4. ECONOMIC DEVELOPMENT, REGIONAL GOVERNANCE AND THE ROLE OF DEVELOPMENT AGENCIES

4.1 Introduction

Promoting the opportunity to develop the economy more effectively has always been a significant element in the debate over the future governance of individual regions, especially of regions facing endemic problems. Such factors as high unemployment, low relative incomes and gross domestic product (GDP), net emigration, the collapse of a region's traditional basic industries, and domination by nonlocal capital have all been cited as reasons for seeking increased indigenous control or other forms of intervention in a regional economy. However, for many regional economies, with an open economy dependent on the national, continental and world economic forces (McGregor et al. 1997), there is obviously a constrained policy environment. This inevitably limits the ability of a regional administration to achieve macroeconomic objectives by following traditional policies and ways of delivering such policies.

Further, and even within these strictures, for many communities in the European Union (for example, Scotland under the new devolution arrangements)¹ regional levels of governance will have available only a limited range of economic powers. Control over fiscal, economic and monetary policy will be reserved for higher levels. Similarly, the regulation of competition, intellectual property, and research councils will remain under the power of the central government of the United Kingdom, as will policies pertaining to broad aspects of transport, energy, the welfare state, trade and assistance to industry. The abilities of regional levels of governance to intervene at the Scottish level under these constitutional arrangements are not very different from the powers and instruments available to many regional governments across the developed world.

Because the particular history and geography of a country or region are important in determining the effectiveness and efficiency of the firms, markets and policies in the country or region in the present, it is always necessary to have a good idea of such background information. The extended endnote below² presents a very brief description of the development of the Scottish economy and institutional structure.

Dow (1997) argues that devolved governments have greater flexibility to intervene in regional economies than the problems mentioned above may suggest. Indeed, some researchers claim that the success of regional governance structures in economic policy terms should not be measured by the level or financing of public expenditure in their region but rather by their impact on the rate of economic growth and development locally (Newlands 1997).

Increasingly over the last two decades, attention has been turned to what Doeringer (1987) called the "invisible factors in ... economic development" as the crucial areas for intervention. In this vein, Porter (1990) has argued for the significance of investment and innovation in explaining the promotion of competitiveness and productivity, highlighting "R&D, learning, modern facilities and sophisticated training" as key factors. More generally "new growth" and "endogenous growth" theories follow the Schumpeterian tradition of stressing the role of competition in creating dynamic change in the economy. Today, an alternative approach that stresses the specific comparative advantages of areas can be reconciled with these growth theories where agglomeration economies built on trust, cooperation and innovation are present.

Similarly, the significant role of an infrastructure conducive to innovation and development has been long associated with the growth pole theories of Perroux. Having fallen out of fashion in policy and research terms in the 1970s, growth poles are being resurrected in the form of clusters and networking: the underpinnings of the successful regional economies of the Third Italy and Baden-Württemberg (Whittam 1997). Indeed these comparators have been cited by the Secretary of State as the way forward for Scotland (Press Release, February 1998).

In all these competing theories of regional growth, a rationale can be identified for a regional government intervening in the economy to establish conditions and institutions to promote economic development. The decline of Keynesian demand management policies and the re-emergence of supply-side concerns has led to factors which affect costs of production, competitiveness, and to the creation and adoption of technologically advanced methods of production (Newlands 1997). In these contexts, regional governance structures can be argued to have the potential to have significant impact on industrial and economic development by introducing and customizing policies in such areas as training, technology, venture capital, new firm formation and the ownership of industry. However, as McGregor et al. (1997) and Newlands argue (1997), intervention will not lead to automatic improvements in such circumstances; rather the need for a policy regime appropriate to the needs of the particular region’s economy can be critical, as the strategies of the national state may be inappropriate.

