understood. Rating categories ranged from AAA at the top to CCC at the bottom and, for illustrative purposes, it was mentioned that Lazio in Italy is in the A category, while Baden-Wurttemberg, Bavaria and Hesse, the three most prosperous German Lander, are all in the AAA category. Rating methodology is sophisticated, drawing on the following criteria:

Many of the factors which help regions to improve their credit rating are the same as those necessary to promote regional development more generally, like attracting new investment, improving local infrastructure, enhancing workforce qualifications etc. With democratic devolution, however, the inter-governmental dimension assumes more importance because the territorial allocation of public expenditure becomes more transparent, more visible and more politicised, all of which can trigger deep inter-regional conflicts between 'donor' and 'recipient' regions. An illustration of this conflict emerges from Germany, where a prosperous Land like Hesse feels penalized and demotivated by the fact that, under certain circumstances, 80% of every DM of tax income flows out of the state. (3)

The territorial distribution of resources is one of the most incendiary issues of all in a multi-level polity, especially when each level has a directly-elected tier of government as opposed to a purely administrative tier. The transition from administrative to democratic devolution may seem a modest change, but it actually signals a new form of territorial politics which can threaten the very integrity of the nation state if the twin issues of regional rivalry and territorial justice are not properly addressed (Morgan: 2001). This brings us to some of the dilemmas of devolution.

(3) The 80% refers to the marginal contribution rate for an additional DM of tax income for Hesse, assuming that the income of all other states remains constant. Some simulations can result in marginal contribution rates of more than 100% (ie the state has a net loss if it has additional tax income). However, this happens only in very specific cases, hence it is far from being the rule (though this does not prevent it being used as a political argument by those opposed to inter-state equalization).