Mike Hedges asks whether we can learn lessons from past failures of a recycled economic development policy
In the early 1980s a number of Enterprise Zones were created throughout Britain including in Wales the lower Swansea valley, Delyn and Milford Haven. Based upon the principle that all policy ideas are recycled every 20 to 30 years – after those involved first time around have changed jobs or retired – then Enterprise Zones have returned once more and are now official government policy again.
Their purpose was to stimulate private sector economic activity, thus creating employment in less well-off areas. This was to have been achieved using tax incentives, including:
- 100 per cent tax allowances for capital expenditure on industrial and commercial buildings.
- Exemption from paying business rates for 10 years from the date of the building being occupied.
Developers and investors also benefitted from simplified town planning, where planning permission was not required for new developments provided they complied with the published planning regime for the zone. Some other minor benefits were also available, including exemption from training board levies and expedited custom facilities.
Initially, retail was excluded from Enterprise Zones but in many, including Swansea, it became a significant player. In Swansea the term Enterprise Zone is often used as an alternative for out of town shopping area. Wikipedia describes the Swansea Enterprise Zone thus, “The regeneration has attracted many light industries, offices and in particular retail outlets to Swansea.
In early 2011 a report from the think tank Centre for Cities, and the not-for-profit organisation The Work Foundation both said the concept of enterprise zones and parks was out-dated. The Work Foundation report said, “Most of the areas that had such zones are still struggling today — places like Middlesbrough, Speke, Hartlepool and Swansea.” Most of the jobs created had simply been displaced from other areas. It continued:
“Evidence from previous Enterprise Zones suggest that up to 80 per cent of the jobs they create are taken from other places; that Enterprise Zones do very little to promote lasting economic prosperity. Most Enterprise Zones create a short-term boom, followed by a long-term reversal back into depression; and Enterprise Zones are hugely expensive. Evidence from the 1980s suggests that Enterprise Zones cost at least £23,000 per new job they create.”
According to a 1987 evaluation by the Department of the Environment, only 13,000 of the 63,300 jobs created in Enterprise Zones were new jobs, with the remainder displaced from within the area. The relatively small size of the Enterprise Zones meant that, in many cases they displaced jobs from within the same town or city. A 1999 study, UK Enterprise Zones and the Attraction of Inward Investment by Jonathan Potter and Barry Moore (here), suggested that around 25 per cent of new jobs were displaced from within the same town or city. This type of local displacement destabilises local economies by artificially enticing businesses into less competitive areas. The result is that other industrial parks outside the zone are left with empty units.
Enterprise Zones were also created in the USA, especially California where it has been the state’s major economic development intervention. However, a report published by the Public Policy Institute of California in 2009 concluded that it had failed to achieve its key goal of increasing jobs. The report
“…contrasts employment growth in Enterprise Zones with comparison areas and concludes that the program, on average, has no effect on job or business creation. The report recommends a re-examination of the program, which offers tax credits and incentives to businesses in 42 designated zones throughout the state. The program’s cost in the next fiscal year is estimated at nearly half a billion dollars.”
The second interim report on Enterprise Zones by the Department of the Environment in 1995 identified that:
“…in general a significant proportion of the rates relief available to tenants of properties on Enterprise Zones have been absorbed into the rental payments of new tenants, through higher rental values on Enterprise Zones relative to the control group off zone… assuming capital allowances are shared between investors, developers and landowners (rather than being passed on to tenants) the majority of the benefits from capital allowances appear to have gone to the investors…. Enterprise Zones do not appear to have been successful in encouraging hives of companies with close integration in the pursuit of mutual business development.”
The Swansea Enterprise zone speeded up the regeneration of the lower Swansea Valley which was a very good thing. At the same time, however, it created a large out of town retail centre that had a detrimental effect on the city centre.
The generally negative account of the impact of Enterprise Zones in the 1980s took them off the agenda for the next 25 years. Now they have returned the challenge must be to learn the lessons from the first wave and to not make the same mistakes with the new Enterprise Zones.
Given the evidence presented in this article, it feels like the lesson to learn from the first wave of enterprise zones is really to not have any more enterprise zones. The problem of displacement is just inherent in this type of policy intervention – I can’t see how you could fix them in some way to avoid the problem. Any suggestions? Better education, the encouragement of more indigenous entrepreneurship and continuing improvements to infrastructure, particularly ICT, are the answers to better,and more sustainable, long run economic performance.
Thanks for this interesting article Mike. I haven’t read a dissenting voice of this type before on Enterprise Zones, and it doesn’t seem to be raised in the Siambr. Is there a sort of conspiracy of silence? And does it mean that the (Welsh) Government is (at heart) slow peddling on this? One would hope that the Welsh Government would embrace schemes like this wholeheartedly and make a success of them, or say up front that it is taking a different path… and take a different path. A sort of muted ‘reluctantism’ serves nobody in the long term. I for one won’t buy, “well it was a Tory idea and we never really thought it would work” sort of line if it doesn’t have the desired effect.
But I’m completely ignorant of the background and politics here. Perhaps others can cast some light on this.
Incidentally Mike, you don’t tell us what corrective action should take place this time in the context of a continued EZ policy (surely that’s the debate you want to kick off isn’t it?). Or if EZs are just structurally wrong in your opinion, how would you focus regeneration investment differently?
Very interesting article by Mike Hedges, who is growing in my estimation every day as a serious and thoughtful AM unafraid to buck the Labour party line on certain issues. I wonder how Edwina Hart will react to the criticism thought?
Good article … but displacement should be considered having regard to the structure of the specific property market. In this regard, I believe it is of less relevance to Wales.
Taking the industrial markets – we know that the economic life of an industrial unit is circa 35-45 years; so it is simple maths to see that those businesses attracted in the 1970s-80s may be in properties that are now approaching obsolescence. Indeed, we have a significant number of inward investors / major employers attracted during the heady days of the 1970s-80s now occupying obsolete stock.
This ‘creeping obsolescence’ of our industrial base needs to be addressed otherwise, for each occupier, the requirement for significant investment in refurbishment can become the catalyst for closure. We saw many examples of this in the 2000s when the ‘off-shoring’ pressures were at their greatest.
The displacement factor is, therefore, less relevant in an economy with a higher proportion of inward investors and branch plants. We actually require new and modern floorspace to retain our existing and emerging industries. I for one would rather retain the multi-national for the next investment cycle than lose it because it would have been ‘displacement’. The same arguments can be made in the office markets.
Finally, in professional services we say it is 6 times easier to retain an existing client than to gain a new one. I think it is similar odds for Wales in terms of retaining existing corporate occupiers as opposed to scrapping for new projects. In this regard, a critical part of the ‘Wales offer’ is to ensure the availability of new floorspace.
Chris