Many commentaries on specific regional economies tend to stress the uniqueness of the political and institutional environment of that community; in Scotland, for instance, for many years it has been argued that economic development policy has been determined within Scotland by Scottish institutions (McCrone 1994; Danson et al. 1990). In many regions facing endemic structural economic problems, a distinctive element in the evolving picture of their own environments has been the role of the regional development agency (RDA). Within the regional governance structures, it is often to these established institutions that the regional or national parliament will look to deliver key policy options and strategies. This section of the learning materials considers next the typical structural problems of the regional economy, then in parts 4.3and 4.4 the rationale for development agencies, followed by their functions and performance. Guiding the deliberations over what institutional forms and configurations could be adopted, it is argued here, should be four key principles: accountability, subsidiarity, sustainability, and integration/inclusion. These are defined in part 4.5. Applying these in part 4.6, we propose how RDAs might be evaluated; part 4.7 considers the role of partnerships. The concluding part proposes how the development agencies should be reformed to operate more effectively to meet the aspirations of the community in the region.

4.2 The regional economy

For many regional economies, such problems have become endemic as high and persistent unemployment, net emigration, declining local traditional industries, a weak indigenous business establishment with low rates of new firm formation, and a dependence on external investment by multiregional or multinational firms. Together these factors produce a difficult environment for the growth and development of new enterprises, the attraction of R&D facilities, and the promotion of self-sustaining regional growth. Selective migration of the younger, more skilled, educated and enterprising members of the population will exacerbate such problems, instilling positive feedback mechanisms into the local environment and creating vicious circles of decline. Coupled with a reluctance to persevere with traditional Keynesian policies of demand management, restricted in the ability to adopt more interventionist strategies by politics or the regulations of the wider power blocs (nation, European Union, or equivalent), the move to supply-side policies has encouraged the foundation and reliance on RDAs.

4.3 Rationale for regional development agencies

Faced with these endemic regional problems and the need to intervene to address market failure, areas of the United Kingdom have begun to rely on the development agency approach to the promotion of regional restructuring. In the United Kingdom, with its long history of innovative policy development, the establishment of the Highlands and Islands Development Board and the Scottish Development Agency (in the mid-1960s and 70s respectively) and their survival through the Conservative governments of the last eighteen years have had much to do with the corporatist tradition in Scotland (Fairley and Lloyd 1995). They have also helped lead to the divergence of politics north and south of the border over this period (Brown, McCrone and Paterson 1996), and the consensus for intervention in Scotland (McCrone 1994). Many other regions around the world have followed this strategy and established their own RDAs.³ Whether the Scottish Parliament empowers local authorities, reabsorbs responsibilities into the Scottish Office departmental structure, or continues with RDAs will depend as much on political perceptions of the agencies' potential as on objective study of their performance against these alternatives. It is to the rationale, structure and roles for the development agencies under alternative regional governance models that we now turn.

It has been argued that the increased interest in economic development initiatives has helped stimulate greater "bottom up" development and the development of indigenous potential, compared with many former policies that tended to be more dominated by "top down" concerns (see for example Stohr 1989). An important part in this process has been played by semi-autonomous institutions: RDAs, the European Regional Development Agencies Association (EURADA), andGATEWAY (a general Web site on regional institutional developments in Europe).

An RDA can be defined as "a regionally based, publicly financed institution outside the mainstream of central and local government administration designed to promote economic development." In their studies of such bodies across the European continent, a model RDA is defined by Halkier and Danson (1997, 245) as a body that, first, is in a semi-autonomous position vis-à-vis its sponsoring political authority; second, supports mainly indigenous firms by means of "soft" policy instruments; and third, is a multifunctional and integrated agency, the level of which may be determined by the range of policy instruments it uses.

In the United Kingdom, RDAs have been seen as a method of reducing the level of localized market failure in accordance with and in support of the government’s macroeconomic regional policy instruments and objectives. Calling on the literature in this field (Haughton and Peck 1991; Lipsey 1983; Pearce 1977), Fairley and Lloyd (1998) explore the principle of market failure as it applies to development agencies, and again record how the Scottish agencies tended to widen the definition to allow a broader degree of policy intervention than the government envisaged. They also incorporate the evolving concept of "government failure" as a reason posited for restricting intervention; by extension the concept would lead one to support the devolution of powers to a quasi nongovernmental body more oriented to the needs of the market.

