Equalisation Bank (Deutsche Ausgleichsbank, DtA); and the ERP Fund (ERP Sondervermögen)

* product development measures aimed principally at SMEs

* measures to improve sales of east German products

* a package of research and development measures together with the establishment of Fraunhofer and Max-Planck Society institutions in the new Länder

* wage cost reductions in respect of recruitment in specific areas

According to a report by the Deutsche Bundesbank (7/95) gross transfers to the new Länder amounted to DM 840 billion in the period 1991 to 1995. The flow of payments has increased steadily each year, as has the share of spending by the federal government (from 54 percent in 1991 to 75 percent in 1995). In 1991, DM 139 billion (71,649 MECU) was transferred: DM 75 billion from the federal government, DM 5 billion from the western Länder authorities, DM 31 billion from the Unity Fund, and the remainder from the EC budget and the federal labour office. By 1995 it is estimated that transfers will rise to DM 200 billion (over 103,000 MECU), with DM 151 billion coming from the federal government and DM 14 billion from the western Länder and local authorities, the rest from the EC, federal labour office and statutory pension insurance institutions.

In the United Kingdom, separate measures are operated for Northern Ireland in most spheres of government policy and implemented through a system of administrative devolution. According to the expenditure plans for Northern Ireland(7), "The government's policies for law and order, political and social affairs... must be recognised as making complementary contributions to meeting the overall objective of achieving peace, stability and prosperity in Northern Ireland."

The Secretary of State for Northern Ireland has discretion to allocate resources within the so-called NI Block (with the exception of social security benefits which are mainly determined by the level of demand) in response to local needs and priorities. The NI Block amounted to over £7 billion (8,974 MECU) in 1993-4; in addition, social security spending involved a further £0.52 billion (667 MECU). These sums are used to operate distinct policies for the province, except, obviously, in the

sphere of general government affairs such as defence and external relations which are UK-wide policies.

Separate arrangements and, to a lesser extent, separate policies are also operated for Scotland and Wales where the allocations to the Scottish and Welsh Offices are calculated on the basis of the so-called Barnett formula. In part, this is intended to take account of the disadvantage resulting from peripherality and, for much of Scotland, long distances and low population density. As for Northern Ireland, however, there is also an important political dimension to the special public expenditure provisions made; indeed, the formula was devised shortly after an upsurge of support for independence in both countries.

The UK arrangements are, however, far from representing transfers along the lines of the system for the new Länder. The NI Block constitutes the bulk of government spending with respect to Northern Ireland. Similarly, for Wales and Scotland, the funding relates to policies that are implemented by the respective territorial administrations in place of, and not in addition to, UK-wide policies. Nevertheless, it is the case that the formulae applied result in higher per capita levels of spend in Northern Ireland, Scotland and Wales than in England.

The political dimension has also been central in France where special measures for Corsica have encompassed both institutional reform and special funding provisions. In 1991 Corsica's status as a local authority (collectivité locale) was reinforced by the loi Joxe which provided for greater autonomy for Corsica in the fields of education, energy, culture and communications. Since 1992, central government has adopted a more interventionist stance to economic development in partnership with the Corsican authorities. The objectives are to create the conditions for economic development through structural reforms and the achievement of the 15 year social, cultural and economic development plan approved by the Corsican assembly in September 1993.

There are three principal types of measure operated in Corsica:

* the State-local authority planning contract for Corsica and the additional measures

* the fiscal status of Corsica

* the "territorial continuity" grant

The planning contract for Corsica is broadly similar to those concluded with the other 21 French regions.

<footnote>(7) Expenditure Plans and Priorities, Northern Ireland, The Government's Expenditure Plans 1995-6 to 1997-8, Cm 2816, March 1995.</footnote>
However, the element of central government funding is
significantly higher than for other regions: for 1989-93,
the total State contribution was FF517 million (78
MECU). This amounted to FF2,068 (312 ECU) per in-
habitant; in only one other region (Limousin) did the
State contribution exceed FF 1,500 per head. For the
1994-98 contract, central government funding has
been raised to FF695 million (105 MECU). In addition,
a further FF380 million (57 MECU) has been commit-
ted by central government to priorities decided by the
Corsican authorities; most of this (FF250 million) will be
allocated to a road-building programme.

Legislation passed in December 1994 accorded spe-
cial fiscal status to Corsica with a view to compensat-
ing for geographical handicaps and promoting eco-
nomic and social development. The main measure in-
volves contributing to local authority budgets to enable
local business tax rates to be reduced by 60 percent.
Moreover, there is corporation tax relief available to
new activities and a portion of the duty on fuel sales is
received by the Corsican authorities. These measures
together cost central government some FF350 million
(53 MECU). In addition, the so-called "territorial conti-
nuity" grant (dotation de continuité territoriale), which
has been in place for some 20 years, aims to com-
pensate for the additional transport costs associated
with island status. The 1995 allocation to this fund was
FF850 million (128 MECU).

In Italy, it was noted earlier that, over most of the post-
war period, policies for the development of the south
(the Mezzogiorno) took the form of "special interven-
tion" (intervento straordinario), with quite distinct poli-
cies and separate institutions to manage them. How-
ever, over time, the issue of the cost and effectiveness
of policies for the Mezzogiorno became a growing
theme in Italian politics and the source of considerable
antagonism between the north and south of the coun-
try. At the same time, there was significant dissatisfac-
tion with the institutional structure operating Mezzo-
giorno policy, part of a wider antipathy towards the role
of the public administration in the Italian economy. The
combination of these domestic tensions with European
Commission pressures for there to be a review of Italian
regional policy resulted in the demise of a distinct Mez-
zogiorno policy in 1992 and of the related Mezzogiorno
institutions as from 1 May 1993. Thus, while the Mez-
zogiorno clearly represented a "special status" region
for more than 40 years, it is no longer in that position.

Finally in this review of regions with special status, it is
worthwhile returning to the theme highlighted at the
start of the section - namely the significant political
motivation for such policies in the context of national
solidarity. As just noted, three of the Member States

studied currently operate special policies in respect of
parts of their territories: France (Corsica); Germany
(new Länder); and the United Kingdom (Northern Ire-
land). In all three cases, the policies lead to a very sig-
nificantly higher level of spending per capita than
would otherwise be the case. However, the scale of
the transfers are not always in evidence. In the United
Kingdom, for example, little is made of the scale of
funding for Northern Ireland. Similarly, in Corsica, fund-
ing is provided through a range of sources so that the
scale of funding is not immediately apparent and, as
for Northern Ireland, it is not always easy to distinguish
the extent to which special policies and measures are
substituting for nationwide ones. In contrast, the scale
of the transfers to east Germany is frequently the sub-
ject of media reports, a fact which is leading to in-
creased dissent in some sections of the west German
population. Interestingly, it might be argued that the
high profile of the special policies for the Mezzogiorno,
together with the absence of concrete evidence on the
effectiveness of policy, was a major factor in growing
political opposition to special policies for the south of
Italy and to their ultimate demise.

## 3.2 The Impact of Member States' Other Spatial Policies

In addition to providing an overview of the objectives
of Member States' other spatial policies, this research
involves an assessment and summary of available ev-
idence and study results with a view to determining the
impact of those policies. For these purposes, *impact*
refers to:

i. the *distribution* of national expenditures on other spatial policies between the regions; and

ii. the *effect* of these expenditures.

These are now discussed in turn.

### 3.2.1 The Regional Distribution of Expenditure

A broad indication of overall levels of expenditure can
be found in the discussion of the objectives of other
spatial policies provided above. However, going be-
yond this presents a number of methodological prob-
lems and a number of cautionary remarks are in order,
especially with respect to the regional breakdown of
such information.

First, it has proven difficult to obtain detailed expendi-
ture data in many areas. This reflects the disparate na-
ture of many of the policies concerned and the frequent use of tax concessions where levels of revenue foregone are seldom calculated. Second, it is not always evident where there are overlaps in policy expenditure and to what extent transfers *substitute for* rather than are *additional to* general government spending; this is particularly true of policies operated for special status regions. Third, a regional breakdown of such expenditure does not always provide a useful indication of the significance of spending in relation to issues of economic and social cohesion. For example, the data below show high levels of urban policy spending in Île de France and south-east England, the richest regions in France and the UK respectively. However, this is not necessarily indicative of an inappropriate distribution of resources since both regions contain some of the worst urban problems. A further difficulty is that, unlike the analysis of regional policy spending, it has not proven possible to obtain the information necessary to measure the *intensity* of other spatial policy spending. Little or no data is available on the proportion of the national population covered by other spatial policies, and none is to hand on the proportion of regional populations covered.

In spite of the constraints on the analysis of the data, there is still evidence that other spatial policy spending tends to flow towards the problem regions. Although in France, under the *contrats de ville* programme, the Île de France region is the principal beneficiary, receiving over a quarter of total funds, along with Rhône-Alpes, Nord Pas de Calais and Provence Alpes Côte d'Azur (PACA), it has to be recognised that these four regions are the most urbanised regions in France. Moreover, the least pros-

perous of the four, Nord-Pas de Calais, is the principal beneficiary in terms of expenditure per head. The extent to which cohesion is favoured is more marked in the context of the DSU. The Paris region, again along with Nord-Pas de Calais and PACA, is the principal beneficiary. However, when the data is viewed in *per capita* terms, the main beneficiary is Nord-Pas de Calais, followed by Corsica, PACA and Langue-doc-Roussillon. In addition, among the more urbanised of the French regions, Île de France and Alsace are net contributors to the fund.

Under the PACTs contained in the State-region planning contracts which encompass some of the policies for crisis areas, urban areas and rural areas described above, a similar pattern is in evidence. Average per capita spending under the PACTs is FF 210 (32 ECU); however, the levels of spend are significantly higher in Corsica (FF 890 - 134 ECU), Limousin (FF 422 - 64 ECU), Lorraine (FF393 - 59 ECU) and Nord Pas de Calais (FF302 - 46 ECU), all regions with significant rural, urban or industrial reconversion problems and regional per capita GDP of less than the national average.

The statistics available (which are limited) are more difficult to interpret for the United Kingdom, partly because urban and rural policies are the responsibilities of different territorial administrations. In addition, the nature of urban problems is such that they concern geographically small areas for which data are frequently not available. Information available on the regional breakdown of urban policy measures shows the following shares for London (figures are not available for the Urban Programme which involved expenditure of £166.5 million (213 MECU)):

<table><caption>Table 3.3: London's Share of Urban Policy Expenditure</caption><thead><tr><td>Programme</td><td>Total 1993-4 Outturn (MECU)</td><td>% allocated</td></tr></thead><tbody><tr><td>Housing investment programme</td><td>2,263</td><td>30</td></tr><tr><td>Estate Action</td><td>450</td><td>24</td></tr><tr><td>Housing Partnership Fund</td><td>38</td><td>4</td></tr><tr><td>Housing Action Trusts</td><td>96</td><td>41</td></tr><tr><td>Flats over Shops</td><td>12</td><td>20</td></tr><tr><td>Derelict Land Grants</td><td>134</td><td>4</td></tr><tr><td>City Action Team</td><td>4</td><td>15</td></tr><tr><td>Task Forces</td><td>23</td><td>28</td></tr><tr><td>Urban Development Corporations</td><td>440</td><td>31</td></tr><tr><td>City Challenge</td><td>295</td><td>23</td></tr><tr><td>Docklands Light Railway</td><td>36</td><td>100</td></tr></tbody></table>

Source: EPRC calculations based on Secretary of State for the Environment response to Parliamentary question.

These figures show that London receives a significant proportion of urban spending in the United Kingdom,

and a particularly large share of the larger sums. This appears to sit uneasily with the fact that Greater Lon-
don accounts for just 14 percent of the English popu-
lation and that per capita GDP is 143 percent of the
EU average compared with just 98 percent for the UK
as a whole. However, on other measures, notably
those relating to social deprivation, parts of London
are acutely disadvantaged, in spite of their location
within a region that is prosperous overall. Any consid-
eration of the extent to which such expenditure is con-
sistent with cohesion must take account of this policy
context.

The most striking levels of expenditure on other spatial policies concern special status regions. The gross transfer to the new Länder for 1996 amounts to some DM 196.5 billion (101.3 billion ECU); this compares with Structural Fund spending for the entire period 1989-93 of 64 billion ECU for the EU as a whole. The force of political considerations and issues of national solidarity are also in evidence in the high levels of spend in Corsica compared to the French average and in Northern Ireland, and to a lesser extent Scotland and Wales, in the United Kingdom, where specific transfer mechanisms are in place.

More generally, the point is worth making that most
spatially-discriminating policies tend to favour those ar-
eas in receipt of regional policy support. This is cer-
tainly true of policies for special status regions, all of
which are located firmly within nationally-designated
problem regions (and, indeed, also within EU Objective
1 areas). It is also true of the vast majority of "crisis"
areas. While such areas occasionally are located out-
side national problem regions, this generally is resolved
the next time the assisted areas are reviewed. More
than this, with the recent move towards agreed popu-
lation ceilings for nationally-designated problem re-
gions, it is increasingly common for any short-term
designation of areas outside previously-agreed prob-
lem region boundaries to be accompanied by the de-
designation of assisted areas (see, for instance, the
1993 agreement between the Commission and the
German authorities).

For rural and urban policy areas there may be less co-
incidence of policy boundaries with designated region-
al problem areas, not least because rural and urban
policies generally have a significant social and environ-
mental component and are less-focused on large-
scale economic development than is often the case
with regional policy. That having been said, the focus
of both policies is very clearly on economic and social
cohesion. Urban policy in the United Kingdom, for in-
stance, is very closely related to the need to remove
the causes of social unrest in various inner city areas.
In similar vein, rural policy generally reflects the need
to retain a degree of balance between rural and non-

rural activities and to help maintain otherwise fragile
population settlement structures.

3.2.2 The Effect of Other Spatial Policies

This section highlights recent evaluation studies in respect of other spatial policy instruments. For the most part, the evaluation focus has been on urban policy measures, though certain policies for crisis areas are also covered. Given the significant increase in the importance attached to urban policy in Great Britain (and the concomitant decline in the significance of regional policy) it is perhaps unsurprising that most evaluative work has been concentrated on the UK.

As with regional policy instruments (see Section 2.2.2), official evaluation work in respect of urban policy has often taken a relatively narrow perspective, measuring effectiveness according to a narrow range of policy input and output criteria. Typical of this approach is early work evaluating the Urban Development Grant (UDG) in Britain. Eligible for a number of designated local authority areas with "serious social needs", the UDG is allocated on a competitive basis to projects (industrial, commercial, housing or recreational) providing employment opportunities in depressed inner city areas.

One important evaluative study (PSMRU, 1988) examined the operation of the UDG between 1982 and 1986 and discovered a significant level of deadweight spending on projects assisted under the programme. For the projects studied, the cost per job seemed relatively high in comparison with British regional policy instruments (ie. between £11,800 and £16,500). The study found that most jobs were filled by residents living in or near inner city areas, although only 18 percent of the jobs created employed previously unemployed people. This may reflect the high number of temporary construction jobs (ie. 2478 person-years) generated by the UDG projects (PSMRU, 1988). Although the study concluded that the scheme be retained, the researchers felt better appraisal techniques were needed to reduce deadweight spending on projects that could have gone ahead without assistance. PSMRU claim that, without better scrutiny of project additionality, governments are able to overestimate job creation levels attributable to public policies.

Interestingly, a follow up study was conducted on the
UDG - now the City Grant - by Price Waterhouse
(1993). Although the Price Waterhouse research fol-
lowed a similar methodological route as the PSMRU
study, greater emphasis was laid on net additional job
creation as the key evaluative criteria. The study dis-
covered that the net public sector cost per job was
£14,280. Interestingly this falls mid-way between the
cost per job range estimated by the earlier study by PSMRU (1988). Overall, the research concluded that the UDG/City Grant compares favourably with other public sector job creation initiatives. It is important to note that the Price Waterhouse study included a telephone survey component, not normally deemed as reliable as traditional survey techniques. However, the study was useful because it provided additional longitudinal data with which to compare the effectiveness of policy instruments over a number of years.

Further studies of the grant in specific localities took a different approach. Cebulla's (1995) study of the operational effectiveness of the UDG in Belfast sought to evaluate the programme by comparing UDG-assisted businesses with non-assisted businesses. This study claims that, although halting the decline of indigenous businesses, UDG-assisted firms did not generate greater employment growth. According to Cebulla, both national economic forces and indigenous economic strengths play a larger role in explaining firm growth. The strength of Cebulla's Belfast case study was the insight this gave into the local economic and property market circumstances of one particular locality. Given the limitations of property-led economic development strategies in alleviating inner city deprivation (see, Turok, 1992), the UDG seems to be a limited policy instrument if unaccompanied by more comprehensive policy action.

Another component of spatially-targeted policy in Britain was the designation of enterprise zones. Enterprise zones provide firms with a host of fiscal and property-related incentives. Although enterprise zones also operate in France, the majority of evaluative work has been conducted in Britain. One of the key official evaluations undertaken in Britain (PACEC, 1987) examined the effectiveness of the zones during the early 1980s. Between 1981 and 1986, the study found that 63,000 jobs were located in the twenty-three zones studied. Of these, about 35,000 were a direct result of the enterprise zone policy. However, the study found quite high levels of displacement (23.7 percent) among firms which had moved into the enterprise zone. In other words, incoming firms were damaging local businesses quite considerably. Another problem when evaluating enterprise zones is the fact that many local firms move short distances into the designated areas in order to take advantage of the various tax concessions available. Such displacement of employment clearly erodes the overall contribution of an enterprise zone in its sub-regional economic context. Rather than generating new employment, zones may actually redistribute employment through opportunistic 'boundary-hopping'

An important aspect of this study was the inclusion of secondary factors when evaluating the economic impact zones had on the local economy. Secondary factors take account of the two main multiplier effects (supplier and income) created by developments in the zone. In comparison with other evaluation studies a low supplier multiplier was identified for enterprise zones (ie. 0.048). This is possibly due to the high proportion of externally-owned plants which locate in enterprise zones which in turn have highly globalised procurement structures. The direct or income multiplier was line with other evaluation studies (ie. 1.1). Although inclusion of secondary effects in the evaluation provides a better picture of the overall economic impact produced by the zones, it does not inform policymakers about the reasons supplier linkages remain low or the qualitative nature of employment generated in firms.

More recently, a study sponsored by the British government evaluated 22 of the 25 enterprise zones (HM-So, 1995). Overall the study analysed similar indicators (employment, number of firms established and property impact analysis) as the study outlined above (see, PACEC, 1987). This data allows the evolution of the programme to be compared over different time periods. The recent study estimates that the zones created 125,700 jobs of which 58,000 jobs were additional to those which would have been created. The cost per job at 1994/95 prices is estimated to have been in the region of £17,000, which is high in comparison with British regional policy instruments such as RSA. Notwithstanding the problems of calculating 'true' additionality, the study depicts a relatively positive view of enterprise zones and their efficacy.

