GOVERNMENT AND INDUSTRY

In Unit 2 we saw that the typical economic system in the noncommunist world is the mixed economy, so called because it contains elements of both private and public

enterprise together with some measure of government con­trol over the activities of the private sector. The UK provides a good example of a mixed economy although the industri­alised nations of Western Europe and North America are also typical.

In these countries the governments have accepted responsibilities in relation to the maintenance of full employment, the movements of prices, the balance of pay­ments situation, and the rate of economic growth. It is these responsibilities which oblige governments to play an impor­tant part in determining the pattern and direction of eco­nomic activity.

In the UK, as far as industry is concerned, state inter­vention is quite extensive and has many strands. It is extremely difficult to classify all the elements of government policy towards industry, and all we can do at this level is to provide some very broad groupings.

Government and the behaviour affirms

Some of the government's measures may be seen as attempts to make the market mechanism work more effi­ciently by providing a framework of regulations aimed at encouraging a more competitive market structure and at preventing dishonesty in commercial dealings. Others are designed to protect groups which have relatively weak bar­gaining positions.

A series of Companies Acts regulate the formation, structure, and organisation of joint stock companies. They also require companies to make public certain information about their finances and operations so that people dealing with them should not be misled. The laws relating to Monopolies and Restrictive Practices are designed to secure a more equitable balance of market forces so that individual firms or groups of firms cannot (or do not) exercise undue market power.

In the UK, firms are subject to many statutory controls which are intended to protect the interest of groups of peo­ple which might, in a free market, be vulnerable to 'unfair' exploitation. Thus, we have legislation regulating the work­ing conditions in factories, shops and offices, and there are statutory Wages Councils which determine wages in occu­pations where union organisation has been particularly weak. The Fair Trading Act has the objective of providing protection for the consumer in his dealings with suppliers of goods and services. There are laws which give the purchaser the chance to have second thoughts about any hire purchase agreement he may have signed. The Trade Descriptions Act 1968 imposes strict controls on the claims a firm may make in advertising its product. Other regulations control the ingredients of processed food and patent medicines. There are many other examples of this type of regulation.

What we are now witnessing in many capitalist coun­tries is a fundamental change in the traditional attitudes towards private enterprise. The generally accepted view, and, indeed, the underlying assumption of much of eco­nomic theory, has been that the main function of the firm is to earn maximum profits for its shareholders. Increasing political pressure is now obliging governments to ensure that the firm exercises much wider responsibilities. While the rights of shareholders to profits is generally upheld, the rights of employees, customers, and the general public must be given far more weight in the management decisions taken within the firm.

Government and industrial efficiency

Widespread dissatisfaction with the rate of economic growth has meant that governments have paid increasing attention to the performance of British industry. As far as the private sector is concerned, policies to improve industri­al efficiency are mainly confined to financial inducements

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and exhortation. The emphasis has been on investment (the installation of new capital equipment) and research. Attempts to stimulate investment in private industry have taken the form of investment grants (the government con­tributes directly to the cost) and various tax concessions on investment expenditures.

Economic growth demands large expenditures on research and development, but this involves great risks, especially in the development stage. The development of the industrial process may cost ten or twenty times as much as the original research. Developing an airliner, for example, costs more than 1 billion and the same is true of its engine. These costs will take more than 12years to recover. It is most unlikely that this type of research and development would be undertaken in the UK without state subsidies.

The government also operates its own research and development institutions, and several government agencies exist to offer advice and help to firms introducing new tech­nology (i.e. for innovation). In recent years the government has provided financial assistance towards the costs of devel­opments in micro-electronics, office automation, comput-eraided design, robots and aerospace. Financial support for innovation is available for all firms, both large and small.

It is believed that the UK's economic growth and abili­ty to compete in world markets depends very much on the existence of a skilled and adaptable labour force. Even when unemployment was very high during the 1980s, several sec­tors of industry were reporting serious shortages of particu­lar types of skilled labour. This was one of several indications that the UK's training effort was lagging behind those of some other industrialised countries. The government has responded to this problem by greatly extending the facilities for training. There are now several government-financed schemes to train young people, to train those who are employed and who wish to change their jobs, and to train

redundant and unemployed workers. Most of these schemes are operated by the Manpower Services Commission. In addition, schemes have been prepared which will introduce more work-related education and training into schools.

