Mike Hedges asks whether we can learn lessons from past failures of a recycled economic development policyJuly 12th, 2013
In the early 1980s a number of Enterprise Zones were created throughout Britain including in Wales the lower Swansea valley, Delyn and Milford Haven. Based upon the principle that all policy ideas are recycled every 20 to 30 years – after those involved first time around have changed jobs or retired – then Enterprise Zones have returned once more and are now official government policy again.
Their purpose was to stimulate private sector economic activity, thus creating employment in less well-off areas. This was to have been achieved using tax incentives, including:
- 100 per cent tax allowances for capital expenditure on industrial and commercial buildings.
- Exemption from paying business rates for 10 years from the date of the building being occupied.
Developers and investors also benefitted from simplified town planning, where planning permission was not required for new developments provided they complied with the published planning regime for the zone. Some other minor benefits were also available, including exemption from training board levies and expedited custom facilities.
Initially, retail was excluded from Enterprise Zones but in many, including Swansea, it became a significant player. In Swansea the term Enterprise Zone is often used as an alternative for out of town shopping area. Wikipedia describes the Swansea Enterprise Zone thus, “The regeneration has attracted many light industries, offices and in particular retail outlets to Swansea.
In early 2011 a report from the think tank Centre for Cities, and the not-for-profit organisation The Work Foundation both said the concept of enterprise zones and parks was out-dated. The Work Foundation report said, “Most of the areas that had such zones are still struggling today — places like Middlesbrough, Speke, Hartlepool and Swansea.” Most of the jobs created had simply been displaced from other areas. It continued:
“Evidence from previous Enterprise Zones suggest that up to 80 per cent of the jobs they create are taken from other places; that Enterprise Zones do very little to promote lasting economic prosperity. Most Enterprise Zones create a short-term boom, followed by a long-term reversal back into depression; and Enterprise Zones are hugely expensive. Evidence from the 1980s suggests that Enterprise Zones cost at least £23,000 per new job they create.”
According to a 1987 evaluation by the Department of the Environment, only 13,000 of the 63,300 jobs created in Enterprise Zones were new jobs, with the remainder displaced from within the area. The relatively small size of the Enterprise Zones meant that, in many cases they displaced jobs from within the same town or city. A 1999 study, UK Enterprise Zones and the Attraction of Inward Investment by Jonathan Potter and Barry Moore (here), suggested that around 25 per cent of new jobs were displaced from within the same town or city. This type of local displacement destabilises local economies by artificially enticing businesses into less competitive areas. The result is that other industrial parks outside the zone are left with empty units.
Enterprise Zones were also created in the USA, especially California where it has been the state’s major economic development intervention. However, a report published by the Public Policy Institute of California in 2009 concluded that it had failed to achieve its key goal of increasing jobs. The report
“…contrasts employment growth in Enterprise Zones with comparison areas and concludes that the program, on average, has no effect on job or business creation. The report recommends a re-examination of the program, which offers tax credits and incentives to businesses in 42 designated zones throughout the state. The program’s cost in the next fiscal year is estimated at nearly half a billion dollars.”
The second interim report on Enterprise Zones by the Department of the Environment in 1995 identified that:
“…in general a significant proportion of the rates relief available to tenants of properties on Enterprise Zones have been absorbed into the rental payments of new tenants, through higher rental values on Enterprise Zones relative to the control group off zone… assuming capital allowances are shared between investors, developers and landowners (rather than being passed on to tenants) the majority of the benefits from capital allowances appear to have gone to the investors…. Enterprise Zones do not appear to have been successful in encouraging hives of companies with close integration in the pursuit of mutual business development.”
The Swansea Enterprise zone speeded up the regeneration of the lower Swansea Valley which was a very good thing. At the same time, however, it created a large out of town retail centre that had a detrimental effect on the city centre.
The generally negative account of the impact of Enterprise Zones in the 1980s took them off the agenda for the next 25 years. Now they have returned the challenge must be to learn the lessons from the first wave and to not make the same mistakes with the new Enterprise Zones.