27 October, 2009

Regional development subsidies - the road to hell is paved with good intentions

Economies change. The pattern and places of jobs shift. Voters demand politicians do something about it. Regional development programmes are often part of the political response, and many start to offer tax breaks, employment subsidies, building subsidies and so on. It sounds good, it looks like action, and (I’m being unfairly cynical here) no politician hangs around long enough to be accountable for the almost inevitable lack of success.

It gets worse when you have regions in the same economy competing with similar programmes. It just escalates into an arms-race of who offers the biggest subsidies. Britain has a particularly bad case of regional subsidies. In a country full of property investors and businesses, it’s amazing that its seven regional economic development agencies built business parks, often in areas away from where business is or wants to be. Bangor, a small university town in remote north-west Wales, has got one. It’s been empty for years. To throw good taxpayer money after bad, they’ve built another one 20 miles down the road at Holyhead!

Here’s a simple test. If it was your money, would you invest in a speculative large-scale commercial property investment in a remote small town. Of course you wouldn’t. So why should the taxpayer? Here’s another simple test. Would this business operate in this town/region/country without this subsidy? Why will it stay long term? No-one in their right mind would have built a major computer factory in Ireland (2 sea journeys away from mainland Europe) if it hadn’t been for the then-cheap labour, EU subsidies and Irish tax breaks. So it should have been no surprise when Dell announced it will close its subsidised Irish factories and move to Poland. The Poles simply offered Dell a better proposition than the Irish.

Is there any developed country with regional economy development subsidies which has achieved sustained economic well-being that wouldn’t have happened anyway? Ah, I hear, what about Singapore? Singapore is the exception that proves the rule, and that’s the point; it is an exception, a small city-state sitting at the hub of a key trade route, with no hinterland to worry about, and a collective will which allows it to act more like an industrial conglomerate than a country. For the rest of us, all the evidence shows that the market will determine what long-term industries you have, and where they will locate. All governments can usefully do is facilitate underlying factor conditions such as infrastructure, education, regulation and taxation frameworks, etc.. After that, like it or lump it, it’s all up to individual businesses.

None of which will stop voters demanding that “the gumment must do something” and politicians saying “we will“.

Disclosure: I was a non-executive board member of 2 regional economic development agencies in NZ. We didn’t do subsidies; we did try (not always successfully) to address factor conditions.

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