Urban Development Corporations (UDCs) have now taken over from enterprise zones as Britain's key spatially targeted policy instrument. Primarily, these were designed to stimulate the private sector property market in areas of severe economic and social hardship by redeveloping areas of derelict urban land. Owing to the institutional nature of UDCs, assessing the effectiveness of these bodies is difficult. Usually, a case study approach is adopted. Owing to their politically-sensitive role vis-à-vis local authorities, many academic evaluations have taken a highly critical 'political economy' approach when assessing their effectiveness. This partly owes to the lack of objective data on their performance outputs.

One such study (Robinson et al, 1994) evaluated two UDCs in the northern region of England: Tyne & Wear and Teeside. Robinson et al claim that the employment creation impact of both UDCs was relatively low. The study also suggests that official UDC figures ex-
aggerate their employment creation impact. While the UDC claim that 3,143 jobs have been created on Newcastle Business park, a survey conducted by the authors found only 2,447 new jobs. Of 17 firms surveyed, 11 firms had relocated from elsewhere in Tyne & Wear or from other parts of the region - suggesting a high level of displacement. The authors also found that the most expensive flagship projects, e.g. Teesdale shopping centre and Hartlepool Marina, were particularly weak in generating new employment. Finally, the authors believe that poor official data coupled with the problem of disentangling the work done by UDCs from other publicly funded bodies reduces current knowledge of the policy's overall effectiveness.

Another case study assessment of UDCs (Atkinson and Moon, 1994) looked at the London Docklands Development Corporation (LDDC). This flagship UDC is well known for the Canary Wharf project and is generally viewed as an excellent example of property-led urban regeneration. Using data published by the LDDC, the researchers found that 41,000 jobs had been created in the area; 17,000 of which were new. There had also been a 56 percent increase in the local population from 39,400 to 61,000. According to the authors, these figures represent quite dramatic economic and social restructuring. On the downside, only 9 percent of construction workers on the Canary Wharf project were from the local Borough of Tower Hamlets. In line with other property-led regeneration projects, LDDC paid very little attention to matching the employment needs of developers with local unemployed people through training etc. There are also some doubts over the low quality nature of the 'back-office' jobs which the property has attracted. Finally, the researchers criticise the LDDC for being insensitive to the needs of local authorities over local planning issues

On the whole UDCs and other private-sector-led regeneration institutions have come in for considerable criticism from the research community. The general view is that the overall effectiveness of property-led urban regeneration must be open to question. Owing to the speculative nature of projects such as Canary Wharf, success depends heavily on the vagaries of national and international economic factors outwith the control of local economic development institutions. The policy instrument is susceptible to outside variables and local economic development is heavily dependent on the trickle-down of wealth and employment. In the absence of a fully-rounded measures designed to obtain maximum benefit for the local economy, UDCs tend to be viewed as unlikely to achieve their objectives of aiding the local regeneration process. Nevertheless, the ten year life-span of UDCs

makes a comprehensive assessment impossible until they are finally wound up near the end of the century.

Other national spatially-oriented policies include those designed to aid the process of economic restructuring in regions experiencing severe economic disadvantage. Areas such as these receive heavy levels of subvention from national governments to ensure social stability. A good example of this is Northern Ireland where public spending per capita is substantially above the national average. The fiscal transfer from Whitehall at the end of the 1960s amounted to 5 per cent of regional GDP, but by the start of the 1990s it stood at about 37 percent (Teague, 1994). According to one observer, this level of subsidy can generate false assumptions among local businesses: "the existence of extensive subsidies has created a climate of dependency and has sapped the competitive vigour of many firms" (Teague, 1994, p. 284). Clearly, evaluating this type policy is more difficult than assessing the impact of more targeted policy instruments, a problem made the more difficult by the interplay of identifiable public expenditure with less regionally-sensitive areas of public expenditure.

The above evaluation studies illustrate some of the problems when trying to assess the effectiveness of other spatial policies. Few studies have tried to understand the full complexity of forces generating spatial inequalities and how policy interacts with these factors. Instead, the easier option of measuring certain quantifiable policy outputs has been the preferred method of evaluation. Although giving some insight into the short term impact policy has on areas of economic disadvantage, this narrow view does not allow the sort of in-depth understanding needed to improve spatial policy-making. The relatively new status of some policy instruments may account for this situation however.

Notwithstanding this, available evidence shows current policy instruments to be of limited impact. In particular, the effectiveness of British urban policies seems to be questionable: placing too much emphasis on the private sector property market as a source of wealth and employment creation. Property-led urban regeneration initiatives often generate a large proportion of low quality temporary employment, ill suited to the unemployed people within disadvantaged communities. This result is disappointing given the heavy social component of urban policy objectives. Also worth noting (though any such comparisons must be treated with caution) is the considerably higher cost per job figures which have been calculated for both UDGs and enterprise zones. At least within the UK, the standard regional policy incentive, RSA, appears to be a more cost-effective economic development instrument.
## 3.3 Concluding Points

The focus of this chapter has been on spatially-discriminating policies other than regional policies. For the purposes of this report these have been grouped into urban, rural, crisis area and special status area policies. The distinction between regional and other spatial policies is not always a clear one - this is especially so of countries like France which take a broader view of regional development policies within the context of *aménagement du territoire* and where there have been increasing moves to integrate spatial policies within a single framework. Nevertheless, there is a difference in emphasis between regional and other spatial policies; the essence of this lies primarily in the extent to which other spatial policies concern issues of social and political cohesion, rather than essentially economic development objectives. This is not to say that there is not always a mix of rationales and motivating factors underlying policy; however, the four categories of policy identified concern areas where the political dimension of policy tends to be central - certainly more so than is generally the case with regional policy.

As far as *urban policy* is concerned, the discussion in Section 3.1.1 concentrates mainly on the position in France and, especially, the United Kingdom where urban policy has been given a relatively high priority. Indeed, in the UK, the political imperatives arising from growing unrest in areas of extreme poverty and deprivation have seen urban policy expenditure rise to some four times that of the main British regional incentive (Regional Selective Assistance). In similar vein, national urban policy spending in France is broadly on a par with the sum expended on the range of *amenagement du territoire* policies (including measures for rural and “crisis” regions as well as regional policy support). These two country examples underline the significant social and environmental aspects of national urban policy; while economic development instruments are among the measures used, they are generally employed for social and political ends.

Elsewhere in the Member States, urban policy tends to be somewhat different in nature - a response to physical planning and environmental pressures rather than social unrest. Moreover, it is often the responsibility of sub-national levels of government rather than being a national policy initiative. On the other hand, and as already mentioned, the federal government in Germany can grant supplementary aid for urban measures where the investments serve to improve the conditions for growth in the economy as a whole or to equalise economic strength between the regions.

Regarding *rural policy*, the emphasis in Section 3.1.2 is very much on France where the speed of agricultural change in the post-war period and the stress placed on the rural way of life has resulted in the policy being accorded a high national political profile. Elsewhere, rural issues tend to be less politically-sensitive from a national perspective and, indeed, much of the policy impetus now comes from EU-level policies (in particular, Objective 5b and the LEADER Community Initiative). In general, the objectives of rural policy at the national level tend to reflect social priorities - in particular, the desirability of maintaining population settlements by sustaining standards of living and by assuring the provision of public services. While economic development instruments can play a role in achieving such objectives, the overall focus of policy is more on social than economic cohesion.

Policies for “crisis” areas have been a feature in many Member States since the 1980s, particularly in response to increasing problems of structural adjustment arising from job losses in the steel, shipbuilding and (most recently) defence industries (see Section 3.1.3). There is usually a clear economic development objective underlying such policies, reflecting the need to encourage alternative economic activities. However, the intensity of decline (and its spatial focus) is usually such that the policy response also incorporates significant social and political aspects. In the case study countries, examples of “crisis” area policies are provided for Germany, France, the United Kingdom and Italy, all of which have experienced major plant closures in narrowly-defined localities. Over time, such areas tend to be incorporated within designated problem regions.

Finally, policies for “special status” regions are considered in Section 3.1.4. In such regions - which include the new Länder in Germany, Corsica in France, Northern Ireland in the United Kingdom and (historically) the Mezzogiorno in Italy - the primary motivation of policy is to contribute to national political cohesion by reducing economic and social disparities. A feature of policies for special status regions is the sheer scale of the transfers involved, underlining the importance attached to national solidarity and political cohesion. The most striking illustration of this is the scale of transfers to the new Länder set alongside the volume of EU spending on the Structural Funds: the gross transfers to the new Länder for 1996 alone amount to 101 billion ECU; this compares with Structural Fund spending for the EU as whole of 64 billion over five years (1989-93).

As far as the *spatial distribution* of expenditure is concerned (see Section 3.2.1), comparative regional-level information has proved difficult to obtain. Even so, the evidence is that most spatially-discriminating policies
tend to favour those areas in receipt of regional policy support. As mentioned earlier, this is certainly true of policies for special status regions and it is also generally the case for most "crisis" areas. For rural and urban policy areas there may be less coincidence of policy boundaries with designated regional problem areas. That having been said, both policies are very clearly focused on economic and social cohesion in its wider sense; they aim to tackle the specific problems of urban and rural areas and, in so doing, to reduce sources of national discord.

Considering, finally, the *evaluation studies* reviewed in

Section 3.2.2, the available evidence tends to suggest that current policy instruments are of limited impact. In particular, as regards urban policy, the evidence is that property-led urban regeneration initiatives generate a large proportion of low quality temporary employment, ill-suited to the unemployed people within disadvantaged communities. As noted above, this is a disappointing finding given the significant social component to urban policy objectives. A further, more positive finding, at least for regional policy, is the fact that the cost per job figures attached to many other spatial policies are generally higher than those found for standard regional incentives.
4. Horizontal Policies with Important Regional
Impacts

This chapter deals with policies which have no intend-
ed spatial effects. The focus is on policies for compet-
itiveness and employment, reflecting not only the prin-
cipal policy concerns of many Member States, but al-
so the key themes of the Commission's recent White
Paper®.

These two policy areas cover a wide range of govern-
ment activities aimed at influencing the business envi-
ronment and the labour market. It is important to
stress that this chapter focuses on the proactive poli-
cies of government; in other words, those policies that
are intended to improve the climate for firms and affect
the way in which the job market functions. Policies in
these two areas are operated largely without reference
to their spatial effects; in contrast, the previous two
chapters have been concerned with policies which
specifically address spatial disparities. Nevertheless, in
practice, spatial cohesion, employment and competi-
tiveness are intrinsically linked and potentially in con-
flict.

The regional policy chapter of this report (Chapter 2)
described the policy dilemma faced by the poorest EU
Members in balancing short-term competitiveness
against internal regional disparity, a dilemma exacer-
bated by the poverty of the countries concerned in an
EU context. However, such policy choices are by no
means limited to the poorer EU countries. A problem
common to all Member States is that policies to pro-
mote competitiveness may, in the short term, have
detrimental effects on regional economic disparities
and a negative impact on the labour market. Similarly,
there is a perception that policies that aim to promote

regional and social cohesion may, at least in the short
term, jeopardise competitiveness by diverting re-
sources. The promotion of economic cohesion, social
cohesion and competitiveness might be conceptu-
alised as a triangle of policy tensions where the pursuit
of each objective impacts directly on the other two.

This chapter considers policies to promote competi-
tiveness and employment policies in turn. The discus-
sion of competitiveness policies in Section 4.1 focus-
es on the spatial impact of RTD and innovation poli-
cies in the Member States. It deals first with the con-
text for such policies (Section 4.1.1), then with the ob-
jectives of policy (Section 4.1.2) and finally with their
regional impact (Section 4.1.3). A review of employ-
ment policies is provided in Section 4.2. The final sec-
tion, Section 4.3, draws together the main points
made in the chapter.

## 4.1 Policies to Promote
Competitiveness

In recent years growing attention has been paid to the
promotion of "competitiveness". This is reflected in a
range of government reports and policy statements in-
cluding *Competitiveness: Helping Business to Win* in
the UK, and the German *Bericht der Bundersregierung
zur Zukunftssicherung des Standortes Deutschland* (the
safeguarding of Germany's future as an industrial loca-
tion), as well as the Commission's own White Paper.

Although the term "competitiveness" has entered into
common parlance among policymakers, there is no
clear definition of its meaning in policy terms and no
definitive listing of the policy instruments designed to

<footnote><sup>®</sup> Commission of the European Communities (1993) *Growth, Competitiveness and Employment: The Challenges and Ways Forward into the 21st Century*, OOPEC, Luxembourg.</footnote>
promote competitiveness. Nevertheless, a common theme among the policies that fall within the scope of "competitiveness" policies concerns research and development, technological change and the capacity to diffuse R&D results into products and processes. This section takes the science and technology policies of the Member States as its main focus.

### 4.1.1 RTD and Innovation Policies in Context

Spending on research and development by government, universities and the business sector is significant; in 1991 it accounted for 2.1 percent of GDP in the European Union. However, there is a striking variation in levels of overall spend on R&D across the EU: Germany spends five times as much on R&D relative to its GDP as does Greece. Indeed, the four Cohesion countries form a clear grouping, all spending around 1 percent or less of GDP on research and development.

Italy and four of the smaller continental Member States (Austria, Belgium, Denmark, the Netherlands) each spend between 1.3 percent and 1.9 percent of GDP on R&D. A third grouping comprises France, Germany, the UK and the two Nordic Member States, which all spend in excess of 2 percent of GDP on research and development. Sweden is the only EU country where R&D expenditure as a proportion of GDP exceeds that of the United States. Variations in spending as a proportion of GDP are broadly mirrored in expenditure per head of population. Both of these indicators are illustrated in Chart 4.1. Following the approach adopted in Chapter 2, this chart groups countries into four broad categories: the Cohesion countries, Germany/Italy, the "northern European" countries and the Nordic Member States. The first three of these groupings are also utilised in the discussion of policy objectives which follows. Given the focus of this report, the policies of the three new Member States are not considered further in this section.

<figure><img src="image_13.png" /><figcaption>Chart 4.1</figcaption></figure>

Source: OECD (1995)
### 4.1.2 The Objectives of R&D and Innovation Policies

#### 4.1.2.1 The Cohesion Countries

From Chart 4.1 it is clear that - in relation to both GDP and national population - R&D spending in the four Cohesion countries is significantly less than that found elsewhere in the EU Member States. Having said this,

it is important to note that there is a substantial difference in the overall scale of R&D spending between Spain, on the one hand, and the remaining three countries, on the other. Clearly, this reflects differences in population size and in the size of the economy as a whole. The different levels of general and business-related R&D expenditure in the four Cohesion countries are illustrated in Chart 4.2.

<figure><img src="image_14.png" /><figcaption>Chart 4.2</figcaption></figure>

Source: OECD (1995)

The overall size of the Spanish economy also has an impact on RTD priorities. Unlike the other Cohesion countries, there is greater emphasis on the promotion of basic research in Spain; in the late 1980s this accounted for around 19 percent of the R&D budget (OECD, 1994). Indeed, the basic legislation governing science, technology and research policies in Spain (the 1986 "Law of Science") stresses the need to maintain and support basic research in order to develop new knowledge. Moreover, like most of the larger EU Member States, R&D policy is focused on a number of designated key themes and programmes. In contrast, in Greece, Portugal and Ireland, the emphasis is on two

main areas: the expansion of the scientific and technical capacity of the country - the science base; and support for innovation and technology transfer.

A further common feature of these three wholly Objective 1 countries is the role played by EU policies in stimulating R&D. CIENCIA and PEDIP in Portugal; EPET in Greece and STRIDE in all three countries have involved significant levels of funding for RTD and innovation. Perhaps related to this, Ireland and Portugal were the only OECD countries in which both public and private expenditure on R&D increased between the periods 1985-9 and 1990-2. In the context of co-
hesion at the European level, this is clearly of interest insofar as it seems unlikely that such levels of spend would have been sustainable through national resources alone.

With respect to sectors of activity, two points are worth making. First, and this is illustrated in Chart 4.2, in both

Portugal and Greece, a very small proportion of R&D is undertaken by the private sector; just 27 and 22 percent respectively. This contrasts with a share of almost two-thirds in Ireland (among the highest in the OECD) and nearly one half in Spain. The second point concerns the areas on which R&D expenditure is focused. This is illustrated in Chart 4.3.

<figure><img src="image_15.png" /><figcaption>Chart 4.3</figcaption></figure>

Source: OECD (1994)

Note: General University Funds are part of the funds assigned to "Advancement of Knowledge".

There are a number of interesting features of these expenditure priorities. Of particular note, Ireland and Spain are the highest spenders on industrial R&D (as a proportion of domestic expenditure) in the EU 12 while Greece and Portugal are the highest spenders on agricultural R&D.

As far as the *regional* dimension of policy is concerned, within the Cohesion countries, the emphasis is clearly on issues of national competitiveness. Indeed, as discussed earlier in this report, arguments for regional policy can be difficult enough to sustain in economies that are as whole underdeveloped in a European context. It is, therefore, scarcely surprising that regional development issues do not have a high profile in RTD policies in the Cohesion countries. Having said

this, there are examples of attempts to dilute the concentration of RTD activities in the more prosperous regions. In Greece, part of the EU STRIDE funding is assigned to special measures for the most disadvantaged regions. However, this accounts for only a small proportion of the budget (3 percent) and seems unlikely to have any significant impact; as far as national policy is concerned there is no regional RTD policy in Greece. In Portugal, the focus is also on national RTD; however, the EU-funded CIENCIA Programme has been systematically oriented to try to redress regional imbalances in science and technology by ensuring that 50 percent of investment under the programme is outside the Lisbon region and by supporting specific projects in the least-favoured regions. At the same time, since the 1970s Portugal has been establishing higher
education establishments in regions where previously
none existed. In Spain, too, RTD is a national policy
and there is no regional policy orientation to policy.
However, virtually all of the Autonomous Communities
have established organisations to promote R&D and
technological innovation at the regional level. Probably
the most high profile technology initiative to take place
in the problem regions is the Málaga technology park
in Andalucía. Finally, in Ireland, there has been an at-
tempt to bring R&D policy and industrial development
policy closer together by restructuring the activities of
the Industrial Development Authority (IDA) and the Sci-
ence and Technology Agency (EOLAS). Two new
agencies have been created - IDA-Ireland, concentrat-
ing on multinational firms, and *Forbairt*, concerned with
the development of indigenous industry. While the re-
gional orientation of policy remains limited (see Section
2.1.1 above), a feature of *Forbairt* is its strong region-
al organisation.

4.1.2.2 *Germany and Italy*

In the discussion of regional policy in Chapter 2, Ger-
many and Italy were characterised as dual economies.
The issues arising from the reunification of Germany
and the Italian experience with implementing special
policies for the *Mezzogiorno* make these two countries
a pertinent grouping for the purposes of considering
the regional impact of R&D policies. Indeed, it must be
stressed that it is really only in this context that the
grouping is relevant. As far as RTD policy *per se* is
concerned, there is no convincing rationale for consid-
ering Germany and Italy as a distinct group, not least
given that the relative importance of RTD spending dif-
fers widely between the two countries as do their
overall budgets. These differences can be seen clear-
ly from Chart 4.4.