Danson, Lloyd and Newlands (1993) argue in support of development agencies as the most effective tool for addressing such local market failures as risk aversion in the financial sector, poor market information, externalities in the provision of infrastructure and training, and problems associated with rapid growth and technological change. Their argument rests on several advantages RDAs seem to hold over other methods of policy implementation that have been considered, such as local authorities, central government departments, and private sector-led bodies such as the English UDCs (Urban Development Corporations).

Able to intervene and interact with the economy at the most appropriate jurisdictional level (Armstrong 1997), regional agencies can bring substantial resources to bear on problems of local economic development by combining regional, industrial and training policies and resources on specific projects. They represent the manageable "bottom-up" alternative, avoiding the bewildering maze of local initiatives now present in many regions, but they are also flexible and receptive to the specific needs of the indigenous industry within their regions. A significant problem in the proposals for the RDAs in the English regions (DTER 1998) is their failure to recognize the difficulties caused by the continued existence of the plethora of bodies and programs in each region; in the Scottish cases, such additions to the institutional infrastructure were introduced after the Highlands and Islands Development Board and the Scottish Development Agency were established. A number of responsibilities which otherwise may be split between different departments or quasi-government agencies - such as the provision of sites, attraction of industry, environmental improvement, sector strategy, and urban development - could be located within a single organization to reduce costs and realize synergies (Moore and Booth 119). In the words of the Trade and Industry Committee, local enterprise companies in Scotland (LECs) are ‘able to deliver national schemes and programs flexibly, in response to local needs and circumstances’ (Trade and Industry Committee 1995).

Operationally RDAs frequently combine area and sectoral strategies as opportunities arise, and offer comprehensive business services, both functions that could be more difficult to deliver if they were spread across departments and agencies. More crucial perhaps, as they are at arms’ length from government, RDAs can develop a degree of operational freedom and credibility that regional departments of government may lack. They may be able, therefore, to have potential leverage over significant private funds, representing a strong advantage that an agency will have over the Scottish Parliament itself. In times of high mobility of multinational capital, such compromises may be necessary to attract and retain jobs, incomes and technologies. As Halkier and Danson (1995) have noted, because RDAs work "outside the mainstream government," they may be able to facilitate the pursuit of public policies without direct government intervention (1). This can make the development agency approach to regional economic development more acceptable to the full range of social partners, without necessarily undermining accountability.

Although RDAs can focus on the particular needs of the enterprises and labor force of their areas, they can also adopt a long-term perspective. Taking a strategic view can allow policies to be followed which are to the long-run benefit of the region, but which may be unpopular in the immediate period. Thus, relatively isolated from short term political intervention and maneuverings, RDAs should have the potential to restructure the economy in a planned way that would lift the development path of indigenous industry onto a higher level, achieving greater endogenous growth. It can be argued that distance from central government could well be fundamental to the success of such a strategy. Although the operating environment may be more closely attuned to the needs of local enterprise, a Scottish development agency can also instill a sense of regional ownership of economic development strategies while demonstrating a political commitment to the long-term growth of the economy as a whole. The potential to promote and encourage trust and cooperation through such an institutional approach can engender further virtuous circles of growth and development, as described below, in ways that a regional parliament and local authorities cannot.

4.4 Structure and roles of the development agencies

In many ways the specific roles and functions of the Scottish development agencies are less important than the balance between their objectives and their priorities. There is a broad consensus over the macroeconomic role of government and over the detailed needs of the Scottish economy. The most significant debate involving RDAs is over how expenditure should be targeted and on which sectors and areas it should be targeted. Yet much of the discussion threatens to be concerned with who should have the powers of intervention. In assessing the present structure and performance of the RDAs we hope to illuminate this debate.