The government takes an interest in industrial perfor­mance in many other ways. It has played a leading role in the development of management education and took the initia­tive in setting up the British Institute of Management. It provides a wide range of services to assist exporters most notably with the Export Credits Guarantee Department which, by providing a kind of insurance against the possibil­ity of default by overseas buyers, reduces the risks attached to trading overseas.

Many authorities hold the view that the relatively slow growth of productivity in British industry was at least partly due to constant changes in government economic policy which, by creating uncertainty, made firms very cautious about embarking on expensive longrun modernisation pro­grammes. In the 1960s the government attempted to deal with this problem by setting up some machinery to assist with long-term planning. It established the National Economic Development Council with members drawn from the trade unions, the employers, and the government. Its task is to propose measures which would remove obsta­cles to economic growth and improve Britain's economic performance. Its proposals aim to provide some basis for the government's economic policies, and the setting out of its findings, it is hoped, will encourage industry to frame appropriate development plans. The NEDC indicates desir­able policies; it has no executive powers.

Government and industrial structure

Changes in the structure of industry may be considered necessary to arrest the decline of an industry, to speed up the movement of resources into a new technology (e.g. micro-

electronics), to change the geographical distribution of industry, or to improve the performance of exporting or import-saving industries. These changes may well come about without any intervention by the government. Market forces, if left to themselves, will bring about changes in the structure of industry. Competition between firms will lead to the elimination of firms which are unable, or too slow, to change their products and their methods of production. But the government may believe that, in some cases, market forces will bring about the changes either too slowly or too painfully. For example, there could be heavy social costs in the form of bankruptcies and unemployment as some firms and industries decline and others expand.

In the post-war period governments have found it nec­essary to supply large amounts of public money to assist industries and firms facing severe foreign competition or decline, for example in the coal, steel, shipbuilding and vehicle manufacturing industries. This help has often been given on condition that the individual firms carry out major changes in their organisation so as to improve their effi­ciency.

It was the fear that Britain was lagging behind her major competitors which encouraged governments to offer finan­cial incentives for firms to move into high technology elec­tronics and communications industries and 'information technology'. The decline of employment in manufacturing industry has obliged the government to offer more financial assistance to service industries. It is hoped that an increase in employment in these industries will offset the contraction in employment in manufacturing.

The government also sees the small-firm sector as a major source of new jobs and has introduced many schemes to encourage the setting-up and development of small firms.

There are two particularly important features of indus­trial policy which aim to influence the structure of industry:

 

(a) measures to bring about changes in the location of
industry, and

(b) measures to increase or decrease the extent to which
industry is publicly owned, i.e. nationalisation and privatisation.

Government and the location of industry (regional policies)

Reasons for state intervention

The purely economic factors discussed in the previous chapter are rarely the sole determinant of industrial loca­tion. In most countries the government has a large say in the geographical location of any medium-sized or large-scale new enterprise. There are two main reasons why the govern­ment has taken powers to influence the geographical distri­bution of industry.

The first of these, and the one which originally prompt­ed governments to take action, was the fact that serious dif­ferences in regional unemployment rates developed in the period between the two World Wars.

Another reason for government intervention is the fact that a firm's choice of location often involves important social costs which are borne by the community rather than the firm. Firms will tend to choose locations which offer the best prospects of profitable production when private costs and private benefits are taken into account. The locations chosen, however, might increase congestion in an area and lead to increased public expenditure on roads, houses, schools, etc. as people move to take up the jobs which have been created. It may be the case that similar social capital is being underutilised in other areas. Firms will tend to be attracted to prosperous areas while other areas may have rel­atively high unemployment rates.