<figure><img src="image_16.png" /><figcaption>Chart 4.4</figcaption></figure>

Source: OECD (1995).

Both this chart and the earlier Chart 4.1 make clear
that support for R&D and innovation is a major fo-
cus of government policy in Germany. At the fed-
eral level, the BMBF (ministry for education, sci-
ence, research and technology) is the main body
responsible for policy, although specialist organisa-
tions are frequently used in its implementation and

most of the SME research promotion programmes
are operated by the AiF, an umbrella organisation
for industrial research. The main *objectives* of the
BMBF are:

* to support the transfer of scientific research results into competitive production
* to develop an efficient research infrastructure in the new Länder

* to support fundamental research and technology promotion concentrated on selected high technologies and the expansion of "precautionary" research, especially in the area of the environment

* to improve the basis for product-oriented R&D in firms through the promotion of pre-competitive research in key technologies such as IT, biotechnology, materials. Such research is mainly carried out in universities, national research centres and the Fraunhofer and Max Planck institutes

* to encourage the increased participation of SMEs in the innovation process by making the instruments of science and technology promotion simpler and more flexible

* to extend international co-operation in the areas of education, science and research.

In Italy, the main responsibility for science and technology policy rests with MURST, the ministry for universities, scientific and technological research. A number of public research bodies also operate in specific fields, such as space research. In addition, the national research council (CNR) utilises a network of several hundred research institutes and funds private and public sector research as well as "mission-oriented" re-

search projects. The main emphasis of policies to promote RTD in the business sector is on applied industrial research and innovation, reflecting the status of Italy as a net importer of technology. The main policy instrument is the Applied Research Fund which supports international and European collaboration, basic research projects carried out by industry, national research programmes for strategic technologies, training in R&D and participation in RTD activities by public institutions and consortia.

In terms of overall shares of spending between the public and the private sectors, a much higher proportion of the R&D spend is accounted for by the private sector in Germany than in Italy; 60.8 percent and 51.1 percent respectively. This places Germany towards the top of the range within the OECD and Italy around the median.

Regarding sectors of R&D spend, Germany, like Spain (although on a much larger scale), focuses much of public and private sector research activity around a number of advertised priorities including renewable energy, information technology and aerospace. In addition, there are State long-term research programmes in marine, polar and space research and technology. In Italy, research into specified fields is primarily carried out in the public sector; the main programmes to encourage RTD in the private sector do not operate around prescribed areas of research. The overall distribution of government R&D expenditure is set out in Chart 4.5.

<caption>Chart 4.5</caption>

Government R&D Expenditure by Socio-Economic Objective

<figure><img src="image_17.png" /></figure>

Source: OECD (1994)
As in the Cohesion countries, most expenditure is accounted for by "advancement of knowledge" which includes general university funding. However, unlike the Cohesion countries, spending on agricultural research is relatively small. In common with the other larger European economies, both Germany and Italy spend significant sums on defence and civil space research.

As far as the regional dimension is concerned, the similarities in the regional economic structures of Germany and Italy are not reflected in current approaches to RTD in the problem regions. The OECD's regular review of science and technology policies noted that:

"The primary goal of German research and development policy over the last few years has been to establish an efficient research environment in the new German Länder..." (9)

In contrast, the same report noted the demise of special RTD policies for the Mezzogiorno in the context of the ending of the separate policies for the south of Italy (see Section 2.1.2 above).

Following German reunification, the Science Council drew up recommendations which led to the formation of 24 new "blue list" institutes; 21 Fraunhofer Society institutions and working groups; two institutes and 28 working groups of the Max Planck Society. Industrial R&D in the new Länder is supported by a set of coordinated measures including R&D advisory agencies, and demonstration centres, support for new technology-based firms, assistance for increasing R&D staff resources and support of the award of R&D contracts by firms to research institutes. In 1992, planned measures to promote R&D in the new Länder amounted to some 313 MECU. In addition to the measures specific to the new Länder, firms in the east also have preferential access to all the specialised programmes operated by the BMBF.

In Italy, there are no separate measures for supporting RTD in the problem regions (other than those contained in the Objective 1, 2 and 5b plans and co-

financed by the EU). In the past, separate support for research centres had been available in the context of intervento straordinario for the Mezzogiorno. There were also initiatives to develop science parks in the south; however, none of the measures introduced seemed capable of preventing research resources from migrating towards the Centre-North. For the most part, RTD and industrial development policies in Italy have always been operated with national economic development priorities in mind. In practice, this led to a striking imbalance in spending on research: in 1987 the public sector spent just 9 percent of total research funds in the Mezzogiorno (which contains 36 percent of the national population); private sector investment in industrial research in the Mezzogiorno accounted for a mere 3 percent of the national total (OECD, 1992).

Although there is no regional RTD policy in Italy, the link between national regional policy and EU policy has been strengthened in the context of RTD policy by favouring projects located in Objective 1, 2 and 5b areas. Projects in these areas qualify for higher rates of award under the main programmes to support industrial R&D - the FRA (fund for applied research) and the FIT (fund for technological innovation). In fact, these programmes have always been available on a nationwide basis in Italy; however, the uptake of assistance by Mezzogiorno firms has always been significantly lower than would have been expected - accounting for just 5 percent of total spend under the FIT in 1990-94.

#### 4.1.2.3 The "Northern European" Member States

There are five "northern European" Member States for which R&D expenditure data is available: Belgium, Denmark, France, the Netherlands and the United Kingdom. It will be recalled from Chart 4.1 that relative spending on R&D in France and the UK - at over 2 percent of GDP - is in excess of that found in the Netherlands, Denmark and Belgium (all around 1.7 percent). The differences are even more stark in absolute terms, as Chart 4.6 shows.

<footnote n="9">⁹ OECD, 1994.</footnote>
<figure><img src="image_18.png" /><figcaption>Chart 4.6</figcaption></figure>

Source: OECD (1995)

As can be seen, France and the UK spend considerably more than the remaining northern European Member States in respect of both overall and business-related R&D expenditure. These two countries are the focus of discussion in the remainder of this section.

In France, responsibility for RTD policies rests with the Ministries for Industry and Research, the latter incorporating higher education. The objectives of R&D policy were most recently defined in June 1994. These involve the promotion of research with a view to assuring the competitiveness of the country, reinforcing the national R&D effort to keep pace with main competitors, making up the shortfall in research undertaken by firms, and reinforcing and "federating" public research. This contrasts with the philosophy expressed by the UK government. In the United Kingdom, the Department of Trade and Industry is the main government department responsible for policies promoting innovation and technology. The areas where it is believed DTI resources will be used to the best advantage are set out in two White Papers, one on science, engineering and technology (issued by the DTI in April 1993) and the second on "competitiveness" referred to above. In the former, it was announced that the partnership between government, industry and academia would be strengthened to

ensure that the nation's science and technology is better geared to stimulating wealth creation. In the latter, action was announced to create the climate for industry to invest more of its own resources profitably on innovation and research and development.

DTI resources are to an increasing extent being targeted on:

* promoting innovation

* encouraging best practice

* simplifying access to sources of help

* facilitating the exploitation of technology, from the science base in the UK, in Europe or elsewhere.

In adopting these priorities, there has been a shift of resources away from technology development, where industry already invests considerable resources, towards technology transfer. This is best illustrated by the closure of the Advanced Technology Programmes.

In France, support for RTD covers the spectrum of activity from basic industrial research through to technol-
ogy transfer. General support is provided in the form of a tax credit for research expenditure of up to FF40 million (6 MECU) per firm per year. In addition, a number of major targeted programmes are operated in the fields of healthcare, transport, electronics and information technology through co-ordinated programmes involving a range of relevant ministries. The "technological leaps" initiative aims to encourage basic industrial research in areas put forward by industry, mainly large firms. The programme is run by the ministry for research. There is a continuum between this programme and the major innovative projects scheme which is primarily the responsibility of the ministry of industry. Both of these initiatives are mainly of relevance to large firms and are administered centrally. In addition, however, there has been growing emphasis in recent years on technology transfer, innovation and technology dissemination. This has involved a wide range of initiatives which are targeted towards SMEs to a greater extent and which are delivered at the regional level by local delegations of the ministries of research and industry and by the national agency for innovation, ANVAR.

In the field of research and development, the emphasis of UK policy is on promoting collaborative research. The main programme in this vein is LINK which supports pre-competitive R&D in specified spheres of activity and aims to encourage the rapid uptake of research ideas. Government funding covers up to 50 percent of the cost of each programme. LINK initiatives are restricted to closely-defined areas of research such as optoelectronics systems, structural composites and ventilation, air-conditioning and refrigeration. In contrast with countries such as France and Germany, support in the UK for applied research and development is virtually non-existent. This is particularly so with respect to non-activity-specific research and large firms. There is limited support for R&D to be undertaken by SMEs, the main measures being the SMART and SPUR programmes. Under SMART, individuals or firms with fewer than 50 employees are invited to compete for R&D funding. Successful proposals can receive grants of up to ECU 200,000 to enable an innovative idea to be followed through from concept to production. SPUR provides grants of up to 30 percent of eligible costs (subject to an award ceiling of £150,000 (0.2 MECU)) for the development of new products and processes involving a significant technological advance; it is limited to firms with fewer than 250 employees.

As noted earlier, the focus of UK policies to promote competitiveness has been increasingly on technology transfer. Measures include:

* Innovation and Technology Counsellors in 22 so-called Business Links to ensure that businesses

have full local access to the range of information, advice and services they require.

* Teaching Company Scheme (TCS) - this scheme assists the transfer of technology and expertise from universities into industry by placing graduates into firms for two-year secondments to carry out projects under the joint supervision of academics and company staff. It operates UK-wide.

In terms of sectoral emphasis, it has already been noted that France operates a number of targeted technological development programmes and that the UK LINK programme addresses very specific research objectives. However, the most striking feature of R&D spending in the two countries is the extent to which it is defence-related (see Chart 4.7). Only the US assigns a greater proportion of the R&D spend to defence within the OECD group. On the other hand, these figures can be expected to decline; the latest data relates to expenditure in 1992 and 1993, since when defence spending in both the UK and France has been significantly reduced.

As far as the regional dimension is concerned, RTD and innovation policies in both countries are primarily concerned with national competitiveness. All the measures described above are operated on a nationwide basis in the two countries. That having been said, it is clear that the allocations made are likely to be greater where there are concentrations of appropriate business and research institutions and an innovation-friendly operating climate. Moreover, by their nature, defence and space-related research are particularly unlikely to be evenly distributed.

There are, however, initiatives to encourage greater participation of all regions in innovation in both countries. In France, the R&D policy statement referred to earlier emphasised the role of R&D in regional development through the diffusion of technologies and through a new instrument, the regional plans for the development of higher education and research. In addition, for a number of years there has been an explicit policy aimed at relocating public research institutes away from Paris. In the UK, 12 regional technology centres have been established with joint industry and government funding. These cover most of the country and seek to encourage the flow of knowledge between institutes of higher education and business, and to provide training for the introduction and management of technology, especially in SMEs. In addition, in 1992 a new strategy for research and technological development entitled "Innovation 2000" was launched in Northern Ireland. This outlines the way in which government intends to stimulate technical change to ad-
<figure><img src="image_19.png" /><figcaption>Chart 4.7</figcaption></figure>

Source: OECD (1994)

dress the region's low average level of productivity and growth rate. At the same time as this strategy was launched in Northern Ireland, more prominence was being given to Northern Irish RTD in both a UK and an EU context. The RTD strategy is one of several strategy documents published as part of the reorientation of industrial policy in Northern Ireland which has taken place since 1990. The documents fit within the common framework outlined in "Competing in the 1990s"(10). Policy changes were accompanied by institutional changes as responsibility for RTD measures was given to a single body, the Industrial Research and Technology Unit (IRTU) in March 1992. The unit gives "strategic focus and increased impetus to the use of R&D for wealth creation and industrial innovation".

### 4.1.3 The Regional Impact of Competitiveness Policies

The focus of the previous section was on RTD and innovation policies operated by the Member States, and in particular on the extent to which, if at all, there is a regional dimension to policy. Overall, it is clear that poli-

cies to promote RTD and innovation are operated with national policy objectives in mind. There are some attempts explicitly to stimulate innovation in the problem regions, but, where this does take place, it is primarily in the form of encouraging technology transfer and the uptake of innovation rather than innovation per se.

The picture which emerges is scarcely surprising: research and development policymakers are understandably unlikely to be willing to jeopardise R&D policy objectives for the sake of promoting less viable projects in the problem regions. Moreover, in Italy, where in the past there was a practice of reserving a quota of R&D spend for the *Mezzogiorno*, this led to an overall underspend on policy. This illustrates very clearly the reason for the lower levels of spending in the problem regions; R&D policy is essentially demand led, and demand is more likely to emanate from regions that are already prosperous. Moreover, for the prosperous regions, this promotes the trends towards a "virtuous" cycle of innovation and competitiveness. The reverse is true in the less prosperous regions; indeed, the uptake of R&D programmes should perhaps be interpreted as a measure of the regional problem, rather than a form of covert discrimination against problem regions by national policymakers. In the con-

<footnote>(10) Department of Economic Development, 1990.</footnote>
text of the problem regions, the tendency is more like-
ly to be towards a vicious circle of lack of innovation
and increasing inability to compete.

In spite of the emphasis of competitiveness policy on na-
tional objectives, there is, in many countries, explicit
recognition of the need to sustain national competitive-
ness by improving the competitiveness of the problem
regions. The United Kingdom and Germany both oper-
ate special and distinct policy measures for parts of their
territories (Northern Ireland and the new Länder) on more
generous terms than in the remainder of the country.

Also widespread is the increasing emphasis on the "re-
gionalised" delivery of competitiveness policies. In France,
following the decentralisation and deconcentration
processes of the early 1980s SME, technology transfer
and diffusion have increasingly been operated at the re-
gional level. In the United Kingdom, the TECs and LECs,
and, more recently, the Business Link network have
sought to make policy delivery more sensitive to local
needs. In Germany and, to a lesser extent, in Spain, this
approach is partly inherent in the institutional structure.

In this section, the impact of competitiveness policies
on cohesion is considered. For these purposes, im-
pact refers to:

i. the *distribution* of national expenditures between
the regions; and

ii. the *effect* of these policies.

4.1.3.1 The Regional Distribution of
Expenditure

Relatively little information is available on the regional
distribution of expenditure on RTD and innovation in
the EU. This is understandable since the policies con-
sidered for the most part explicitly do not address spa-
tial objectives. Nevertheless, the EU's REGIO database
provides some data on the regional distribution of re-
search personnel and expenditure in the private, gov-
ernment and higher education sectors. This section
begins by considering the overall levels of spend on
R&D for the regions for which data are available and
the different sectors of the economy from which that
expenditure is derived. The second part of this section
considers the so-called business enterprise sector ex-
penditure on R&D (BERD) and focuses on the extent
to which this is financed by government.

4.1.3.1.1 *Regional Expenditure on R&D*

On the REGIO database, regional-level information on
overall R&D expenditure - broken down into higher ed-
ucation, State and private enterprise spending - is
available for three of the case study countries covered
in this report: France, Italy and Spain. In addition,
equivalent information has been generated for the
United Kingdom utilising CSO sources.

<caption>Chart 4.8</caption>

<figure><img src="image_20.png" /><figcaption>France: Regional Expenditure on Research and Development</figcaption></figure>

Source: REGIO, EUROSTAT
The data for France are particularly striking. R&D ex-
penditure is very heavily concentrated in the Paris re-
gion, Île de France. This is illustrated in Chart 4.8.
The Paris region accounts for some 43 percent of all
R&D expenditure in France and an even higher pro-
portion of R&D financed by the private sector. The
R&D spend in the next highest spending region (in
per head terms), Midi-Pyrénées, is just 11 percent of
the spend in Paris. Expenditure in the Midi-Pyrénées
region is clearly affected by the concentration of
aerospace activities in the Toulouse area. The next
highest spending region in France is Rhône-Alpes.
This accounts for just 7.5 percent of the national
R&D spend while the per capita expenditure is a third
of that in Paris. At the other end of the spectrum, the
less prosperous regions fare less well in the distribu-
tion of R&D expenditure. In Nord-Pas de Calais, ex-
penditure per head on R&D is only 6.4 percent of
that in Paris. In Limousin the figure is even lower with
the region accounting for less than 0.2 percent of the

national R&D spend; per capita spending on R&D is
20 times higher in Paris than in Limousin.

Expenditure by sector (ie. higher education, State, pri-
vate enterprises) varies widely between regions. In all
regions except Languedoc-Roussillon, most R&D ex-
penditure takes place in the private sector; indeed,
Languedoc-Roussillon is the only region in which pri-
vate sector spending accounts for less than 30 per-
cent of the total. In Bretagne, too, the private sector
contribution is small at only around half of the total. On
the other hand, in a number of the more prosperous
regions (Île de France, Basse-Normandie, Alsace, and
Rhône-Alpes) less than 80 percent of the spend is
contributed by the private sector. This contrasts with
the position in a number of the less prosperous regions
(Nord-Pas de Calais, Limousin and Auvergne) where,
although the overall spend tends to be lower, a greater
proportion of the total comes from private rather than
public sources.

<figure><img src="image_21.png" /><figcaption>Chart 4.9</figcaption></figure>

Source: REGIO, EUROSTAT

Note: Government expenditure for Valle d'Aosta is not available

In Italy, the data available on the regional distribution of
R&D expenditures do not include the higher education
sector; this accounts for around 21 percent of the na-
tional R&D spend. Information is, however, available on

the distribution of private sector and government
spending. This is presented in Chart 4.9 on a per capi-
ta basis. As in France, the notable feature is the con-
centration of spending in the more prosperous regions.
Almost half of State and private sector R&D expenditure is accounted for by two regions, Piemonte and Lombardia. In contrast, in the eight regions of the *Mezzogiorno*, expenditure per head on R&D is very significantly below the national average. Indeed, in absolute terms, these regions account for only eight percent of private and State R&D funding (compared with 36 percent of the national population).

As in France, the distribution of funding between the public and private sectors also varies between regions. Lazio alone receives over half of the State funding of

R&D in absolute terms. Moreover, the relative share in the region is skewed very markedly towards the public sector which, as Chart 4.9 shows, accounts for around a third of the R&D spend in the region; similar proportions are found in Basilicata and Sardegna. However, in Abruzzi and Molise, a higher proportion of R&D is funded by private industry than the national average (elsewhere in the *Mezzogiorno*, a greater proportion of R&D funding is by the State than the national average). In terms of overall shares, the *Mezzogiorno* accounts for 7 percent of private sector R&D spending and 11 percent of State funding.

<caption>Chart 4.10</caption>

Spain: Regional Expenditure on Research and Development

<figure><img src="image_22.png" /></figure>

Source: REGIO, EUROSTAT

In common with Italy and France, R&D expenditure in Spain is concentrated in the more prosperous regions of the country. In per capita terms, spending in Madrid is significantly higher than in any other Spanish region, followed by other prosperous regions, Cataluña, País Vasco and Navarra - see Chart 4.10. Indeed, Madrid alone accounts for 42 percent of total R&D expenditure (against a share of 13 percent of the national population) whilst the Objective 1 regions collectively account for 24 percent of the total R&D spend and almost 60 percent of the national population.