The RDAs for Scotland, Scottish Enterprise (SE) and Highlands and Islands Enterprise (HIE) have responsibility for the integrated delivery of economic and business development initiatives, the provision of training and the implementation of measures to secure the improvement of the environment in Scotland. According to a concept long championed by the organization for Scottish trade unions - the STUC, SE and HIE represent a radical initiative within the Scottish tradition of regional planning for economic development by bringing together the key factors of capital, labor and land.

SE and HIE aim to stimulate self-sustaining economic development and the growth of enterprise, secure improvement of the environment, encourage the creation of viable jobs, reduce unemployment, and improve the skills of the Scottish work force. The delivery of the integrated enterprise and training services is subcontracted by SE and HIE to a network of LECs (Fairley and Lloyd 1998). The function of LECs are to co-ordinate the provision of the supply side of the economic infrastructure of their areas, addressing market failure. They provide the delivery framework for the specific services associated with training, enterprise and business development and environmental improvement. At a higher level, SE and HIE "provide strategic policy guidance and expert advice to the LECs on individual economic sectors; undertake major projects or research activities which extend beyond the areas of individual LECs; provide individual LECs with a range of central support services which include administrative, accounting and property services; undertake marketing and inward investment programs for the areas in question; undertake major environmental improvement and land renewal programs, in consultation with the LECs involved; and monitor the progress of the LECs in implementing their plans and achieving their objectives" (Fairley and Lloyd 1998). It should also be noted that HIE has been given a social aspect to its developmental responsibilities, raising questions over the potential imposition of an all-Scottish departmental approach to economic development. Such an approach would be supported by a framework that categorizes the Highlands and Islands into different priority areas: "fragile remote areas," "areas of employment deficit," "intermediate areas," and "Inverness" and its hinterland.

Following the tendency for corporatist and consensus politics and policy institutions to be more acceptable in Scotland, as argued earlier, these arrangements are clearly and distinctly Scottish and offer the potential for securing an integrated development framework in each area. Before discussing whether any of the functions of the RDAs should be centralized to the new Parliament (in particular the headquarters of SE and HIE) or brought under the control of the local authorities (the LECs), two key dimensions need to be explored: partnership and principle.

A key element to the operations of the LECs and the RDAs is that they work in partnership. This is especially relevant in discussions over the future of the development agencies under a devolved Parliament. They are not the "all singing, all dancing" monolithic multifunctional agencies envisaged in the early 1970s. SE and HIE must work with other organizations, including local authorities, government departments, academia and training bodies, the community and voluntary sectors, as well as the private sector, to develop and deliver such things as skills training, business development and inward investment. This is important, but it is also important that other organizations in turn recognize that the RDAs themselves bring a good deal of experience and expertise to local and regional development strategies and programs. Whatever configuration of powers and institutions is proposed, partnership will be an essential feature not only because it is rational to share best practice and to realize synergies, but also because the European Commission insists that across the European Union, Structural Funds be delivered through the Scottish European Partnership model (Danson et. al 1997).

4.5 Principles

In the assessments of the roles and performances of the RDAs in Scotland, a number of areas of criticism have been raised over the years. It has been difficult to discern any scientific approach to an evaluation of development agencies as such anywhere, though much has been written about their programs and strategies.⁴ To make proposals on the future governance and functions of SE and HIE in this critical vacuum suggests a need to return to first principles, and indeed an appreciation of the critical criteria against which the mode of delivery of economic development policies should be measured. In proposing these principles, we are calling upon a evolving field of literature that the Regional Studies Association, among other organizations, has debated and addressed in recent years. The four principles, which are inevitably interrelated, are accountability, sustainability, subsidiarity, and integration/inclusion.