The nature of the problem

In the UK the problem of regional unemployment aris­es from the localisation of the major industries which pro-

vided the basis for industrial development in the nineteenth century. Since the First World War several of these basic industries have experienced a serious decline in their home and overseas markets. Thus coal, cotton, and shipbuilding declined because overseas buyers developed their own industries, or major new competitors appeared in foreign markets (e.g. Japan), or because technological progress pro­duced new and superior substitutes (e.g. oil for coal), or new techniques which led to a massive replacement of labour by capital (e.g. coal and steel). These industries happen to be heavily concentrated in areas such as Lancashire, South Wales, Clydeside, North East, and North West England.

We live in a world of change so that at any moment of time there will always be some industries in decline, but oth­ers will be growing. A declining industry, therefore, would present no serious economic problems if labour and capital were extremely mobile; resources could move from declin­ing to expanding industries. Unfortunately the newer indus­tries which have developed during the twentieth century (e.g. motor vehicles, electrical appliances, radio and televi­sion, and food processing) have tended to prefer locations away from the traditional industrial centres. The attraction for these mainly consumer goods industries have been the large markets in the Midlands, London, and the South East. Given the serious barriers to the mobility of labour discussed earlier the result has been a difficult and persistent regional imbalance in the labour market.

Regional policies

Faced with the problems outlined above governments have placed regional policies high on their fist of priorities. Regional policy is a twentieth-century development designed to deal with three basic problems.

1. An excessive concentration of people in particular towns and cities.

2. Areas dominated by older declining industries.

3. Regions depressed due to a dependence on low-
income extractive industries such as agriculture, forestry,
and fishing.

In the U К the major problem is the second one, but the problems of London and the South East Lancashire and Midland conurbations provide examples of the first type, while the Scottish Highlands and the South West peninsula provide examples of the third type.

The main effects of an uneven regional distribution of unemployment are:

(a) The unemployment in the less prosperous areas rep-

esents a serious waste of economic resources and national
income is lower than it might otherwise be.

(b) The drift of population to the more prosperous areas
leads to housing shortages and general overcrowding in
these areas and there will be added social costs incurred in
trying to overcome the problems of the overcrowded areas.
In other regions community life might be damaged by the
loss of population and the distortion of the age composition
(since younger persons are the ones most likely to move). In
addition there may be social costs in the form of under­
utilised social capital.

(c) When the total demand for goods and services is
running at a high level, there is excess demand for labour
(and other factors) in the prosperous areas giving rise to
upward pressures on incomes and other prices. Inflationary
pressures are generated while manpower resources are
underutilised elsewhere.

Regional policy measures fall into three main groups:

1. Development of the infrastructure of the depressed areas by improving roads, railways, and airports, increasing the availability of fuel and power, and providing the neces­sary social capital and amenities.

2. Schemes to improve the occupational and geograph­
ical mobility of labour so that workers can move more read­
ily to the new jobs provided by firms moving into areas with
surplus labour.

3. Measures to stimulate industrial expansion and
diversification in selected areas together with restrictions on
expansion in more prosperous or overcrowded regions.

Regional policy in the UK

The extent of the regional problem is revealed in Table 9, which shows the variations in unemployment rates in the official planning regions of the UK. The government began to tackle the problem in a small way in the 1930s, but the measures had little or no effect mainly because the national rate of unemployment was high throughout the inter-war period. During the Second World War the problem disap­peared, but the return to peace-time conditions saw the reappearance of the regional imbalance in unemployment rates and the problem has persisted with varying degrees of severity.

A series of Distribution of Industry, and Local Employment Acts has brought into being a wide range of policy instruments for dealing with the regional problems. The more important aspects of government policy are designed to 'take work to the workers' rather than 'taking workers to the work'. The reasons for this concentration on moving firms to areas with surplus labour are based upon the geographical immobilities of labour and the problems asso­ciated with large movements of population which have already been discussed.

From 1945 until 1982, regional policy was designed to attract new investment in manufacturing industry from areas where unemployment was low to areas where unem­ployment was high. The principal measures used for this purpose were:

 

(a) subsidies to manufacturing firms which located their
new plants in areas with high rates of unemployment, and

(b) strict controls on the location of new plants in the
more prosperous areas — it was very difficult to get planning
permission for new factories in these areas.