With respect to the distribution of expenditure between the private and public sectors, on average, around 55 percent of the national spend is accounted for by the private sector. However, there are considerable region-

al variations in the composition of the spend. In a number of the Objective 1 regions (Galicia, Cantabria, Valencia, Andalucia and Murcia), the private sector contribution is well under 40 percent of the regional total. On the other hand, the proportion of private sector funding in Madrid is close to the national average and on a par with the proportion contributed by the private sector in Castilla-La Mancha, an Objective 1 region. Moreover, it is notable that 61 percent of State funding is channelled into Madrid while the private sector spend for the region amounts to only 43 percent of the national total. Conversely, in Castilla-León, also Objective 1, business in the region accounts for 3.4 percent of the Spanish private sector R&D spend whereas State spending in the region amounts to only 1.8 percent of the total.
<caption>Chart 4.11</caption>

<figure><img src="image_23.png" /><figcaption>UK: Regional Expenditure on Research and Development</figcaption></figure>

Source: EUROSTAT, CSO (1995)

In common with the other countries for which region-
alised R&D expenditure data are available, spending in
the UK is concentrated on the most prosperous re-
gions, and especially the South East of England. Per
capita spending across the regions is illustrated in
Chart 4.11. In absolute terms, the South East ac-
counts for some 54 percent of total R&D expenditure;
the region contains just over 30 percent of the nation-
al population. At the opposite end of the spectrum,
Northern Ireland, the least prosperous region in the
UK, accounts for just 0.7 percent of the total national
spend on R&D, but 2.8 percent of the national popu-
lation.

The composition of expenditures across sectors also
varies between regions. On average, around 70 per-
cent of R&D expenditure is accounted for by the pri-
vate sector. However, less than 50 percent comes
from the private sector in three regions: East Anglia
(the second most prosperous region in the UK, with
GDP higher than the EU average), Scotland and
Northern Ireland. In the East and West Midlands, the
South East and the North West (the second poorest
English region), the private sector contribution exceeds
70 percent of the total spend. State expenditure also
varies widely. In considering the relative contributions
of the public and private sectors, there are some par-
allels with Spain. For example, East Anglia receives al-
most 6 percent of State R&D funding, but businesses
in the region contribute just 3 percent of private R&D

spending; in contrast, in the North West, businesses
accounted for 10.5 percent of the national private sec-
tor spend, but just 3 percent of State R&D expenditure
is channelled into the region.

4.1.3.1.2 Government Funding of Private Sector R&D

The section above has focused on overall levels of
R&D spend in the regions, considering the distribution
of expenditure between regions and sectors. This sec-
tion looks at the extent to which business enterprise
sector R&D (BERD) is financed by government and the
regional distribution of such finance. The aim here is to
provide some basis for comparing, in a regional con-
text, levels of regional aid with levels of government
funding of R&D.

There are two principal sources of information on gov-
ernment funding of R&D in the business sector. First,
the European Commission undertakes regular surveys
of the State aid spending of the EU countries, includ-
ing R&D aid. Second, the OECD also undertakes sta-
tistical work in the field. The main disadvantage with
the Commission surveys for the purposes of this study
is that substantial amounts of government funding of
R&D in the private sector are excluded from the analy-
sis because the funding does not constitute State aid
for the purposes of Article 92 of the EC Treaty. This
section, therefore, takes the OECD figures as its start-
ing point. Before proceeding to consider the regional
distribution of expenditures, it is worth providing some

indication of overall orders of magnitude of R&D and
regional aid spending.

<caption>Chart 4.12</caption>

R&D and Regional Aid funding as a % of National GDP

<figure><img src="image_24.png" /></figure>

Source: OECD (1995), EUROSTAT, EPRC Calculations

In terms of overall government funding of BERD, the OECD figures suggest that expenditure in the EU11<sup>(11)</sup> amounted to some 8,311 MECU, around 0.15 percent of total EU GDP<sup>(12)</sup>. Expenditure on regional incentives by the same Member States is of a similar order of magnitude; the mean spend over the period 1989-93 was 7,229 MECU or equivalent to about 0.13 percent of EU GDP.

However, the distribution of spending on the two poli-
cy areas is by no means even. Chart 4.12 shows very
wide variations in the relative importance of R&D and
regional aid expenditures between countries. As a pro-
portion of national GDP, the four Cohesion countries
spend significantly more on regional aid than do the
northern European countries. Moreover, all four coun-
tries spend in excess of 0.15 percent of national GDP
on regional aid while spending less than 0.05 percent
of national GDP on R&D support. In the five northern

European countries, the position is reversed; four of
the five (Belgium is the exception) spend very signifi-
cantly more on R&D support to firms than they do on
regional incentives. In the two so-called dual
economies, the position is different again. Both spend
significant sums on regional aid as a proportion of na-
tional GDP (more than Spain, but not as much as the
other three Cohesion countries), but both also spend
significant sums on R&D. In short, the poorer countries
of the EU channel a large proportion of national re-
sources towards regional policy, while the more pros-
perous countries focus principally on R&D; in between,
in the two dual economies, there are significant levels
of intervention in both policy areas.

Chart 4.12 focuses on the relative importance of R&D support and regional aid in relation to the size of the *national* economies; however, it is important to remember that the national economies vary considerably in size and that a consideration of the *absolute* levels of spend gives a very different picture. One illustration of this is that French government expenditure on BERD amounted to 2,916 MECU, whilst the equivalent

<footnote><sup>(11)</sup> Data are not available for Luxembourg.</footnote>

<footnote><sup>(12)</sup> For most countries the data relate to 1992. For Belgium, Denmark and Greece the data are for 1991; for Portugal the data relates to 1990.</footnote>
figure for Greece is 3.6 MECU. *Even in per capita terms*, this means that France spends 146 times as much on R&D support as does Greece.

An illustration of the relative expenditures in absolute terms is given in Chart 4.15 and Chart 4.16. For the purposes of comparison, similar illustrations of shares of population and GDP in the Community are given in Chart 4.13 and Chart 4.14 respectively.

Chart 4.15 shows that, in spite of the high levels of ap-

parent spend on regional aid by the Cohesion Four, in absolute terms, this expenditure is about on a par with the share of population of those countries in the EU total. Similarly, while expenditure on regional aid in Italy and Germany appears low compared with the Cohesion country spend illustrated in Chart 4.12, the real volume of spending involved only becomes apparent when considered in absolute terms; these two countries together account for 72 percent of regional incentive spending in the EU, compared with shares of 40 percent and 45 percent of EU population and GDP respectively.

<caption>Chart 4.13</caption>

<figure><img src="image_25.png" /><figcaption>Chart 4.14</figcaption></figure>

<figure><img src="image_26.png" /><figcaption>Shares of EU12 GDP (ECU 1993)</figcaption></figure>

Source: EUROSTAT
<caption>Chart 4.15</caption>

Shares of Regional Incentive Expenditure

<figure><img src="image_27.png" /></figure>

Source: OECD (1995), EUROSTAT, EPRC Calculations

Chart 4.16 shows that spending on R&D in Italy and Germany combined is slightly less than what would be expected on the basis of their shares of population and GDP in the EU total. However, the situation in the Northern Countries and the Cohesion Four is dramatically different. Indeed, Chart 4.16 illustrates the extent to which Chart 4.12 underplays the scale of R&D funding in the north and exaggerates the R&D spend in the Cohesion Countries; this is a direct consequence of the small size of the Cohesion Four economies com-

pared with the Northern Countries. Chart 4.16 shows Cohesion country spend on R&D support accounting for just 3 percent of the EU total, about a quarter of what would be expected on the basis even of their share of EU GDP, let alone population. Conversely, the higher spend on R&D support in the Northern countries and the larger size of those economies is reflected in a significantly larger share of overall R&D spend than would be expected on the basis of GDP or population.

<caption>Chart 4.16</caption>

Shares of Government Funded Business Enterprise R&D

<figure><img src="image_28.png" /></figure>

Source: OECD (1995), EUROSTAT, EPRC Calculations
As far as the regional distributions of government fund-
ing of BERD are concerned, calculations are based on
the spread of private sector spending on R&D set out
in the charts discussed earlier. Clearly, this assumes
that the availability and uptake of government funding
of BERD remains the same across regions; in fact, this

may not be so given the different sectoral emphases
of government R&D policies and the different sectoral
concentrations of the various regions. Nevertheless,
the approach remains the best approximation of gov-
ernment spending on BERD in the regions, in the ab-
sence of more concrete data.

<caption>Chart 4.17</caption>

France: R&D and Regional Aid Funding as % of Regional GDP

<figure><img src="image_29.png" /></figure>

Source: OECD (1995), REGIO, EPRC Calculations

In considering Chart 4.17, it is essential to note that
the scales for R&D and regional aid are different; in-
deed, the R&D scale is ten times the scale for re-
gional aid funding. The scale chosen is obviously de-
termined by the volume of spend and reflects the far
higher levels of R&D expenditure compared to re-
gional aid funding in France (see Chart 4.12). It is no-
table that, in virtually all regions (data are not avail-
able for Corsica), government funding of BERD rep-
resents a larger proportion of regional GDP than is
contributed by regional aid; this is so even in the
least prosperous regions such as Nord Pas de Calais
and Limousin. The chart shows that the highest con-
tribution of regional aid to regional GDP is in the Lor-
raine region; however, it is striking that the contribu-
tion of government funding of BERD in the Paris re-

gion is more than 10 times the value of regional aid
in Lorraine. In spite of the difference in scales ne-
cessitated by the very different volumes of funding in-
volved, there is a visible complementarity in the rela-
tionship between the two sources of funds; those re-
gions that receive most in regional aid as a propor-
tion of GDP tend to receive least in R&D aid. Per-
haps surprising, however, is the extent to which the
more prosperous regions benefit from R&D funding
as expressed in regional GDP terms. In absolute
terms, it is to be expected that expenditure on R&D
would be concentrated in the more prosperous re-
gions; however, Chart 4.17 shows that, for the most
part, the more prosperous regions benefit much more
from R&D funding as a percentage of regional GDP
than do the poorer ones from regional aid.
<caption>Chart 4.18</caption>

Italy: R&D and Regional Aid Funding as a % of Regional GDP

<figure><img src="image_30.png" /></figure>

Source: OECD (1995), REGIO, EPRC Calculations

For the Italian data presented in Chart 4.18, the scales for measuring assistance also differ between the two policy types. However, reflecting the very different volumes of spending on the two policy areas (see Chart 4.12), compared with France, the positions are reversed. As discussed in the chapter on Member States' regional policies (Chapter 2), Italian regional policy accounts for a significant proportion of regional GDP in some parts of the Mezzogiorno, although there is not always a direct correlation between prosperity and the contribution of regional aid to regional GDP. In Abruzzi, for example, regional GDP is 90 percent of the EU average and regional aid represents 1.2 percent of GDP; in contrast, regional GDP in Calabria is just 60 percent of the EU average and regional aid amounts to

only 0.2 percent of (a substantially smaller) regional GDP.

Taking the Mezzogiorno as a whole, the contribution of government funding of BERD to regional GDP is very small; only in Abruzzi - soon to lose its Objective 1 status - does the contribution even approach 0.05 percent of regional GDP. In contrast, and as in France, in the more prosperous regions R&D funding makes a larger contribution to regional GDP than in the poorer regions; indeed, the pattern in France is replicated in Italy. In Piemonte and Lombardia, the wealthiest regions, the share of regional GDP accounted for by government funding of BERD is substantially greater than elsewhere and this even although regional GDP is itself, by definition, substantially bigger.
<caption>Chart 4.19</caption>

Spain: R&D and Regional Aid Funding as a % of Regional GDP

<figure><img src="image_31.png" /></figure>

Source: OECD (1995), REGIO, EPRC Calculations

Chart 4.19, which presents the data for Spain, uses the same scale as the chart for Italy. Thus, the regional aid scale is ten times the scale used for government funding of BERD, a reflection of the relatively low spend on support for business R&D in Spain (see Chart 4.12). Comparing the Spanish and Italian charts reveal considerable similarities in the overall patterns of expenditure. In general there are very low levels government funding of BERD as a proportion of regional GDP across the Objective 1 regions (Galiacia, Asturias, Cantabria, Extremadura, Andalucia, etc.), but a very high contribution in the richest regions (Madrid, País Vasco, Cataluña). Again, it is worth stressing that these figures represent not only larger shares of regional wealth, but also that the level of prosperity in which those shares are larger is also higher.

Unlike France, however, and in common with Italy, even in the regions which gain most from R&D spend-

ing, the level of spending is less significant than spending on regional aid in the poorer regions.

The data for the UK presented in Chart 4.20 are particularly interesting since levels of spending on the two policy areas are such as to enable them to be presented on the same scales. As elsewhere, the more prosperous regions (notably the South East of England) gain more government support for BERD relative to regional GDP than the poorer regions. Indeed, the South East receives more as a proportion of (a very high level of) regional GDP in terms of government funding of R&D than does Northern Ireland in regional aid. Further, the share of BERD funded by government in the South East exceeds regional and R&D aid combined in Northern Ireland. Again, it should be stressed that, as far as the poorer regions are concerned, the R&D spend represent very small shares of relatively low levels of regional GDP; in contrast, in the richer regions, GDP is, by definition higher, but the share of spend related to regional GDP is also substantially higher.
<caption>Chart 4.20</caption>

UK: R&D and Regional Aid Funding as a % of Regional GDP

<figure><img src="image_32.png" /></figure>

Source: OECD (1995), CSO (1995), REGIO, EPRC Calculations

### 4.1.3.2 The Regional Effects of Competitiveness Policies

The second aspect of the impact of horizontal policies involves considering the effects of those policies based on a review of published studies. Research examining the spatial impact of spending on R&D is, almost inevitably, hampered by a lack of comparative regional data. As a result, evaluations have tended to be fairly limited in scope. Nevertheless, many researchers feel that non-spatial policy expenditure is potentially a powerful determinant of regional economic development throughout the EU (Amin and Tomaney, 1995).

Although measurement problems undoubtedly curtail (aggregate) research in this area, some evaluative work undertaken examines the effectiveness of national technology policy from a regional perspective. Studies assessing the impact of national R&D expenditure on regional economic development show that national policy towards problem regions is often poorly re-

sourced and badly co-ordinated. One area frequently considered is the effectiveness of science parks. One study examining technology parks in Spain discovered that such parks tend to be located in more advanced areas with a history of technological innovation (Ybarra, 1991) and those which had located in such regions showed limited development effects. Many science parks in less favoured regions are characterised by poor linkages with the local region (academic institutions and suppliers) and perform little strategic R&D (Massey and Weild, 1992).

One in-depth case study of Spain's technology park in Andalucia (Peck, et al, 1996) found that policymakers had largely failed to create a genuine technology-led complex. The park is primarily seen as a location for incoming inward investment. Given the truncated nature of decision making within multinational subsidiaries most firms in the park do little in the way of R&D. Although some firms undertake some design work at their plant, this is mostly adaptive design for
specific customers rather than fundamental product
development (Peck et al, 1996). Low levels of suppli-
er linkages further reduce the scope for technology
transfer between FDI and local suppliers. Peck et al
conclude that Andalucia's technology park is ultimate-
ly based on 'knowledge produced elsewhere'.

Hassink's (1993) comparative study of technology pol-
icy in three European regions (North East of England,
the Ruhr and Baden-Wurtemberg) shows how region-
al technology policy is often an amalgamation of na-
tional and local initiatives. Hassink (1993) claims that
the region with the most effective regional technology
programme, Baden-Wurtemburg, is also the territory
with the most substantive regional autonomy in this
area. According to Hassink (1993), the centralised na-
ture of the UK, coupled with the low priority Britain ac-
cords to regional technological development, under-
mines local capacity building in the north east of Eng-
land.

Other studies assessing the effectiveness of Member
State regional technology policy have tended to focus
on case study assessments of individual programmes
or policies. An example of this was Sternberg's (1995)
study of innovation centres in Germany. Using a vari-
ety of research techniques - such as before and after
analysis, control groups and case studies - Sternberg
examined the effectiveness of this policy and the im-
pact these institutions had on regional economic de-
velopment. Sternberg believes that innovation centres
play an important role in promoting industrial efficiency
and claims that, after leaving the innovation centre,
successful firms employed more people, needed more
office space, and experienced higher turnover.

Interestingly, Sternberg claims that nationally funded
programmes are much more important for the new
Länder than the more prosperous western and south-
ern Länder. He concedes, however, that evaluations of
this kind are invariably dogged by numerous method-
ological problems that make data reliability problemat-
ic. Another evaluative study of Emilia-Romagna, con-
cludes that national innovation policy plays a vital role
in developing the local technological base (Bianchi and
Girodani, 1993). This owes to the fact that local initia-
tives are inevitably constrained by lack of available
funding. However, Bianchi and Girodani believe that
local business service centres such as CITER (Textile
Information Centre, Emilia-Romagna) can play a pow-
erful role in boosting the innovative capacity of local
textile manufacturers through the provision of common
services. Although not an evaluation per se, this study
highlights how regional innovation policy must be seen
as a complex network of initiatives operated by policy
bodies on various spatial scales. In a regional devel-

opment context, however, it is important to note that
Emilia-Romagna is among the more prosperous re-
gions of the EU, a fact which inevitably impacts on its
innovative capacity.

Although most research in this area tends to focus on
the role SMEs play in developing regional technologi-
cal capabilities, the role played by multinationals is al-
so of interest to policymakers in regions dominated by
FDI. In these regions multinationals are the main
source of local technological development. This is
particularly interesting because some claim multina-
tionals are pushing more of their R&D towards their lo-
cal subsidiaries. This development is associated with
moves towards more decentralised forms of industrial
organisation which multinationals are supposedly
adopting. This organisational transformation is not,
however, accepted by all researchers and case stud-
ies of plants throughout Europe show a continuing re-
gional hierarchy between core and peripheral regions
in terms of MNC R&D (Amin et al, 1994).

While some observers note that this regional hierarchy
may be becoming less clear cut, research conducted
on multinationals in the Mezzogiorno discovered that
this was not part of a comprehensive upgrading of the
R&D capacity of firms in the region (Giunta and Mar-
tinelli, 1995). Others, meanwhile, conclude that tech-
nology transfer between multinationals and indigenous
industry remains weak, especially in Objective 1 re-
gions such as Portugal and Ireland (see respectively,
Amin et al, 1994; Kenny, 1995). Furthermore, weak
linkages between FDI and local suppliers undermine
technology transfer in many Objective 2 regions (see
Amin et al, 1994). These findings are particularly im-
portant for European regions where FDI is often the
main source of R&D within the regional economy.