That RDAs should be accountable is self-evident. Indeed this theme exercised the Scottish Affairs Committee when it examined SE and HIE in 1995/6 and, despite the heat generated around this issue, there were but few recommendations on improving democratic accountability. Others have thought otherwise; the Macfadden Committee, for instance, argued for the powers of the LECs to be transferred to local authorities, though the promised "bonfire of the QUANGOs" has not been as great an issue in Scotland as in Wales. What seems clear from the experiences with the Scottish RDAs and others elsewhere (Hughes 1998) is that control over the strategic long-term objectives and priorities of SE and HIE is necessary, but crucially there should not be day-to-day interference in delivery mechanisms and projects. These latter should be assessed through appropriate techniques and forms such as annual reports, monitoring frameworks, targets, and performance criteria.

Much of the debate over the effectiveness of RDAs in the European Union and of economic development agencies more generally across the world has concerned displacement. In other words, there is often a belief that such agencies merely shift jobs and economic activity from urban areas in need of revitalization to greenfield sites, and similarly from areas in need to other preferred locations. The trade-off between the efficiency and the equity of policy regimes therefore impacts accountability. In the evaluations of the "enterprise zone" experiment in the United Kingdom (where very specific locations were able to offer tax breaks and other subsidies to mobile manufacturing plants), much was made of the need to demonstrate a net benefit associated with local economic development efforts within the spatial context of the wider region.

The concern within the United Kingdom, and the European Union as a whole, over the promotion of the simple redistribution of plants by local, regional and central government policies has led to a series of regulations and controls over this aspect of policy intervention. These regulations appear to be in contrast with the United States, where authorities are more able to invite investment and so to persuade companies to change their location decisions. Within the United Kingdom there is a series of protocols over who can become involved in the attraction of mobile investment. Only central government agencies can talk to potential new investors in an area, and then only within tight guidelines. The range of inducements and assistance available to local and regional development agencies is likewise strongly constrained by higher levels of governance. Above the national controls lies the European Commission, which periodically sets the monetary and spatial limits and types of policy instruments allowed for nations under the Commission. This regional policy environment is far more constrained than are similar environments under the federal system of the United States.

Although certain states within the European Union have used tax incentives to attract firms, this form of intervention works differently from how it works in the United States. In most cases in Europe, local governments will not benefit directly from an increase in economic activity in their areas. Equalization grants (Kellerman and Schmidt 1997) and unified local tax systems mean that local income and property taxes do not follow firms from one local government jurisdication to another. This means that there is less benefit in RDAs and other regional institutions involving themselves in the enticement of mobile plants. There are, of course, other advantages in the attraction of firms, most noticeably employment generation and the possibility of increased wealth creation for local companies through supply chains. In the United States, the federal system allows local municipalities to benefit from an enhanced tax base in both payroll and property terms, without having to subsidize firm relocation.

For development to be sustainable, it must involve the whole community and be accepted across all the social partners - TUs, small and medium enterprises, community and voluntary sectors. Operationally there are questions over the strategy of promoting a branch plant economy through inward investment at the expense of long-term indigenous development (Ashcroft and Love 1996). There is a degree to which the new dependencies created in the Scottish economy identified earlier are unsustainable and so unsuitable in the Scottish context. On this criterion, the role of Locate in Scotland, the inward investment body for Scotland, would be called into question. A greater emphasis on clustering and networking is a potential change that could be made in Locate in Scotland's remit.

In the 1990s, subsidiarity was introduced into the evaluation of many policy areas. Following the approach of Armstrong (1997), we define subsidiarity here as taking and delivering policies at the most appropriate jurisdictional level. In other words, for certain functions the "local" level will be the most efficient level for the development of such things as training policies, while for other functions it will be the regional or Scottish levels. Training of software engineers would be more appropriately organized across the nation’s universities rather than in the locality; there are important economies of scale and scope to be realized at all levels. The benefits of a flexible yet strategic and objective approach can be considerable and will undoubtedly occupy the boards of the development agencies and the committees of the Scottish Parliament; but these deliberations could be at the expense of efficient operations on the ground.