In 1982 the restrictions on new investment in the more prosperous areas were removed.

Assisted areas

Certain regions of the UK have been designated as qualifying for special government aid. Although the level of unemployment is the main determinant of an area's status as an assisted area, regional variations in income per head, in the state of the infrastructure, and in the gen­eral economic and social environment are also taken into account.

Development areas

These are located around the older industrial areas of Glasgow, Liverpool, Newcastle and South Wales. Remote areas of Cornwall and small areas severely affected by clo­sures of steelworks, such as Corby, are also classified as development areas,

Intermediate areas

These are regions suffering from similar, but less acute, problems to those of the development areas. Intermediate areas mostly adjoin the development areas but also take in remote parts of the country, such as the Scottish Highlands as well as parts of North Wales. The serious decline in manufacturing employment in the 1970s and early 1980s led to the Birmingham and West Midlands area and parts of the Manchester conurbation being classified as interme­diate areas.

In 1987 the assisted areas covered about 35 per cent of the working population of Great Britain.

 

Policy measures

In 1984 important changes were made in the ways in which government financial assistance is made available to firms in assisted areas. Before this date, much of the Finan­cial assistance took the form of automatic investment grants equal to some fixed percentage of a firm's capital outlay. These grants were attractive to capital-intensive industries, for example the oil and chemical industries, which meant that large outlays by the government often succeeded in cre­ating relatively few jobs. It has been estimated that from 1960 to 1981 the cost of regional policy in terms of jobs cre­ated was about &40 000 per job (at 1982 prices).

The 1984 policy changes were designed to target finan­cial aid much more closely to job creation. It was also decid­ed to make more financial aid available to service industries, which tend to be more labour-intensive.

Types of aid

Regional Development Grants (RDGs). These are only available to firms in development areas. The amount of the grant is calculated in two ways:

(a) at 15 per cent of the capital expenditure, subject to
a maximum of &10 000 for each new job created, or

(b) &3 000 for each new job created.

Companies automatically get whichever amount proves the bigger. Service industries now qualify for RDGs.

Regional Selective Assistance. This form of aid is available in development areas and intermediate areas. Both manu­facturing and service industries qualify for selective assis­tance. The amount of aid is calculated as the minimum assis­tance needed to persuade a firm to undertake a project which will either create new jobs or preserve existing jobs. Financial aid will only be provided if it can be demonstrated that the project would not go ahead without government assistance. Two types of grant are available under this scheme:

 

(a) project grants, which are based on the capital costs
of the project or on the number of jobs created, and

(b) training grants, which are based on the costs of
the additional training required as a result of the new
investment.

Other forms of aid. Firms moving to assisted areas can obtain financial aid from the government to help with the costs of moving key workers to the new location. The gov­ernment also builds factories in the assisted areas and makes them available on very favourable terms (e.g. rent free for a limited period).

The European Community's Regional Fund has also provided substantial sums of money in the form of grants to promote economic development in the assisted areas.

Mobility

An important part of regional policy consists of govern­ment measures to assist the mobility of labour so that work­ers can move more easily to the new jobs created by the other measures. In addition to the training grants paid to firms creating jobs in development areas, the government has established (and is establishing more) government train­ing centres (GTCs) where redundant workers can learn new skills. Training grants are payable to workers who attend these courses. This programme of retraining together with the Redundancy Payments Scheme should, it is hoped, greatly increase the occupational mobility of labour. There are also schemes offering financial assistance to workers seeking to move to work in other areas. Travelling expenses, lodging allowances, and assistance with removal expenses may be provided by the Department of Employment.

Another aspect of regional policy in the UK has been the creation of the New Towns. About 20 new towns have been built and some other towns have been greatly enlarged under the same policy. The principal objective has been to

reduce the congestion in the large conurbations (several of the towns have been created to take 'overspill' population from London and Birmingham), but others have been established in development areas in attempts to generate growth points.