Moving beyond R&D policies to horizontal policies
more generally, other evaluative work has shown how
national policies on defence have uneven regional im-
pacts (Lovering, 1991), especially important for EU
Member States with sizeable defence industries (eg.
Britain and France). In Britain, for example, the main
beneficiaries of government defence-related spending
are concentrated in the southern regions (South East
and South West) where most high technology research
is conducted. Although many people are employed in
defence establishments in northern parts of the UK,
these jobs comprise the lower value aspects of the
production process. Meanwhile, the bulk of high-end
R&D takes place in the more prosperous parts of the
country, particularly the South East (Lovering, 1991).

This spatial division of labour has important conse-
quences for regional development. Given that almost
half UK government spending on R&D goes on de-
fence-related projects, some regions will disproport-
tionately benefit from this element of government ex-
penditure. One recent study reveals how large
amounts of aerospace defence expenditure is ab-
sorbed by firms and research institutes in the South
West near Bristol, while the same is true for electron-
ics R&D in the Thames Valley area near London (Sim-
mie, 1995). The high skills profile of this research
means that defence-dependent regions disproportion-
ately benefit from this element of national expenditure.
This uneven spatial distribution of government R&D
spending has an important downside, however. These
localities are now highly sensitive to the current reduc-
tions in defence expenditure: reductions which could
have serious knock-on effects for employment, skills
and regional technological capacity in these areas
(Simmie, 1995).

Another element of national public expenditure thought
to impact regions differently is training. Although little
evaluative work has been undertaken in this area, one
study found the spatial impact of national training
schemes to vary according to the level of unemploy-
ment within the region (Peck, 1990). Peck's study of
the British government's Youth Trainee Scheme (YTS)
discovered that the employer-led nature of this scheme
meant that employers use trainees differently across
the country. On one hand employers in areas of low
unemployment and tight labour markets, such as the
South East of England, often used the programme as
a means of screening trainees for full time employment
and offer genuine job-related training. Employers in
depressed northern regions, on the other hand, pre-
dominantly used the scheme as a form of job substi-
tution or 'cheap labour'. According to Peck, higher
unemployment rates in the latter area reduced the
need for recruitment and proper training. This study is
interesting because it shows that national policies do
not operate uniformly across countries and that policy
effectiveness is often geographically uneven.

In the main, the studies reported within this review did
not attempt to evaluate the regional effects of horizon-
tal policies. Instead they mostly attempted to assess
the effectiveness of horizontal policies in different geo-
graphical contexts. The studies examined point to-
wards the fact that horizontal policies do not always
work well in less favoured regions. The unique char-
acteristics and circumstances of less favoured regions
mean that national policy often neglects or works
poorly when implemented in these areas. Various fac-
tors circumscribe current levels of understanding of
these issues: the lack of regional sensitive data; the
wide ranging nature of these policies; and the difficul-
ty in disentangling their effects from other government

policies. For these reasons little or no comprehensive
evaluations have been attempted. Given the impor-
tance of such policies from a regional development
perspective, this seems a worrying omission.

## 4.2 Employment Policies

The achievement of an acceptable level of employment
and its counterpart, a low level of unemployment, is
perhaps the most important objective of economic pol-
icy across the European Union. While the pursuit of this
objective remains the responsibility of individual Mem-
ber States, with the increasing recognition of the com-
mon nature of economic problems facing governments
across Europe and of the high degree of interdepend-
ence of national economies, there is a growing aware-
ness of the value of developing a common strategy.

At the same time, it is accepted that such a strategy
has to take account of the major differences which re-
main in the stage of economic development attained
by Member States and in their social, cultural and in-
stitutional characteristics, which mean that the appro-
priate form of the measures to be taken will vary from
country to country. Although the general nature of
problems faced may be similar, their manifestation, in
terms, for example, of the social groups most affect-
ed, tends to differ as does the policy response likely to
prove effective. Measures which work well in one
country will not necessarily have a similarly beneficial
effect somewhere else if the underlying conditions, in-
cluding social behaviour and attitudes as well as insti-
tutional arrangements, are different.

A common approach to employment policy was given
impetus by the publication at the end of 1993 of the
Commission White Paper, *Growth, competitiveness,
employment*, which outlined a European strategy for
achieving a higher rate of growth and job creation and,
thereby, for combating unemployment, ensuring a
more equitable distribution of employment opportuni-
ties and for increasing economic and social cohesion.
The general thrust of this strategy was endorsed by
the Member States at the Edinburgh Council meeting
in December of that year and has been reiterated and
elaborated at subsequent meetings.

In particular, the Essen Council at the end of 1994 listed
a number of key areas of policy as being of major im-
portance for tackling the Union's employment problems:

* improving employment opportunities for the labour force, by promoting investment in vocational train-
ing. To that end a key role falls to the acquisition of
vocational qualifications, particularly by young peo-
ple. As many people as possible must receive ini-
tial and further training which enables them through
life-long learning to adapt to changes brought
about by technological progress, in order to reduce
the risk of losing their employment;

* increasing the employment intensity of growth, in particular by:

- a more flexible organisation of work, in a way which fulfils both the wishes of employees and the requirements of competition;

- a wage policy which encourages job-creating investments and in the present situation requires moderate wage agreements below increases in productivity;

* the promotion of initiatives, particularly at regional and local level, that create jobs which take account of new requirements, e.g. in the environmental and social-service spheres

* reducing non-wage labour costs extensively enough to ensure that there is a noticeable effect on decisions concerning the taking on of employees and in particular of unqualified employees;

* increasing the effectiveness of employment policy by avoiding practices which are detrimental to the readiness to work, and by moving from a passive to an active labour market policy. The individual incentive to continue seeking employment on the general labour market must remain. Particular account must be taken of this when working out income-support measures. The need for, and efficiency of, the instruments of labour market policy must be assessed at regular intervals;

* implementing particular measures necessary to help young people, especially school leavers who have virtually no qualifications, by offering them either employment or training. The fight against long-term unemployment must be a major aspect of labour market policy. Varying labour market policy measures are necessary according to the very varied groups and requirements of the long-term unemployed. Special attention should be paid to the difficult situation of unemployed women and older employees.

As part of a policy of giving priority to action in these
areas, Member States undertook to develop multi-an-
nual employment programmes spelling out the meas-

ures introduced or planned. Further, they agreed at the
Cannes Council meeting to present these in the Au-
tumn of 1995. This section is largely based on the
contents of these presentations.

The employment policy agreed at Essen was elaborat-
ed further at the Madrid Summit in December 1995,
where it was reaffirmed that the fight against unem-
ployment and for equal opportunities is the priority task
for the Community and its Member States. At the
same time, there was a convergence of views on the
approach to be followed in carrying out this task. In
particular, common emphasis was placed on the need
for a co-ordinated strategy combining, on the one
hand, macro-economic policies which would create
the conditions for sustained growth of output and em-
ployment and, on the other hand, structural measures
which would ensure that the opportunity for accelerat-
ed job creation afforded by the creation of these con-
ditions was realised in practice.

Nevertheless, despite agreement on these two broad
aspects of policy, there is somewhat less unanimity on
their precise interpretation in terms of the concrete
measures which they imply. This is less the case as re-
gards the contents of macro-economic policy, where
the constraints imposed by the general commitment to
low inflation, financial stability and the achievement of
the conditions for monetary unification as set out in the
Maastricht Treaty limit the scope for independent dis-
cretionary action. In all Member States, therefore,
monetary policy is aimed at maintaining low rates of in-
flation and stable exchange rates and, accordingly, at
expanding credit and setting interest rates at rates and
levels which are consistent with this, while fiscal policy
is aimed at reducing, or containing, budget deficits,
with the emphasis on restricting public expenditure
growth and limiting increases in taxes (though more in
some countries than others).

As regards structural policies, however, differences in
emphasis are more apparent. While there is broad
agreement on the aim of eliminating rigidities and
achieving better operation of labour markets, the ap-
proach adopted and the measures implemented in
pursuit of this aim vary significantly across the Union.
This reflects, in part, differences in underlying philoso-
phy as well as differences in economic conditions, so-
cial attitudes, cultural traditions and institutional char-
acteristics, which, with practical experience, both help
to shape that philosophy and are influenced by it.

In particular, a major difference concerns the role of
government and the extent of State involvement in pol-
icy, with some countries attempting to reduce this,
others to reform the way in which it operates to make
it more effective. At one extreme, the UK approach is to minimise State intervention and both the fiscal burden and regulatory constraints imposed on business and to rely largely on market forces to achieve employment aims. In most other parts of the Union, there is greater acceptance of the need for intervention to ensure that both economic and social objectives are pursued effectively - and, indeed, to ensure that the labour market functions efficiently - though there are differences in the extent of intervention thought necessary.

Such differences are reflected not only in the form of policies adopted, but also in the scale of public expenditure incurred in carrying them out. For example, in Denmark or Sweden, where there is a high degree of social consensus in favour of the State intervening to help people into work through training and other measures, government expenditure on active labour market measures is considerably higher than elsewhere in the Union. By contrast, in countries like the UK, where active labour market measures take the form of deregulation and a low level of fiscal and other charges on business, comparatively little is spent (in terms of monetary outlays if not of foregone tax revenue) on employment policy.

Somewhat paradoxically, the same tends to be true of countries with relatively highly regulated labour markets, those in the South of the Union especially, where objectives are pursued partly through imposing obligations on businesses. This is often compensated, however, by concessions or State support in other areas, which is sometimes reflected in a relatively high expenditure on subsidies and other State aids, whether explicit or implicit, to encourage firms to maintain employment levels and avoid redundancies.

Analogous differences also apply to the scale of so-called passive expenditure on labour market policy. In countries where spending on active measures is relatively high, there is some tendency for expenditure on unemployment benefits and other forms of income support for those out of work also to be high in relation to the number of people unemployed. This partly reflects a concern to assist people in their efforts to find work and to enable them to spend sufficient time looking for a suitable job, so helping to improve the functioning of the labour market. By contrast, in countries where reliance is placed more on the unrestricted interplay of market forces to balance labour demand and supply, there tends to be more emphasis on the avoidance of any disincentive for the unemployed to look for a job. Income support, therefore, tends to be maintained at a minimum acceptable level to encourage people to find employment as quickly as possible.

Nevertheless, in all countries, there has been an increasing shift of policy emphasis from passive labour market measures of income support for the unemployed to active measures designed to help them into work. In large measure, however, this has been frustrated by the sharp rise in unemployment in the early 1990s which added considerably to the funds required for income support and correspondingly limited those available for active measures.

In all countries, whatever the approach followed, specific measures for boosting employment are constrained not only by the intermediate macro-economic objectives of reducing budget deficits but also by the imperative to maintain cost competitiveness, which has tended increasingly to limit the extent to which taxes and other charges can be raised, especially on businesses. The funds available for labour market programmes are, therefore, restricted, as also is the scope for reducing existing charges falling on employment, any reductions necessitating compensatory increases elsewhere to prevent budget deficits from rising.

Similar constraints exist on other measures to maintain employment levels, such as regulations restricting layoffs and redundancies, which effectively shift the cost burden onto the private sector and tend to add to the costs of production.

### 4.2.1 Job Creation or Job Diversion?

Although the employment strategy first outlined in the White Paper and elaborated at subsequent European Council meetings, culminating in the two-pronged approach agreed in Madrid, has the general aim of increasing the net rate of job creation in the Union and, thereby, reducing unemployment, there is a question-mark over how far the structural aspects of the policy serve to redistribute jobs rather than expand their overall number. At the same time, even if the effect is to redistribute jobs rather than to increase them, this would not necessarily negate the value of implementing such measures, given the explicit objective of achieving a more equitable distribution of employment opportunities in the interests of improving economic and social cohesion in the Union.

In practice, there is a serious lack of empirical evidence on the effects of most of the measures included in the employment programmes being followed by Member States. Thus in the case of greater investment in vocational training, while increasing the number of young people receiving initial and further training is likely to give them more chance of finding an acceptable job, it does not necessarily follow that in itself it will create significantly more jobs. This is especially so in the short-term before the availability of a better trained
work force has time to filter through into an increase in
the competitiveness of producers and, therefore, im-
proved trade performance. The results of most re-
search studies seem to show that while increased
training tends to have a positive effect on employment,
the scale of the effect is extremely variable and de-
pends on the quality and content of what is being
taught.

According to a recent Swedish study (Calmfors and
Skedinger, *Oxford Review of Economic Policy*, Vol. 11,
No.1), for example, more training can sometimes in-
crease unemployment by raising employees' expecta-
tions of earnings above what employers are prepared
to pay. Moreover, predicting what skills will be required
by business in future years is by no means straight-for-
ward when the pace of technological change is tend-
ing to alter the nature of jobs radically in a short perи-
od of time and to create employment opportunities
which simply did not exist before. (The enormous ex-
pansion in the use of PCs, for example, and their far-
reaching effect on working methods and the demand
for skills throughout the economy, which has occurred
over the past ten years was almost impossible to pre-
dict in the early 1980s when the technology was in its
infancy.)

A labour market survey carried out in 1994 across the
European Union (see Commission of the European
Communities, 1995a) indicated that only 7 percent of
businesses questioned regarded a shortage of ade-
quately skilled applicants as being a very important ob-
stacle to employing more people in industry and less
than 30 percent considered it to be of any importance
at all. Although this survey was conducted at a time
when the European economies were only slowly be-
ginning to recover from recession and skill shortages
were found to be a more important factor in 1989
close to the peak of the economic cycle, it indicates
that in itself more training cannot add significantly to
job availability, except perhaps in the longer term. At
the same time, a survey of nine countries (carried out
by the McKinsey Global Institute) concluded that the
crucial determinant of productivity, and, therefore, of
competitiveness, was not so much the skills of the
labour force as the ability of management to devise
successful business strategies.

Job subsidies or job creation schemes of various kinds
also have a questionable impact on overall job avail-
ability. According to most studies, most schemes
seem to involve substantial 'dead-weight' losses (in
the sense that many of the people assisted would
have found jobs anyway) and significant substitution
effects (in the sense that to a large extent the people
assisted or the jobs created displace other people in

work or other jobs). On the other hand, evidence
seems to show that dead-weight losses can be re-
duced markedly by targeting subsidies on the most
disadvantaged groups, though displacement effects
are liable to remain important as employers take on
workers who cost them less at the expense of existing
staff or others who might have been recruited in their
place.

Similar considerations apply to measures to reduce in-
direct labour costs, and employers' social contribu-
tions in particular, which have become a widespread
means of encouraging firms to take on more people,
especially new entrants to the labour market and those
who have been unemployed for a long time. Though
these might add to the numbers employed in the
short-term by reducing the overall cost of employment,
their net effect depends on how the associated reduc-
tion in State revenue is made good (ie. on what other
taxes or charges are increased to prevent budget
deficits from expanding) and, in the longer-term, on the
extent to which they result in higher wage levels.
(Cross-country comparisons seem to indicate that
countries with relatively low indirect labour costs, such
as Denmark, for example, where employer's social
contributions are much smaller than elsewhere, do not
tend to have correspondingly lower total labour costs
but rather higher levels of direct labour costs - or gross
wages - which are required to pay the higher income
taxes or taxes on expenditure needed to compensate
for low social contributions.)

Equally, measures aimed at expanding employment
through stimulating the growth of environmental activ-
ities or social and local services, the development of
which cannot readily be left to market forces because
of the externalities involved and the collective nature of
the goods and services produced, justifiable as they
may be, will only tend to add to the number of avail-
able jobs, in the context of an overall budget con-
straint, if they result in a higher employment content of
output or if they serve to shift the pattern of expendi-
ture towards domestic production and away from im-
ports. A key question in this regard, as in the case of
reductions in employer's contributions, concerns the
public expenditure which they effectively displace (or
the higher taxes which they necessitate) and its com-
parative effect on employment.

Other measures have, perhaps, a less questionable ef-
fect on the overall level of employment, particularly if
this is defined in terms of the number of people in work
rather than the volume of work performed. This is most
clearly the case as regards reductions in working time,
whether achieved through a growth of part-time work-
ing or shortening the length of the normal working
week. In most Member States, average hours worked per person have declined over the past decade - by just over 4 percent between 1983 and 1994 for the Union as a whole - so adding to the number of people with jobs (unless it is argued that the reduction in hours stimulated a gain in labour productivity of equal or greater proportions which would not otherwise have occurred). Nevertheless, the reduction has varied significantly between Member States, from 6 percent or more in Germany, Belgium and the Netherlands to 1 percent or less in the UK and Italy.

At the same time, deliberate measures to reduce working time against the wishes of employers and/or employees run the risk of reducing efficiency and adding to costs (especially if there is no compensating reduction in average earnings), so damaging competitiveness and the potential for employment creation. Government policy in this area, therefore, can perhaps be most effectively concentrated on encouragement, education and example rather than on regulation (except where health and safety is at stake) and on helping to separate the issue of plant or business operating times from that of the hours worked by employees.

Policies of wage moderation, of keeping pay rises in line with or below the growth of labour productivity, also seem to have less uncertain effects, insofar as they serve to increase the profitability of operations and the prospective returns to investment and, therefore, should encourage companies to expand employment. In effect, if workers accept pay rises below the rate of productivity growth, then a given wage bill can fund more people in employment. Equally, however, wage moderation might simply lead to higher profits and a lower growth of aggregate demand, so depressing the rate of economic growth.

## 4.2.2 Employment Policy and Cohesion

If the effect of present policies on employment growth is uncertain, particularly in terms of its scale, their impact on cohesion is less questionable, as noted above. A common characteristic of most of the measures in operation or being planned is to reduce disparities in employment opportunities whether between individuals, social groups or regions.

Increased access to training, both initially for young people and for people already in work, stands to widen the job options available, especially to those with relatively few qualifications and low skill levels. Similarly, targeting support, in the form of subsidies, training programmes or reductions in indirect labour costs on the unemployed, particularly the young, the elderly, those out of work for long periods as well as women entering the labour market after a spell of inactivity,

stands to improve the position of both those without jobs relative to those in employment and those most disadvantaged among the unemployed relative to those they are competing with for work. Moreover policies of wage moderation and of encouraging greater flexibility in working time arrangements, especially if accompanied by reductions in average hours worked, stand to spread the available work more equally between those wanting a job.

At the same time, while most measures do not have a specific regional dimension, the very fact that many of them are aimed at the unemployed, and within this group at the most disadvantaged of those without work, is likely to mean that they benefit regions with the most serious problems of unemployment and inadequate rates of job creation more than others, so tending to narrow regional disparities.

The main elements of the employment programmes in operation in Member States are described below, taking each broad kind of measure in turn and indicating the countries in which it has been implemented and the form which it has taken. It should be emphasised, however, that this is based on the presentations of programmes made by Member States and, therefore, on their choice of the measures to include. In consequence, the fact that a particular country is not mentioned in the context of any particular measure does not necessarily signify that it has not in practice introduced it in some form or other, merely that it does not figure in their choice of what to mention.

### 4.2.3 Summary of Employment Policies in Member States(13)

#### 4.2.3.1 Education and Training

The Essen Council identified two objectives in this area for priority policy action:

* better education and training for young people entering the labour market

* the provision of lifelong training

One of the main concerns of Member States is the proportion of *young people* who leave the education system with few or no qualifications, whose chances of finding employment are made much more difficult by the shift in favour of skilled work in the labour market.