Finally, integration and inclusion have become important themes for policies at the end of the millennium. The need to maximize the value added by the Scottish economy and to capture the benefits of the higher functions of national and global corporations operating here in any capacity suggests that greater attention has to be paid to the linkages between plants, offices and services. The fixation of SE and other commentators on the leading high-tech industries of today is in many ways as destructive as the focus of debate in the past on steel, shipbuilding and coal. Thus traditional sectors such as textiles have suffered relative neglect because of their image as a declining industry, compounding their inherent conservatism and under-capitalization (Danson and Whittam 1998). The potential of such key areas of the Scottish economy is being dismissed in current SE plans for clustering despite the successes abroad in turning around older staple sectors. Locate in Scotland has tended to follow an implicit policy of promoting certain locations in Scotland (especially New Towns, suburban and greenfield sites, latterly in enterprise zones in Lanarkshire) to maximize the opportunities of attracting inward investment, regardless of the impacts on other markets - labor, training, and property for instance - and of the damage it causes the remainder of the country. Old industrial and rural areas, inner cities and peripheral estates have seen precious few manufacturing or service jobs directed their way in the past twenty years, and they have received minimal consideration of their access to the new industrial sites. This raises questions over the potential to enhance the role of structure plans in the economic development process, and over the limitations on such power that is threatened by the multinational agreement (MIA), being negotiated through the World Trade Organization. The agreement could restrict the ability of the Scottish Parliament to impose greater controls over the supplying and sourcing policies of inward investors.

The inclusion of SMEs in the development and the administration of economic policies has been a perennial problem in the United Kingdom. With a weak Chamber of Commerce system and with a dual economy that excludes most indigenous entrepreneurs from decision making within trade and employer associations, there is a real need to ensure that the interests of the mass of locally owned concerns are heard in the LECs and industry networks. Without a strong Scottish presence among the commanding heights of the economy and in the leading sectors especially, there is a danger that plans for improved networking and clustering will fail.⁵

Much of the debate over integration has inevitably centered on the need to reduce social exclusion of the long-term unemployed, women, the young and ethnic and peripheral communities. While initiatives, programs and partnerships over the years have been established to address some dimensions of the lack of inclusion of many in society, that the scale and depth of inequality has continued to increase is without doubt. Broadening the remit of SE to encompass the social aspect of its developmental responsibilities, as HIE is charged to undertake, would go some way toward meeting this division. However, a multi-agency, multi-annual, and multifunctional approach will be necessary to overcome the obstacles to improved living standards for all in Scotland. Partnerships between local authorities, LECs, Scottish Homes, employers, trade unions and local communities are showing some promise of advancing the position of the excluded. Critically, LECs cannot have an implicit slogan of "our business is business" if such progression is to become fundamental and irreversible.

These principles suggest a need for the objectives, programs and actions of LECs, and others involved in economic development, to be transparent, as the production and criticism of structure plans must be. Further, linkages between sectors, enterprises, markets, locations and organizations can be key to the improvement in the economy as a whole and to its parts. The Scottish Affairs Committee noted how crucial mandatory consultation by LECs of local authorities could be, at least to secure greater legitimacy for the enterprise networks in Scottish local governance and communities (Fairley and Lloyd 1988).

4.6 Evaluation and performance

As described in the introduction to this section, across the competing explanations of economic growth and performance are certain common features. The creation and encouragement of specialized skills and services, and the exploitation of research, technologies and innovation are considered to be critical drivers of a successful strategy for regeneration. Mechanisms to ensure the commercialization of science and technology from higher education and other institutions, the growth of new firms, the development of existing indigenous enterprises, and the transfer of technologies and processes into the wider economy are recognized as areas where market failure may demand significant intervention to secure advantages for the nation as a whole.

There has been relatively little analysis of the performance of development agencies since the merger of the former agencies and the training agency in Scotland. Much attention has focused on their individual programs and policies, and on issues of accountability. There have been calls for the boundaries of the LECs in the SE network to be coterminous with those of local authorities or subregional groups of authorities, all the more necessary given the abolition of the regional councils in 1996. Minor changes have been made towards reducing some of the anomalies caused by the lack of congruence among these boundaries, but further modifications could usefully be made to make the LECs' jurisdictions closer to both local administrations and local labor, industrial, and property markets and networks. Addressing the need for efficiency and legitimacy, SE has recently been involving a broad range of organizations and partners in a wide ranging and comprehensive review of its skills strategy. The full range of social partners has been consulted in this ongoing process and perhaps illustrates the potential for local, regional and Scottish consensus under the Scottish Parliament.