Enterprise zones

In 1980 the government announced plans for dealing with the serious problems of decline and decay in the cen­tres of several large industrial cities. Demolition of slums and older industrial and commercial properties had not been followed up by redevelopment and the centres of many large cities were becoming less and less attractive to new enterprises. The government decided to create 'enterprise zones' in a number of cities with a view to attracting firms to set up in inner-city areas. Firms located within an enterprise zone do not have to pay rates for up to 10 years; planning controls are less rigid so that factories can be built more quickly, and such firms can obtain very favourable tax treat­ment of their capital expenditures. By 1987 some 26 enter­prise zones had been established.

Effectiveness of regional policy

It is extremely difficult to measure the effectiveness of regional policy. Although over 20 000 million was spent on regional policy between 1963 and 1983, the regional unem­ployment disparities were wider in 1987 than they had been in the 1960s. Facts such as these would seem to indicate that regional policy has been a failure.

It can be argued, however, that the differences in region­al unemployment rates would have been much greater if there had been no regional policy. It has been estimated that the policy created more than half a million new jobs in the 1960s and 1970s. It is, of course, extremely difficult to esti­mate how many existing jobs were saved by regional policy.

Regional policies have been subject to criticism on sev­eral grounds.

1. A policy aimed at diversifying industrial structure in
all the regions may result in a loss of economies of scale. The
motor car industry, which was persuaded to build plants in
several of the development areas, was reluctant to do so
because it meant that these plants would not benefit from
the economies of concentration which were available in the
established centres of the industry.

2. Firms in prosperous areas which were refused per­
mission to expand in their original location may well have
decided to cancel their plans for expansion rather than
accept the alternative of building a branch factory in a devel­
opment area. Alternatively, they may have chosen to expand
by taking over another firm in the same area.

3. A major criticism of earlier regional policy which has
already been mentioned is that it was heavily biased towards
capital-intensive firms which obtained automatic invest­
ment grants in development areas.

4. Many people believe that public expenditure on
regional policy has been inadequate. In fact, in the 1980s,
the government substantially reduced expenditure on region­
al policy. It believed that too much emphasis had been placed
on trying to persuade large firms to move from non-assisted
areas. The government advocated a policy of encouraging
small new firms to start up in development areas.

Structural factors still appear to favour the South East and East Anglia. For example, much of the investment in new industries involving micro-electronics is taking place within 50 miles of London. The gradual process of de-industrialisation is moving capital and labour away from older industries to the services sector, especially financial services, technical services and tourism. Many of the devel­opment areas are unattractive locations for enterprises in these industries.

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In the period from 1966 to 1975, regional policy helped to bring about a substantial narrowing of regional differ­ences in unemployment rates. After 1975, there was a rela­tively large increase in the national rate of unemployment. Unemployment in all the regions increased but the increase was much greater in some regions than in others, and the regional discrepancies increased.

The inner city problem

After the 1987 general election the government announced that the problems of the inner cities would receive the highest priority. Several inner cities in the UK present a picture of dereliction and decay, and have unem­ployment rates well above the national average.

The drift of population and employment from the inner cities to the suburbs and to towns in more rural areas has been going on for a long time. Rising incomes have made it possible for many people to move to more attractive sub­urbs, and, commuters account for an increasing share of inner-city employment. Automation and new techniques of production and distribution have meant that firms require more floor space per employee. This fact, together with the unavailability or high cost of suitable sites in the inner cities, has caused firms to seek locations outside city centres.

in inner cities, the share of unskilled and semi-skilled workers in the labour force is much higher than it is in outer areas. Low-skilled and low-income groups find it difficult to move from low-cost council accommodation in the cities to high-cost owner-occupied houses in the suburban areas.

The serious social problems which have developed in several inner cities have prompted the government to take more urgent and direct action to supplement the induce­ments offered to firms setting up in the enterprise zones already established in most of the problem areas. Current government policy is based largely on urban development

corporations (UDCs). These bodies are appointed and whol­ly financed by the government. They have been given pow­ers to buy and manage land, and to provide buildings, roads and services, and they can also be given planning and build­ing powers. Their main purpose is to encourage private-sec­tor investment in the inner cities. The London Docklands Development Corporation is probably the best-known example. It is claimed that this particular development has encouraged private-sector investment equal to six times the amount of public money devoted to the project.