Participation rates in full-time education have risen in

<footnote>(13) The description of employment programmes below relates to all the Member States apart from Austria and Sweden.</footnote>
recent years in most Member States, which has served
to stem the flow of early school leavers. This, however,
is partly due to economic recession in the early 1990s
and the lack of jobs for them to go into; it remains to be
seen whether the increase in participation will continue
as recovery strengthens and more jobs become avail-
able for young people. Moreover, in addition to encour-
aging young people to stay longer in education, there is
a continuous need to improve its quality and gear it
more towards the skills required by the labour market.
To this end, initial education systems in a number of
Member States have been adapted to incorporate
more opportunity for vocational training.

The use of apprenticeships, or dual systems of work
experience and on-the-job training, is widely regarded
as a successful way of integrating young people into
working life, as evidenced most especially by the Ger-
man system. Employers in the Benelux countries as
well as in Spain are, therefore, being encouraged by
reductions or exemptions in social security contribu-
tions either to hire apprentices or retain them after their
training period.

The UK has set up Modern Apprenticeships for 16-17
year olds and Accelerated Modern Apprenticeships for
18-19 year olds. France has recently lowered the age
to 14 at which preparation for apprenticeships can
take place. Ireland is aiming to expand its apprentice-
ship system with greater emphasis on quality rather
than time served. There is also to be a new vocation-
al training qualification under TEASTAS - the Irish Na-
tional Certification Authority.

Both Greece and the UK are pursuing the idea of train-
ing credits or vouchers which have a financial value
and can be presented to an employer or training
provider in exchange for an approved course of train-
ing. In Greece vouchers may also be used for work ex-
perience as well. This system is being used already in
the UK for 16 and 17 years olds and consideration is
being given to extending it to 18 and 19 year olds. In
Greece the target group is the young unemployed.

The opportunities for second-chance education or fur-
ther and re-training for the unemployed are also being
widely increased. Often their unemployment is the re-
sult of skills that are no longer required by the labour
market and their only chance of finding a job is through
learning new skills. In this context, in some Member
States entitlement to unemployment benefits has been
made more flexible to allow receipt of support while
the person concerned is undergoing education and
training.

In all Member States, there is recognition of the need
for continued training during working life to allow em-

ployees to adapt to technological change in the work-
place and a variety of methods are being used to
achieve this.

In both the UK and the Netherlands, it has largely been
left to businesses or, in the latter, to the social partners
to decide vocational training arrangements. On the
other hand, in Germany, Denmark and Belgium, career
breaks for further training are being encouraged by
government through the payment of allowances. In
Italy, consideration is being given to making the costs
of training to both employers and employees tax de-
ductible.

The provision of additional vocational training by the
State, of course, entails increased public expenditure
and somehow this has be financed.. In most Member
States, the resources earmarked for vocational training
have been increased - notably in Spain, Denmark and
Finland. However other ways - beyond State assis-
tance - are being sought for its funding. In Greece,
employers' contributions were more than doubled in
1994 to 0.45 percent of the wage bill to finance train-
ing. In the UK, in contrast to the general tendency in
the rest of the Union to fund training by levies on firms,
consideration is being given to the establishment of
voluntary individual training accounts to help employ-
ees pay for their own training.

4.2.3.2 The Employment Intensity of Production

Over the past 20 years or so, labour productivity in the
Union has shown an upward trend of around 2 percent
a year, signifying that GDP has to grow by more than
2 percent a year on average to expand the number of
people in employment. (Though the underlying rate of
productivity growth varies from country to country, no
Member State has succeeded in achieving employ-
ment growth over the past decade without having
GDP growth of at least 2 percent a year). In the US,
the rate of overall growth of GDP per person employed
has been much less over the same period at less than
1 percent a year, leading to calls in some quarters for
the Union to follow similar kinds of policies of employ-
ing many people on low pay in marginal activities. The
challenge facing European countries is to achieve a
similar rate of job creation as in the US without expe-
riencing the same phenomenon of large numbers of
working poor.

At Essen, Member States were encouraged to focus
policy action on three broad ways of increasing em-
ployment-intensity:

* encouraging wage moderation
* increasing the flexibility of work organisation

* promoting employment initiatives at the regional and local level

Creating jobs while maintaining profit levels requires real wage restraint, but this can be difficult when wage setting is decentralised. On the other hand, centralised pay bargaining does not necessarily allow for variations in sectoral or regional economic conditions. Given that average real labour costs per person employed need to increase at a slower rate than productivity if employment expansion is to take place, pay rises need to vary from firm to firm and industry to industry.

A principal element of employment programmes is, therefore, the pursuit of decentralisation in pay determination. In some Member States, this is left purely to the social partners to bring about. In others, however, especially in the South of the Community, there is a gradual conversion taking place from pay determination at the national level to the active promotion of collective bargaining at the local level.

In contrast to this approach, Ireland operates a national pay agreement, whereby wage rises are limited to a cumulative amount linked to the expected rate of inflation over a three-year period. This has been in force since 1987 and is designed to maintain overall cost competitiveness. In Belgium also, a general pay policy is in force restricting wage increases across the economy to a small percentage a year.

With regard to more flexible forms of pay determination, the extent to which excessive labour costs hinder job creation, especially for the low-skilled and low-paid, has been the focus of policy attention in a number of Member States. In the Netherlands, there is concern that remuneration for low-paid work is often well above the level that employers are prepared to pay given the productivity of the employees in question. Hence apart from trying to close this gap by a downward convergence of wages at the lower end, the possibility of employers departing temporarily from paying the minimum wage has also been considered. In Germany, the use of start-up wages, amounting to 90 percent of regular wages for the first year, was introduced in the West German paper and chemicals industries in 1994.

Another method of increasing the flexibility of pay determination, encouraged in the UK, is through profit-related pay, where a basic wage can be topped up with a tax-free share of a company's profits, so allowing wage bills to be at least partly related to company performance.

Efforts are being made in some countries to make working arrangements more flexible and more in tune with the demands of the market, while, where possible, reducing the average amount of time each person works, so encouraging an expansion in the number of jobs. These take two main forms:

* an increase in part-time working

* greater flexibility in working hours including shorter working weeks and less overtime

The expansion of part-time working not only allows greater flexibility for both employers and employees but it also creates opportunities for integration into the labour market, especially for the young and the unemployed for whom part-time working may provide valuable workplace experience.

In the Netherlands, the UK and Denmark, part-time working accounts for over 20 percent of employment (in the Netherlands, around 36 percent). In these countries, labour market regulations and prevailing attitudes are already highly conducive to this form of employment. In the rest of the Union, however, it is less common. In Belgium, France and Ireland, it is generally below the Union average of 15 percent, but still above 10 percent, while in Germany, it is only slightly above the average. Elsewhere - including in all of the Southern Member States - part-time working represents no more than 8 percent of total employment.

For the majority of Member States, therefore, the expansion of part-time working is regarded as a key element in the changing pattern of employment. In these cases part-time working is generally being promoted, though employment protection legislation is also being extended to accompany this.

A number of different ways are being used to promote part-time working: In Germany, Belgium and Luxembourg, as in the Netherlands, the public sector is setting an example by creating new part-time jobs, in large measure by converting existing full-time ones into part-time.

One particular problem being addressed in Ireland, Italy and again in Germany is the combination of part-time working and receipt of social security benefits. At present, entitlement to benefit may be endangered by working part-time and these Member States are therefore implementing changes to their social protection systems to reduce or eliminate this possible disincentive for workers to take part-time employment.
In France, part-time working is being encouraged through exempting employers from social security contributions for employees working between 16 and 32 hours a week. Furthermore, efforts are being made here, as well as in Spain, to increase flexibility through the annualisation of working time (ie. by allowing employees some choice over how they organise the total number of hours they are contracted to work over the year).

In Greece and Portugal - where part-time working is under-developed - a cautious approach is being adopted. In Greece, moves towards part-time working are subject to the agreement of the social partners, while Portugal is promoting part-time working only as a means of creating flexibility for parental leave.

Most Member States have the aim of improving the flexibility of working hours so that they are more compatible with the demands of business. In both the Netherlands and Finland, working time legislation is in preparation designed to increase flexibility in working hours at the company level and to allow their determination by collective agreement. In Germany, agreement on a change in working hours was reached in 1994 at the industry level in response to the recession, enabling hours, and wages, to be reduced in order to preserve jobs. This approach is also being recommended in Italy, where it appears that, given the choice, many employees would accept a reduction in working hours and pay in crisis industries if this was necessary to preserve their jobs.

At the same time, there are moves to make the opening or operating hours of businesses more flexible in a number of Member States. This is particularly the case in Germany, Finland, Greece and the Netherlands, where more weekend and public holiday working is being encouraged.

Only in France, do there seem to be serious proposals to shorten the working week as a whole with the provision of state aid for firms willing to experiment with reducing weekly working hours by 15 percent while at the same time increasing the numbers employed by 10 percent for a three year period. In Greece, Italy and Finland, however, there are proposals to attempt to reduce overtime working - in the former, by a half.

In Belgium, Portugal and Luxembourg, there are moves to shorten working hours for those nearing retirement, or opting for early retirement, so that job sharing may take place and at the same time the skills and knowledge of the people concerned can be passed on to their successors.

In this context, it is worth noting that according to a labour market survey carried out across the Union in

1994 (*European Economy, op cit*), only 29 percent of respondents wished to work less (only 21 percent in France where a general reduction in working time is being considered) and almost twice as many expressed a preference for more pay rather than a reduction in working time.

A number of Member States have the aim of increasing occupational and geographical mobility by reducing the obstacles preventing people from moving more readily between jobs and regions. In many, both the unemployed and existing employees are being offered the opportunity to retrain in another profession. In Belgium, Denmark and the Netherlands, career breaks and job rotation are encouraged to give people the opportunity for vocational training. In Denmark, this is coupled with a policy of encouraging their jobs to be filled temporarily by the unemployed, who can thereby gain valuable work experience.

Geographical mobility is also being encouraged in Greece, Spain and Portugal with financial assistance for removal and travel costs. While this may encourage a flow of labour supply from high to low unemployment areas, any such tendency is offset through the payment in Greece and Portugal of allowances to maintain seasonal employment in sectors such as tourism during the off-season.

A further area of action concerns the reduction of regulatory barriers. To the extent that legislation can have adverse effects on the flexibility of working arrangements and on the ability of companies to determine their employment policy, in the Netherlands, Finland and the UK, the government is aiming to reduce these barriers either through specific restructuring of legislation on dismissals (in the former two cases), or by close examination of employment legislation to assess its effectiveness and cost and abolishing that which is considered insufficiently effective or too costly to administer (in the UK).

#### 4.2.3.3 Developing Initiatives at the Local Level

A point highlighted in the Commission White Paper on Growth, competitiveness, employment was the potential boost to job creation of initiatives taken at the local level. This was reiterated in 1995 in a Commission Communication (COM 273, June 1995). A range of measures to create jobs, particularly in local services, have been introduced in most Member States. They involve:

* expanding and legitimising domestic service employment
* increasing socially-useful work

* promoting the creation of small and medium-sized enterprises (SMEs)

Jobs in domestic services are being promoted in a number of Member States. Though such work is often already being carried out, it is not always formal or even legal employment and the unofficial nature of this type of working combined with the administrative burden of formalising or legitimising it may hinder its growth. In most cases, the work involves a relatively low level of skills and therefore creates opportunities for the unskilled among the unemployed who represent a sizeable proportion of those looking for work.

The expansion of domestic working appears, however, to be a mainly a feature of employment programmes in Northern Europe. In Denmark, the domestic services scheme, under which households are given subsidies to reduce the cost of hiring casual labour for activities such as gardening and cleaning, was introduced in 1994 and is expected to become permanent in the near future. In Finland, the domestic service scheme, which encourages domestic working through employment subsidies and tax exemptions, is also to become permanent in 1996. In the Netherlands, a study is being carried out to examine the legitimisation of domestic working for the long-term unemployed, while in Luxembourg, an inter-ministerial group has recently submitted a report on new areas of job creation, which examines the possibilities for domestic working and its possible negative social effects.

Both France and Belgium have introduced measures to simplify the administrative procedure for domestic working and, therefore, promote its use. In France, since 1994, household employers have been granted tax deductions, while administrative procedures have been simplified through the use of an employment-service voucher which obviates the need for employment contracts or pay slips. In Belgium, the Agences locales de l'emploi (ALE) - where unemployed people are placed into personal service jobs - has been in operation in the majority of communities since 1994 and is to be the subject of evaluation during 1996. Depending on the results of this evaluation, domestic service working may be encouraged through the use of the chèque multi-service for the long-term and older unemployed.

Schemes to support socially-useful work usually cover social services, environmental protection, tourism and leisure, and, more specifically, activities in these areas which would not develop without public funding. In Denmark, pool jobs are being created for the unem-

ployed to care for the elderly, sick and small children as well as working on environmental protection projects. In Luxembourg, a socially-useful jobs scheme was introduced in 1984 but its use declined in the late 1980s with the rapid increase in employment across the Union. Socially useful jobs, not already carried out by the public or private sectors, are now to be expanded again to provide work for the unemployed and those threatened with unemployment.

In Germany, local employment initiatives have been promoted in environmental protection, social services and child and youth welfare. Launched initially in 1993 in the new Länder, this scheme which provides lump-sum wage subsidies to provide work for the unemployed was extended in 1995 to the western part of Germany. It was expected that 140,000 unemployed people would benefit from this scheme during 1995. In Portugal, Local Initiative Development Programmes are intended to boost local services to help in the development of rural areas and the stimulation of local communities.

In Italy, there is to be a gradual shift from passive measures of income support for those out of work to measures to support the development of socially-useful jobs for which benefits are paid to those taking them up. This is particularly the case in areas deemed to be crisis regions, such as in the Mezzogiorno.

One of the main areas for employment creation identified in the White Paper was in small and medium-sized enterprises. Indeed in many of the Member States, SMEs already account for a large proportion of total employment. SMEs, however, tend to suffer from low survival rates. According to the Finnish experience, for example, one in three new firms folds within three years and one in two folds within five years. Not only is this costly in terms of jobs lost and the associated time out of work for those becoming unemployed, but it also creates an atmosphere of low business confidence for those remaining and for potential new entrants. Confidence is reduced further during times of recession. Business uncertainty can then lead on further to a reluctance to hire employees even where increased demand justifies it.

In Portugal, a number of tax incentive measures were introduced in 1995 to stimulate the creation of small and very small businesses (between 3 and 20 employees). These include a 95 percent reduction in profits subject to profits tax for the financial years 1995, 1996 and 1997, the exemption from fees for setting up new businesses and increases in the tax allowance limits for new investment. In addition, an incentive scheme was introduced in 1995 to support investment
projects in small enterprises that employ workers made redundant as a result of restructuring in the steel industry. A scheme to boost small businesses run by young entrepreneurs was also introduced in 1995 to provide grants, loans and risk capital guarantees for the creation, modernisation and internationalisation of these firms.

In France, measures have recently been introduced to ease the financial position of SMEs through lightening the tax burden - and so reducing the number of bankruptcies - and providing easier and cheaper access to loans and better loan guarantees. In Finland, similar measures are planned to be introduced in 1997.

In the UK, local enterprise is encouraged through Training and Enterprise Councils (TECs), which are privately-run training establishments maintaining close links with local business. Regional regeneration is supported by the Single Regeneration Budget available to promote urban and rural renewal. Five 'enterprise zones' offering temporary tax incentives for business creation have already been established and three more are planned in areas affected by the closure of coal mines.

In Ireland, plans are drawn up by the County Enterprise Boards and Partnership Companies at the regional level to promote urban and village renewal, with the aim of regenerating these communities so as to attract employers and develop tourism.

In Germany, Greece, Ireland, Luxembourg and Portugal, financial incentives are available to encourage the unemployed, especially the long-term unemployed, to start up their own business. In both Germany and Luxembourg, this bridging assistance was extended to 26 weeks in 1994. In Belgium, there are plans to evaluate the introduction of bridging loans to the unemployed for the same purpose.

#### 4.2.3.4 Reducing Non-Wage Labour Costs

In most parts of the Union, there is increasing concern about the level of charges imposed on employers which add to non-wage labour costs and widespread attempts to reduce them. The only exceptions are Denmark, where social contributions are already at a very low level in comparison to the rest of the Union, Finland, where the efficacy of such reductions relative to lower income taxes is questioned, and Greece, where they do not seem to figure in the policy debate at all.

The relatively high level of social charges imposed on business in Europe reflects the extensive systems of social protection which are distinguishing feature of Union Member States as compared with other countries.

The cost of such systems is an increasing focus of policy debate as the provision of resources for pensions, health and unemployment insurance mounts. Most Member States, however, have a deliberate policy aim of maintaining the prevailing level and extent of social protection, though there is a widespread tendency to target expenditure more effectively. At the same time, efforts are being made to achieve a more efficient functioning of the system.

The Netherlands and the UK are doing most to open up provision to the free market, eg. by privatisation of health insurance and retirement pensions. In Germany, reform of the health sector is intended to make the system more efficient, although here there is a basic understanding that to maintain given standards of social protection requires more people in employment contributing to its funding and fewer people being supported. In Italy, the aim is to revise the incentive system to encourage part-time and more flexible working.

With respect to employment creation measures most Member States have introduced reductions in employers' contributions to induce firms to take on more employees. In some cases - as in Spain, Portugal, Luxembourg, Ireland and the UK - this has been an across-the-board reduction for all employees. In Luxembourg, the funding of family allowances has been shifted from employers' contributions to the State. In Finland, employers' social contribution rates are progressive and increase more than in proportion to the total wage bill for the company, which serves to favour small companies.

In other countries - the majority - reductions in employers' contributions have been targeted on specific groups, especially on the low-paid and unskilled. In Belgium, Spain, Portugal, France, Luxembourg, the Netherlands and the UK, employers can benefit from reductions in contributions - or even exemptions for a limited period - if they hire someone who is long-term unemployed. In most cases, schemes apply to those who been out of work for a year or more, although in the UK the requirement is two years without work. Such incentives are also often conditional upon a minimum period of employment - usually between 1 and 3 years, though in the Netherlands, where long-term unemployment, is above-average for the Union, this has recently been reduced from a year to 6 months.

In the context of tight budgetary constraints and the maintenance of levels of social protection, cuts in employers' contributions have to be financed by increasing taxes or reducing public expenditure. In both the UK and the Netherlands, there are plans to introduce energy and/or environmental taxes to offset the cost (in
the UK a landfill tax is due to come into effect in October 1996). In Luxembourg and in France - for the low-paid only - employers' social security contributions will be transferred from employers to the State. In the case of Luxembourg, a solidarity tax levied on all sections of the community will also be introduced.

The size of the overall tax wedge - the difference between what employers have to pay for labour and the net wage an employee receives - rather than merely the scale of charges falling directly on employers is also of relevance for the process of job creation. A high tax wedge is particularly important in the case of relatively low skilled, and therefore low paid workers, whose productivity, and contribution to the value-added of a business, might not merit the costs of employing them.