When the Scottish Affairs Committee proposed that this comprehensive skills strategy could be linked to sectoral targets in partnership with industries (Fairley and Lloyd 1998), they were perhaps pointing to the continuing need for such integration but using one of the characteristics of RDAs given above: their allowance of public policies to be pursued "without evoking the ghosts of interventionism or state dirigisme" (Halkier and Danson 1995, 1). Balancing this need to be acceptable to private enterprises with the need to be accountable has been recognized as of major significance more generally in Scotland, according to a report on selected members of the Scottish Council (SCDI 1997). Undoubtedly the desire to control QUANGOs and reduce the democratic deficit are strong factors in support of the Scottish Parliament's showing a closer concern with the RDAs in Scotland, but without losing the advantages of the form of intervention that QUANGOs provide.

The efforts to be more inclusive with regard to the development of skills reflects concerns over the lack of a central strategic overview of the problems of the Scottish economy and the problems of coordination described above. In other markets, such as land, continuing and expanding calls for reform lend evidence to the criticism that the RDAs have failed to change the culture of business and economic players. This stands alongside criticisms that their existing policies have been inappropriate with regard to such matters as employment creation and business starts.

Although employers in Scotland continue to be reluctant to meet the cost of training in modern times (Danson et al. 1990), there remains a strong economic argument in favor of employers being obliged to invest in training. Reconfirming a long-held commitment, the Scottish Trades Union Congress has argued that businesses should be required to fund a training program equivalent to 0.5 per cent of payroll costs (Scottish Trades Union Congress 1992). Meeting the training needs of a competitive economy suggests intervention in the market far beyond the proposed minimum wage and the maintenance of a flexible labor force. Reincorporating the trade unions and invigorating the employers' involvement will be two of the principal priorities facing the Scottish Parliament; given their restricted powers, the RDAs may prove the most efficient mode of intervention in the labor market.

In the literature on industrial clusters, networking and learning communities , the issues of technology policy, innovation, new firm formation and the ownership of industry are all closely connected and provide prime examples of the way in which the Scottish Parliament could in the long-term increase the dynamic efficiency of the Scottish economy (Danson, Lloyd and Newlands 1990; Newlands 1997). Yet there has been an undercurrent of concern over the feedback among these issues, and in particular over the implications of a reliance on foreign direct investment for the promotion of indigenous growth. A major concern of the Scottish Office and SE (and of their joint agency Locate in Scotland) has been the regeneration and diversification of the Scottish economy through the attraction of plants owned by corporations outside the United Kingdom, and especially corporations in the United States and the Pacific Rim countries. Much evaluation and analysis of the operations of the Scottish development agencies has focused on the effects of this attraction of inward investment to Scotland. It has been noted above that Scotland has become dependent for much of its dynamism on the overseas owned electronics industry, with all that entails for control over the economy and the potential for indigenous development. Recent indications are that these restraints should be addressed by seeking to locate major R&D plants here to embed these leading sectors into the Scottish industrial environment. This would certainly build on the comparative advantages of the economy, not the least of which are the high level of skills and the research facilities and traditions of the educational system.

However, whether a real Scottish presence in the new technologies - and beyond just the electronics sector - can be established without significant venture capital investment is doubtful. Well established arguments for a Scottish industrial investment bank are returning to discussions on the Scottish economy. While the financial sector in Scotland is significant in global terms, it remains less than effective in the provision of funds for indigenous enterprises. Dow (1997) especially has argued for the closer involvement of the Scottish banking sector in the Scottish economy, to address some of the limitations of the underdeveloped industrial structure and to redress past neglects. Without the industrial banks of such competitors as the German länder, the Scottish Parliament will have to be innovative in its use of indigenous resources; the land that invented investment and unit trusts should be able to mobilize such funds more effectively than at present. Many believed that the establishment of the Scottish Development Agency in 1975 would create such a financial vehicle; it took several years to conclude that its attention was focused elsewhere - primarily on being Europe’s largest industrial landlord.