A widespread aim of policy has been to encourage the employment of the lower skilled by reducing the cost of employing them without reducing their take-home pay - in other words, to reduce the size of the tax wedge. In Ireland, this has been pursued as part of an ongoing policy of tax reform, whereby the lowest paid are taken out of the tax net, standard tax rate bands are widened and personal allowances are increased. In Denmark, basic tax rates have been reduced markedly, by 12-14 percentage points. This approach is also being followed in Finland where the main target is the reduction in direct taxation rather than in employers' contributions since it is believed that the latter would be offset up by pay rises.

### 4.2.3.5 Improving Effectiveness of Labour Market Policy

Improving the effectiveness of labour market policy can be achieved in two ways:

* by a shift from passive to active labour market policy

* through increased efficiency in the functioning of social welfare systems of income support

Throughout the Union, there have been efforts to shift expenditure from passive income support of the unemployed to active labour market measures to help them find work. Such measures include counselling and guidance, education and vocational training, temporary work placements or subsidised employment.

In Denmark, an early, needs-oriented approach has been adopted in an attempt to prevent long-term unemployment. This will result in 1998 in full-time training or jobs being provided to all those unemployed for two

years or more. In France, the UK and Finland, relaxation of unemployment benefit rules is being considered to allow entitlement to allowances to those on training courses.

In the UK, the introduction of the Jobseeker's allowance aims to provide more help to the unemployed to find work while imposing more pressure on them to seek employment and to take jobs which are offered and, at the same time, making work more financially attractive than unemployment. In Ireland and Finland, studies are being carried out to assess the disincentive effects of social benefits. Ways are, therefore, being examined to provide greater distinction between income from benefits or social allowances and earnings from employment. A revision to the Income Support Act came into force in 1996 in the Netherlands requiring everyone receiving income support to accept suitable job offers.

In Ireland, concern about the level of replacement rates for the unemployed with dependants has resulted in greater incentives being introduced for the low-paid through family income supplement (FIS) - on the lines of a similar scheme in the UK - and an increase in child benefit rates for those in work, while child dependent payments to the unemployed have been frozen.

In Ireland also, earnings-related benefits are to be discontinued and unemployment benefits to be taxed, while in France, unemployment compensation has since 1992 declined with the duration of unemployment. Only in Greece has the daily rate of unemployment benefit been raised in real terms in recent years - by 30 percent in 1994 and a further 10 percent in 1995.

In a number of Member States, social welfare systems are being modified to take account of the growth in atypical working, which, by extending entitlement to benefits, should provide a greater incentive for people to accept part-time work.

A further priority is that of achieving greater efficiency in the functioning of the welfare system. With the rising cost of providing welfare systems in the face of higher levels of unemployment, national governments generally are seeking to tighten up and make the functioning of the system more efficient. This is being achieved either through closing loopholes and reducing abuse of the system or increasing the efficiency with which the system works.

A number of Member States - Germany, Belgium and Luxembourg, for example - are aiming to reduce abuse of the system in terms of fraud and illegal employment. At the same time, in both Denmark and the Nether-
lands, rules for benefit entitlement are being tightened through stricter definition of availability for work and through requiring the unemployed to accept suitable offers of employment if they are in receipt of benefits.

There has also been widespread realisation that employment agencies are likely to operate more effectively if they are decentralised. In Germany, Spain and Italy, employment placements were subject to national monopoly and these structures have been dismantled in recent years to allow the development of more locally-based agencies. Furthermore, in Spain, temporary employment agencies have been legalised, in part to help fill vacancies in the skilled professions.

In the Netherlands, more responsibility has been given to local authorities to manage income support systems, partly in order to introduce a greater incentive to reduce the amount paid out in benefits. Since 1994, they have had an incentive budget to fund measures to encourage people to move off of income support.

### 4.2.3.6 Helping Those Hard-Hit by Unemployment

Employment measures have been increasingly targeted on those hit hardest by unemployment, who in most cases are:

* young people under 25

* the long-term unemployed

* older people who have not yet reached retirement age

* women seeking to enter or rejoin the labour market after a period of inactivity

* disabled people

* ethnic minorities

The measures introduced by Member States for each category are summarised below. In Member State presentations of their programmes, however, some general measures were listed where specific groups were not identified. These include the creation of public sector jobs in Denmark for those people who are difficult to place, grants to employers for hiring those with special needs in Greece, part-time community work and training in the voluntary or public sector in Ireland and socially-useful work programmes in the South of Italy.

In Ireland, a Local Employment Service (LES) is being introduced to identify the needs of target groups. The

LES will provide guidance, training and employment support at the local level and is being piloted in 14 areas of high unemployment. The LES project is part of a wider-ranging programme of Integrated Development, which seeks to tackle long-term unemployment and social exclusion at the local level by addressing the underlying causes of economic and social marginalisation especially in disadvantaged areas.

The large numbers of long-term unemployed (those who have been out of work for a year or more) has been a serious problem in nearly all Member States for some time. These people find it increasingly difficult to find a job the longer they are out of work and greater attention is being focused on how their prospects can be improved.

As noted above, many Member States have introduced temporary reductions in employers' social security contributions if they hire someone who is long-term unemployed. In Denmark, in addition to the planned scheme for guaranteeing all those out of work for two years a job or training place, public sector jobs have been created for the most difficult-to-place of the long-term unemployed, which is also the case in the Netherlands, while in Portugal, Ireland and Greece, financial help is available for them to become self-employed. In the UK, companies are able to take on a long-term unemployed person for a three-week free trial, and the very long-term unemployed are permitted to work part-time while still receiving income support.

In Germany, wage subsidies have been introduced to encourage employers to take on the long-term unemployed. These amount to DM 3 billion (1,546 MECU) over the period 1995 to 1999 and are expected to provide employment to some 180,000 people.

The problems faced by young people in finding employment, as noted above, are often due to insufficient education and training, but the lack of work experience can also pose a significant obstacle.

The integration of young people into work is promoted in most Member States through financial incentives to employers. In Spain, Ireland, Luxembourg and Portugal, employers can benefit from temporary reductions in social security contributions when they hire a younger person. Alternatively, in Germany, Belgium, France, Greece, and again in Spain, employers receive subsidies for taking on younger people. For unemployed young people in the UK, there is the guarantee of full-time education, vocational training or a job.

Member States have different approaches to the problem of unemployment among older people. A number - such as Greece and Portugal - still encourage older
people - especially if unemployed - to take early retire-
ment, despite the mounting cost of such a policy with
the growing numbers of people close to or above re-
tirement age. In Denmark and Germany, on the other
hand, measures have been introduced to enable them
to remain in the labour force for longer, often with more
flexible pension options.

In other Member States, employers are given financial incentives to hire older workers. Mostly this amounts to reducing employers' contributions. In Luxembourg, however, a more graduated system of benefit incentives has been introduced, with firms hiring long-term unemployed people over the age of 50 having their social security contributions reimbursed for seven years, while for those over 40 the time period is three years.

*Disabled people* face considerable barriers to finding employment, but only a few Member States have specific policies for tackling the problem. Lower employers' contributions are used as an incentive to hire disabled people in Portugal and Luxembourg, though in the latter case rules also exist for providing a minimum number of jobs for disabled people in public and private organisations employing more than 25 people.

In the Netherlands, legislation is being prepared to pro-
mote the integration of the disabled into working life
through increased wage subsidies and probationary
periods of employment.

In the UK, unemployed disabled people have priority
on government-funded employment and training pro-
grammes, and legislation is being prepared to combat
discrimination against their employment. In Finland, the
number of vocational training places for the disabled is
planned to be expanded.

There are two main problems facing women in the
labour market. First, there remains a demarcation be-
tween male and female jobs and limited opportunities
exist for women in those that are traditionally male-
dominated. Secondly, career breaks to have children
pose a double problem, in the form of a loss of skills
during absence from work and difficulties of finding a
suitable job which is compatible with childcare re-
sponsibilities.

In Luxembourg, Portugal, the Netherlands and the UK,
measures have been introduced to provide women re-
joining the labour market with greater opportunities for
training, especially in new professions. In the Nether-
lands, efforts are being made to promote the role of
women in business. Equal opportunities in Germany are
being promoted on the basis of women receiving labour
market support equal to their share of total unemploy-
ment. In the UK, women returning to the labour market

may still receive benefits (to the extent that they are en-
titled to them) while undergoing vocational training.

Only in the Netherlands presentation is there explicit
mention of measures to promote job creation for eth-
nic minorities. In 1995, legislation came into effect to
promote the 'fair participation' of ethnic minorities in
employment. This will be supplemented in 1996 by the
provision of grants for the settling-in and education of
immigrants.

4.3 Concluding Points

The purpose of this chapter has been to consider poli-
cies which have no intended spatial effects but which,
nevertheless, have significant regional impacts. Unlike
the next chapter which deals with the regional dimen-
sion of general government transfers, the focus of this
chapter has been on the proactive policies of govern-
ment. Two particular policies have been reviewed:
policies to promote competitiveness (in effect, R&D-
oriented policies) and employment policies.

As far as RTD and innovation policies are concerned,
the chapter begins by providing appropriate back-
ground context. The point is made that R&D spending
in the four Cohesion countries is significantly less than
that found elsewhere in the EU Member States -
whether measured in relation to GDP or to national
population. That having been said, Ireland and Portu-
gal were the only OECD countries in which both pub-
lic and private expenditure on R&D increased between
the periods 1985-9 and 1990-2, an indication perhaps
of the stimulating effect of EU policies. With regard to
the regional dimension of R&D policy, the emphasis
within the Cohesion countries is clearly on issues of
national competitiveness, scarcely surprising given the
tensions noted in Chapter 2 between national pros-
perity and regional disparity.

The grouping of Germany and Italy together reflects
the common regional features of their economies
rather than any similarities in the R&D arena. Indeed,
the two countries currently take quite different ap-
proaches to RTD in their problem regions. While in
Germany a major effort is in train to try to establish an
efficient research environment in the new Länder, in
Italy there are now no separate measures for support-
ing RTD in the problem regions, following the demise
of special intervention in the Mezzogiorno.

With respect to the "northern European" Member
States, the focus is on the two case study countries:
France and the United Kingdom. In terms of the em-
phasis placed on R&D expenditure (as a percentage of GDP or on a *per capita* basis), both countries are very much towards the top end of the EU Member State range, just behind Germany and Sweden (see Chart 4.1). As far as the *regional* dimension is concerned the focus, once more, is on *national* competitiveness. That having been said, examples are to hand in both countries of initiatives which aim to encourage greater participation in innovation in all regions. Moreover, in Northern Ireland, a distinct strategy and enhanced funding are available to stimulate RTD in the province.

Summing up the contextual position, it is clear that policies to promote RTD and innovation are generally operated with national policy objectives in mind. While there are some attempts to stimulate innovation in the problem regions, this is primarily in the form of encouraging technology transfer and the uptake of innovation rather than innovation *per se*. This broad picture is hardly surprising: research and development policymakers are understandably unlikely to be willing to jeopardise R&D policy objectives for the sake of promoting less viable projects in the problem regions.

Turning to consider the *regional distribution* of expenditures on R&D, the analysis in Section 4.1.3.1 is restricted to four countries for which relevant data is available: France, Italy, Spain and the United Kingdom. The focus is, first, on the regional-level distribution of overall R&D expenditure, distinguishing between the private sector, government and the higher education sector; and, secondly, on the regional-level distribution of so-called business enterprise sector expenditure on R&D (BERD) and the extent to which this is financed by *government*.

With regard to the former aspect, the regional distribution of overall R&D expenditure, a number of common themes apply across the four case study countries. Of perhaps most significance, R&D expenditure tends to be heavily concentrated in more prosperous regions. Thus, Paris (the Île de France region) accounts for 43 percent of all R&D expenditure in France, Piemonte and Lombardia for almost half private and State R&D expenditure in Italy, Madrid for 42 percent of total R&D expenditure in Spain and the South East for some 54 percent of all R&D expenditure in the United Kingdom.

The reverse side of this coin is that R&D expenditure in the poorest regions is generally very low. By way of example, in France the Limousin region accounts for less than 0.2 percent of the national R&D spend and, on a *per capita* basis has expenditure levels 20 times lower than in Paris. In similar vein, the eight regions of

the *Mezzogiorno* in Italy account for only 8 percent of private and State R&D funding compared with 36 percent of the national population. The Spanish Objective 1 regions collectively account for 24 percent of the total R&D spend while containing almost 60 percent of the national population. Lastly, in the UK, Northern Ireland represents just 0.7 percent of overall national R&D expenditure but holds 2.8 percent of the national population.

A final interesting point regarding the regional distribution of overall R&D expenditure concerns the distribution of private and public sector spending by region. While there is considerable variation between regions, there are a significant number of instances where relatively prosperous regions benefit particularly from public sector funding. An obvious example is Lazio which, on its own, receives over half of the State funding for Italian R&D. In Spain, too, over three-fifths of State R&D funding is channelled into Madrid.

Moving on to consider the regional distribution of government-funded BERD (business enterprise sector R&D) three general points can be made. The first is that there is a high degree of complementarity between government R&D funding and regional aid at the regional level. Prosperous regions are generally ineligible for regional support but benefit disproportionately from R&D funding; in contrast, poorer regions perform badly in terms of government R&D aid for business but generally do well with respect to regional assistance. Second, notwithstanding the general complementarity shown in Chart 4.5 to Chart 4.8, it is important to note the very different *scales* of R&D and regional spend by country. In general terms, R&D spending is far more significant than regional support in the prosperous Member States while regional aid is more important than government-funded BERD in many poorer Member States. Third, combining these two general points, it is the richest regions in the richest countries and the poorest regions in the poorest countries which benefit most from Member State R&D and regional aid in combination.

*Evaluation studies* on the regional effects of horizontal policies in general, and competitiveness policies in particular, are fairly limited, hampered by the lack of appropriate regional data and by the difficulties of disentangling the impact of what are often wide-ranging policies from other government policies. As a result, the focus of most studies is less on the regional effects of competitiveness policies and more on assessing the effectiveness of such policies in different geographical contexts. While it is difficult to generalise, a broad conclusion seems to be that competitiveness policies work less well in less-favoured regions.
Turning, finally, to consider employment policies, there
is, in practice a serious lack of empirical evidence on
the effects of most of the measures included in the em-
ployment programmes being followed by Member
States. However, while the effect of present policies on
employment growth is uncertain, particularly in terms of
its scale, their impact on cohesion is less questionable.
A common characteristic of most of the measures in
operation or being planned is to reduce disparities in

employment opportunities whether between individu-
als, social groups or regions. While most measures do
not have a specific regional dimension, the very fact
that many of them are aimed at the unemployed - and
within this group at the most disadvantaged of those
without work - is likely to mean that they benefit regions
with the most serious problems of unemployment and
inadequate rates of job creation more than others, so
tending to narrow regional disparities.
<figure><img src="image_33.png" /></figure>
# 5. Interregional Transfers from Central Government Budgets

## 5.1 Introduction

Public expenditure in the different Member States of the EU represents a significant proportion of the income of the countries concerned; on average, around a quarter of GNP in industrialised countries - more if social security is included. Government funds are generated from obligatory contributions across the regions of the countries concerned and are redistributed in expenditures across the regions. This process involves involuntary but significant interregional transfers. The question is whether this redistribution is in or out of line with the objectives of regional policy. In spite of its importance as a mechanism to promote cohesion, this issue has been understudied. This chapter presents the results of a research effort to assess these interregional transfer mechanisms in seven EU countries: France, Germany, Italy, Portugal, Spain, Sweden and the United Kingdom (302 million inhabitants).

Relatively little is known about budget-induced interregional transfers because so few studies have been undertaken on the subject. The reason for the lack of research in this area lies primarily in the conceptual and statistical difficulties involved in measuring who, and which region, pays into and/or gains from public funds. There are, however, some important, if relatively old, research results available. In the United States, Mushkin (1956, 1957) conducted seminal research on the State by State allocation of the federal budget. Mushkin appears to be the first to have made a clear distinction between two conceptual approaches to the regional allocation of government expenditure: one is the "dollar flow" approach which indicates where public money is physically going; the second is the "benefit" approach which indicates the location of those

who benefit from public expenditure. This distinction is important and means that an accounting approach is necessarily partial and limited and has to give way to economic analysis integrating various conceptual approaches of the regional incidence of expenditures. For this reason, Mushkin concluded that it was necessary to undertake two sets of calculations (although ultimately she was only able to undertake the "flow" calculation because of insufficient regional data to calculate the "benefit"). The result of the study was clearly that the richer US regions were subsidising the poorer ones. The same kind of study, with the same conclusions, was published in 1967 by the US Congress.

Thanos Catsambas (1978) produced broadly similar results, but went further into the methodological and conceptual issues. In considering the US federal budget, he identified four conceptual approaches:

i. an accounting approach;

ii. a "flow" approach;

iii. a "benefit" approach; and

iv. an "impact on the general equilibrium" approach

In practice he used only the second and third of these approaches. The first has little economic meaning; and the fourth is impossible to calculate. A further important point made by Catsambas concerns the conceptual difficulties and statistical uncertainties of the budget allocation. As a result, he argued that it was necessary to produce several different results; his calculations on the US budget involved 10 different allocations and a rank-Spearman correlation analysis.

In 1969, a similar study was undertaken in respect of a particular region: the British Treasury made an analysis
sis of the situation of Scotland regarding the UK budget. The methodology involved combining, in the same analysis, a "flow" approach (for clearly regionalised expenditures such as capital expenditures or grants) and a "benefit" approach for "indirect" expenditures (such as defence, foreign policy or debt). It appeared that if Scotland was not a part of UK, it should have increased its public revenues or reduced its public expenditures by 30 percent (HM Treasury, 1969).

But the main studies on European countries were conducted for the so-called MacDougall report

(1977), by the European Commission working party on the role of public finances in European integration. This report gives estimates of interregional transfers for four European countries: France, Germany, Italy and the United Kingdom. The methodologies for these studies are quite different, mixing, and not always clearly, the benefit and flow concepts. For this reason, it is questionable to compare the budgetary transfers across countries. However, the general results were clear once more: public funds contribute to reducing disparities in regional incomes. This is illustrated in Table 5.1.

<table><caption>Table 5.1: The Role of Public Funds in Reducing Interregional Disparities in Income.</caption><thead><tr><th></th><th>Average reduction in regional per capita income Var. Coef. (non-weighted by population)</th><th>Variation of the Gini coefficient of regional per capita income (weighted)</th></tr></thead><tbody><tr><td>France</td><td>54</td><td>52</td></tr><tr><td>Germany</td><td>29</td><td>39</td></tr><tr><td>Italy</td><td>47</td><td>44</td></tr><tr><td>UK</td><td>36</td><td>31</td></tr><tr><td>Australia</td><td>53</td><td>53</td></tr><tr><td>Canada</td><td>32</td><td>28</td></tr><tr><td>USA</td><td>28</td><td>23</td></tr></tbody></table>

Source: Rapport du Groupe de Réflexion sur le rôle des finances publiques dans l'intégration européenne(1977).

Other country studies can also be quoted. Van Rompuy & Verheirstraeten (1979), on Belgium, calculated the budget-induced transfers from Flemish to Walloon regions in 1974. They measured the net transfer benefiting Wallonia as 90 billion Belgium francs (11 percent of the budget). Coopers & Lybrand (1985), on the United Kingdom, produced similar results for the 1984 budgetary year: the net estimated contribution of the South East region to the UK budget was £3.7 billion, ie. nearly 4 percent of government expenditures.

In France, INSEE made a first effort to build CRAPUC (Regionalised Accounts of Central Public Administration) and to produce a regional allocation of both revenues and expenditures for the 1982-1984 central government budgets. The results (Donnelier and Garagnon, 1989<sup>(14)</sup>), relate the same kind of story: the richest region, Ile de France, transferred in 1984, through the central government budget, around 90 billion francs (8,000 francs/capita) to the rest of the country (ie. 7.5 percent of the Ile de France GDP or 7 percent of government expenditures). Poor regions such as Languedoc Roussillon or Bretagne gained through these transfers around 5,500 francs/capita. This effort

is currently continuing at INSEE. Recently, new provisional and partial results were published (INSEE, 1995): the Ile de France region, in 1988, according to INSEE calculations, would have transferred, through the central government budget and social security funds, 197 billion francs to the rest of the country.

A number of studies, referred to in the "Sound Money-Stable Finances" (1994) report, have drawn attention to the balancing role of a central budget in a given country when a particular region suffers from an asymmetrical shock. In this case, it is argued, the central budget will play a buffer role, cushion the impact of the shock and more generally assist the region in need. There is but one step from this type of short term analysis to a more structured approach of the impact of the national budget on weaker regions. It is this that this study aims to do, by using a common conceptual and methodological approach to estimate the regional budgetary balances of regions in seven large European countries.

Section 5.2 presents a theoretical approach to budget induced interregional transfers (BIIT). The general methodology proposed and the way it has been adjusted and implemented in each country is presented in Section 5.3. Section 5.4 presents the main findings of the research. Finally, Section 5.5 begins to discuss some of the implications of these results.

<footnote><sup>(14)</sup> The results of this study, available on the quoted 1989 working paper at INSEE, produced by the authors, have been published in Godineau (1992).</footnote>
## 5.2 A Simple Model of Budget-Induced Interregional Transfers

A starting point for the discussion of this issue is a simple model of budget-induced transfers (Prud'homme, 1993). Consider a country (or a federation) with a population P, of per capita GDP y and of GDP Y, composed of regions (or of states) i, of population Pi, of per capita GDP yi, and of income Yi. The budget E of this country is balanced. Let:

ti be the per capita taxes paid by region i to the central budget;

ei be the per capita expenditures or benefits of the central budget in region i;

gi be the per capita budget-induced transfers for region i;

Gi be the budget-induced transfers for region i;

a, b, c, d, be parameters describing the tax and expenditure systems.

Then:

$$t_i = a y_i^b \quad (1)$$

$$e_i = c + d y_i \quad (2)$$

$$g_i = e_i - t_i \quad (3)$$

a is an indicator of the budget size.

b reflects the progressivity of the tax system.

b=1 means a proportional tax system;

b>1 a progressive one.

d denotes what could be called the "equalising nature" of the expenditure system;

d=0 means that expenditures per capita benefit equally all regions and are independent of regional per capita income;

d<0 that they decrease with income; and

d>0 that they increase with income.

Figure 5.1 gives a graphic presentation of the model. In Figure 5.1 b is taken to be equal to one (the tax system is assumed to be proportional) and d is taken to be equal to zero (the expenditure system is assumed to be of an equalising nature).

$$g_i = c + d y_i - a y_i^b$$

$$G_i = c P_i + d y_i P_i - a y_i^b P_i$$

$$E = a \text{Sy}_i^b P_i$$

c can be eliminated by introducing the balanced budget constraint $SG_i=0$:

$$c P + d Y - a \text{Sy}_i^b P = 0$$

$$c = E/P - d y$$

(3) becomes:

$$g_i = E/P - a y_i^b - d (y - y_i) \quad (4)$$

Equation (4) shows that the budget-induced transfers for region i are a function of four factors:

i. they are a function of the size of the budget E of the country (or federation), or, to put it otherwise, a function of the total taxes raised, which in turn depend upon a and b, the parameters of the tax system and upon the regional income distribution; the higher the budget, or the budget per capita, the greater the transfers;

ii. the magnitude of the transfers also depends upon the progressivity of the tax system, as indicated by b. For b>1 and for higher values of yi, a yi^b will be large, and the transfer negative;

iii. transfers are also a function of the equalising nature of the expenditure system, represented by d, the slope of the expenditure curve; if the expenditure system is equalising, that is if expenditures are greater in low income regions, then the lower the income of region i, the greater the positive transfer it will receive;

iv. for a given region i, the transfer is of course also related to its relative per capita income, or more precisely to the difference between its income and the average country income.
<figure><img src="image_34.png" /><figcaption>Figure 5.1: Graphic Presentation of the Simple Model</figcaption></figure>

This simple model can be further simplified. If the tax system is proportional, b=1, and (4) becomes:

$$g_i = E/P - a y_i - d (y - y_i) \quad (4a)$$

The assumption can also be made that the expenditure system is equalisation-neutral, that is independent of regional income. In this case, d=0, and (4) becomes:

$$g_i = E/P - a y_i^b \quad (4b)$$

The two modifications can also be considered jointly. In this case, (4) becomes:

$$g_i = a (y - y_i) \quad (4c)$$

This is the simple case represented by Figure 5.1. In this case, there will be a positive transfer for all the regions with a regional income lower than the average income y*, and a negative transfer for all the regions with an income higher than y*. It is interesting to note that there can be transfers from richer to poorer regions even with a regressive tax system and a non-equalising expenditure system, as in the case represented by Figure 5.2.

<figure><img src="image_35.png" /><figcaption>Figure 5.2: The Simple Model, with Regressive Taxation and Non-Equalising Expenditures</figcaption></figure>

The most important lesson to be drawn from this simple exercise is that national budgets are likely to transfer large amounts of money from richer to poorer regions. These transfers should be expected to be larger in the countries where the size of the budget (relative to GDP) is larger, where the tax system is progressive, where the expenditure system is equalising, and, of course, where inter-regional income disparities are greater. The calculations that follow should verify these assertions.

## 5.3 Methodology

Measuring interregional transfers induced by a national budget for a given country and a given year is a difficult exercise. The difficulties to be overcome are both conceptual and statistical.

### 5.3.1 Conceptual and Statistical Difficulties

At the conceptual level, it is often unclear how a given budget tax, or a given budget expenditure should be regionally allocated. Consider, for instance, the corporate income tax paid by a multi-regional enterprise, which is usually paid at the location of the company's headquarters; what is clear is that it should not be allocated to the region where it is paid and collected. The tax paid is obviously not contributed or borne by that region alone, but by all the regions that have contributed to the taxed profit of the company. Or consider expenditures on agricultural research undertaken in region A; should they be allocated to region A, or to region B, which is predominantly agricultural and will presumably benefit from agricultural research, or perhaps to region C, which happens to be a heavy consumer of agricultural products?

Then, even if and when it is known how, in principle, to allocate a particular type of revenue or expenditure, there may well be statistical difficulties in practice. The figures required to implement a correct conceptual procedure may well not exist at the appropriate regional level.

These difficulties have two implications. One is that there are not many studies of the regional allocation of national budgets. The second is that these studies cannot readily be compared. This is why it was felt important to develop a unified methodology, and to apply it to seven European countries: the UK, France, Italy, Spain, Sweden, Germany and Portugal. This methodology is based on work previously undertaken at L'OEIL, mostly but not only on France (Prud'homme, Rochefort and Nicol 1973, Davezies
1993; Davezies 1991; Davezies, Nicot, Pouliquen & Prud'homme, 1987; Davezies Nicot & Prud'homme, 1985). It is important to try and understand this methodology, because the findings are only as good and creditworthy as the methodology. The methodology involves three steps.

### 5.3.2 Budget Breakdown

The first step involves the establishment of detailed national budgets. These budgets have to be: (i) consolidated, (ii) balanced, (iii) recent, (iv) executed, and (v) broken down into as many items of revenue and expenditure as possible.

The need for consolidation of a budget refers to the extra-budgetary accounts, often subsidised by the budget, that may exist; there is a danger of double-counting that must be avoided. This raises the issue of the "perimeter" of the national budget, which varies from country to country, particularly with respect to the so-called "social security" accounts (the meaning of the concept itself varies from country to country). In principle, we have not included social security in this study; in practice, however, the UK, Italian, Portuguese, Spanish and Swedish budgets which have been used do include social security; this is one of the reasons why they represent a higher share of GDP than in France and Germany. In France, the social security system is distinct from the government budget. The last regional allocation of the social security funds in France is for 1990; no figures were available for 1993. It is important to notice that the German budget studied is the official one, ie. it does not include the Länder share of the tax sharing mechanism. This

mechanism could be better considered as a part of national public finance, in which the central government decides the tax rates, collects all the taxes subject to the tax sharing system, and distribute grants to Länder. The accounts used in Germany, and it is these that were utilised in this study, consider that the share of taxes benefiting the Länder are in the local public finance system.

The budgets used are balanced. Some studies of interregional "transfers" are restricted to expenditures, or to certain types of expenditures. It should be clear, however, that such studies cannot, by definition, produce interregional transfers. To show that some regions "transfer" income to others, it is necessary to start with a balanced budget. The expenditures that are not financed by taxes are necessarily financed by borrowing, even though the regional allocation of this borrowing may raise some difficult theoretical issues. The budgets examined are ex-post, effective, executed budgets, not budgeted budgets. It seems obvious that it should be so, but it is interesting to note that, in many countries, it is much easier to have access to budgeted budgets than to executed budgets.

The budgets studied are the most recent that could be found: they are for the year 1993.

Finally, these budgets have been decomposed into as many items as convenient from the viewpoint of regional allocations. The basic principle used in these decompositions (which are of course constrained by the availability of data) is to produce items that can convincingly be regionally allocated. The resulting number of items appear in Table 5.2.

<table><caption>Table 5.2: Decomposition of National Budgets</caption><thead><tr><td></td><td>Expenditure items</td><td>Revenue items</td><td>Total number of items</td></tr></thead><tbody><tr><td>France</td><td>312</td><td>62</td><td>370</td></tr><tr><td>Germany</td><td>106</td><td>37</td><td>150</td></tr><tr><td>Italy</td><td>140</td><td>24</td><td>186</td></tr><tr><td>Portugal</td><td>82</td><td>198</td><td>137</td></tr><tr><td>Spain</td><td>478</td><td>66</td><td>540</td></tr><tr><td>Sweden</td><td>80</td><td>49</td><td>130</td></tr><tr><td>United Kingdom</td><td>850</td><td>56</td><td>887</td></tr></tbody></table>

In many cases, a relatively small number of items - about a dozen - account for a large share - about half - of expenditures or of revenues. Table 5.3, for the UK,

is illustrative of this feature. Comparable information for the other case study countries can be found in Annex IID.
<table><caption>Table 5.3: Main Items of the UK Budget, 1993</caption><thead><tr><th></th><th>£ billion</th><th>Percent</th></tr></thead><tbody><tr><td><strong>Revenues</strong></td><td></td><td></td></tr><tr><td>Income tax</td><td>58.4</td><td>23.4</td></tr><tr><td>Value-added tax</td><td>39.0</td><td>15.6</td></tr><tr><td>Social security contributions</td><td>38.7</td><td>15.5</td></tr><tr><td>Corporation tax</td><td>14.9</td><td>6.0</td></tr><tr><td>Business rates</td><td>12.6</td><td>5.0</td></tr><tr><td>Fuel duties</td><td>8.9</td><td>3.6</td></tr><tr><td>Tobacco duties</td><td>6.5</td><td>2.6</td></tr><tr><td>Sub-total</td><td>178.4</td><td>71.9</td></tr><tr><td><strong>Total</strong></td><td><strong>249.5</strong></td><td><strong>100.0</strong></td></tr><tr><td><strong>Expenditure</strong></td><td></td><td></td></tr><tr><td>Retirement pensions (basic)</td><td>26.5</td><td>10.6</td></tr><tr><td>Payments to health authorities</td><td>21.4</td><td>8.6</td></tr><tr><td>Revenue support grant to LA</td><td>17.1</td><td>6.8</td></tr><tr><td>Income support (non pensioners)</td><td>12.2</td><td>4.9</td></tr><tr><td>Non domestic rates payments to LA</td><td>11.6</td><td>4.6</td></tr><tr><td>Equipment</td><td>8.0</td><td>3.2</td></tr><tr><td>Armed forces: personnel</td><td>6.9</td><td>2.8</td></tr><tr><td>Child benefits</td><td>6.0</td><td>2.4</td></tr><tr><td>Invalidity benefits</td><td>5.9</td><td>2.3</td></tr><tr><td>Payments on domestic rates to LA</td><td>4.8</td><td>1.9</td></tr><tr><td>Sub-total</td><td>120.3</td><td>48.2</td></tr><tr><td><strong>Total</strong></td><td><strong>249.5</strong></td><td><strong>100.0</strong></td></tr></tbody></table>

### 5.3.3 Regional Allocation Procedure

The second step consists in the regional allocation of these budgetary items. For each of them, allocation criteria or keys are sought. Let T be the total amount of a tax item collected at the national level, K an allocation criteria, Ki the value of this criteria for region i, Ti the amount of taxes allocated to or, put another way, contributed by region i:

$$Ti = T*Ki/K$$

Much depends on the selection of appropriate criteria. The criteria selected must be (i) economically meaningful and (ii) multiple.

It is essential to understand that the criteria retained for the regional allocation of a particular item are chosen because they make economic sense. The work done is not an exercise in accounting. The research methodology is guided by economic reasoning, and by the theory of incidence in the selection of criteria.

In selecting appropriate criteria, a distinguishing feature of this study is that it does not limit itself to a single allocation key when a number of alternative allocations

may seem theoretically appropriate. The reason for adopting this approach is that all of these criteria may be equally meaningful, either because there is a conceptual uncertainty as to the appropriate criteria, or because it has been necessary to use statistical proxies that are equally imperfect although acceptable. In other words, for a number of items, rather than providing just one "best" regional allocation, several "good" allocations are used. This is an important characteristic of the methodology.

Some examples might be useful in clarifying this point. For certain items of revenue or of expenditure, such as personal income tax or transfers to local governments (one of the most important types of expenditure everywhere), the actual recorded figures are utilised. The personal income tax paid and collected in region A can meaningfully be said to be contributed by region A. Similarly, the transfers to the local governments of region A can clearly be said to benefit region A. In such cases, the criteria used is hardly a criteria; it is the actual regional value, and it is of course singular.

For other items, such as corporate income tax, the actual regional values, as indicated above, are meaningless, and are simply ignored. The theory of incidence
suggests that a tax paid by an enterprise is borne by the workers of the enterprise (in the form of reduced wages), by the owners of the capital of the enterprise (in the form of reduced profits) and by the consumers of the products of the enterprise (in the form of higher prices). The theory suggests that the relative share of these tax bearers varies with the structure of the markets for labour, capital and goods, but it is not very helpful in providing percentages. In this study three criteria for the regional allocation of corporate income tax are adopted. The first assumes that the tax is borne 50 percent by workers and 50 percent by capital owners, and allocates half the national proceeds of the tax pro rata in line with the regional allocation of wages, and the remaining half pro rata according to the regional allocation of the stock of private capital. The second assumes that the tax is borne 50 percent by workers, 25 percent by capital owners, and 25 percent by consumers. The third assumes that the tax is borne 50 percent by capital owners, 25 percent by workers, and 25 percent by consumers.

For yet other items, there are no actual regional values available. This is, for instance, often the case for education expenditures in those countries where this is a national budget expenditure. In such a case, criteria such as the number of pupils by region (more precisely: the share of the region in the national total) or the number of teachers by region, can be utilised.

Table 5.4 indicates the number of criteria, or proxies, which have been produced and utilised for each country. For each criteria, the value for each region has been identified. In other words, for France, with 22 regions, a 22x135 matrix of criteria has been utilised. These matrices constitute, by themselves, an interesting regional statistical yearbook.

<table><caption>Table 5.4: Number of Criteria Used by Country</caption><tr><td>France</td><td>135</td></tr><tr><td>Germany</td><td>111</td></tr><tr><td>Italy</td><td>200</td></tr><tr><td>Portugal</td><td>45</td></tr><tr><td>Spain</td><td>180</td></tr><tr><td>Sweden</td><td>110</td></tr><tr><td>United Kingdom</td><td>316</td></tr></table>

### 5.3.4 Summing Procedure

The last step consists in adding up, for revenues, and then for expenditures, for each region, the amounts estimated for each item of revenue and of expenditure, in order to know how much each region has contributed (in revenues) to the budget, and how much it

has gained (in expenditures) from the budget. If only one criteria had been used for each item, this task would be easy. Unfortunately, as mentioned above, several criteria have been used for a number of items. The addition of items can therefore be done in millions of different ways. Consider a country in which there are only two taxes: a business tax and a value-added tax. Assume that three criteria have been identified to allocate to region A the national proceeds of the business tax, and that these criteria yield 20, 22 and 23 as estimates of the contribution of A to the business tax. Assume that there are also three criteria for the regional allocation of VAT, that yield 30, 35 and 38 as estimates of the contribution of region A to VAT. It is easy to see that there are nine combinations of these two sets of figures. They will yield 50, 55, 58, 52, 57, 60, 53, 58 and 61 as estimates of the contribution of region A to the national budget. Instead of having just one figure, there are nine figures that are equally meaningful or at least plausible.

The essence of the procedure adopted in this study is to produce, for each region, all these estimates, and to study the numbers thus obtained. If the distribution of numbers is sufficiently concentrated - that is, if the coefficient of dispersion is reasonably low - the conclusion is that the estimates converge, and the median or the average value of the distribution is retained. This value is considered sufficiently robust to be meaningful and significant. The hypothesis behind this procedure is that the practical importance of some of the hard conceptual choices is often not great. It is not clear whether business taxes should be allocated pro rata with wages, capital or consumption; but in practice, it does not matter as much as might be feared because, for most regions, the share of wages is not very different from the share of capital nor from the share of consumption. If, on the contrary, the distributions are extremely dispersed, it will be impossible to say much about the contributions to the budget and the gains from the budget for a given region.

There are so many possible combinations that in practice it would be impossible to produce and study all the associated distributions. Accordingly the research has been limited to 101 randomly selected combinations, that produce, for each region, 101 estimates of its contribution to the budget and 101 estimates of its gain from the budget. For each region, the distribution of these 101 values is examined. As a check, for several cases the same operation has been carried out with 1001 randomly selected combinations. The results did not differ significantly from the results obtained by means of 101 randomly selected combinations.

Once estimates have been obtained for each region of what it contributes to the budget, and of what it gains