Concerns over the role of Locate in Scotland and of inward investment (Standing Commission on the Scottish Economy 1989, 47), despite the benefits of introducing new technologies, investments and management skills to Scotland, have focused on the deepening of the branch plant syndrome. Because most product and process innovations are developed in the plant in which they are first designed, and because there is little interregional transfer of such innovations, Scotland’s low rates of new firm formation and innovation, and its under-representation in high technology growth sectors, is understandable. Employees at branch plants do not acquire the skills, business contacts or ideas to enable them to set up their own firms or mount a management buy out.

As Newlands (1997) argues, the Scottish Parliament could promote "a shift in the priority given to the attraction of inward investment and in the issues raised in Locate in Scotland’s discussions with potential inward investors." Reflecting Dow’s arguments, he suggests that stronger commitments could and should be sought on such issues as the location of higher corporate and research functions, technology transfer, and corporate recruitment, sales and purchasing policies. The Scottish Parliament might also pursue the suggestion that the Scottish public sector and financial institutions combine to establish a "White Knight" fund to strengthen existing Scottish businesses and enable those wishing to maintain their independence to resist external takeover (Standing Commission on the Scottish Economy 1989).

Without necessarily raising public expenditure and within the powers granted to the devolved Parliament, efforts could be made to strengthen cooperative networks further, and with them the culture and behavior of enterprises and people in Scotland. This would reflect both the economic underpinnings of clustering and the role political institutions can play in shaping economic performance more effectively by influencing the rules and norms of behavior (Hodgson 1989; North 1994).

4.7 Partnerships and Europe

The rationale for the establishment of RDAs as argued by researchers such as Danson, Lloyd and Newlands (1993) and Halkier and Danson (1997) is based on the idea that they are not only "the ‘manageable’ bottom up alternative, avoiding the bewildering maze of local initiatives" but they also allow "for flexibility and receptiveness to the specific problems of indigenous industry within the region" (Halkier and Danson 1995, 1). Consequently, as has been noted, "a position outside the mainstream government apparatus appears to make it possible to pursue public policies without evoking the ghosts of interventionism or state dirigisme, and so to make it easier to adopt a long-term perspective, while the distance from government frequently generates an operating environment more closely attuned to the needs of enterprise" (Halkier and Danson 1995, 1, emphasis added). In other words, the perceived advantages of RDAs as a form of regional policy delivery institution could well be compromised by increasing moves to strong control over the day-to-day operations by a parliament. Similarly, whether the costs of closer involvement of the RDAs in partnerships and formal networks under both national and European Union programs would be worth bearing will depend on the benefits realized and the synergies released by these alternative models of economic development.

4.8 Conclusion

With restricted powers and a hostile and limiting European and global economic environment, the Scottish Parliament will face a need to balance aspirations against its capabilities. It will need and have a powerful desire "to do something" in economic development and do so more directly than institutions do at present, although Newlands (1997) has maintained that the growth function and the efficiency of intervention is significant already. There will be a strong temptation to reabsorb SE especially, and perhaps HIE, back into government, with some pressure to devolve the powers of the LECs to local authorities.

Given the rationale for RDAs and on the basis of the principles adopted here as applied to this form of intervention, we would argue that such moves should be resisted. There is a need for improved democratic control at all levels, and of better accountability of the strategic functions of the agencies particularly. It is a source of worry, therefore, that the Labour government has failed to legislate for the statutory inclusion of local authorities, trade unions and the community on the boards of LECs, European partnerships and equivalent institutions.

We would also not support the transfer of the powers of the LECs to the local authorities. After reorganization, many LECs are too small to deliver business and training services effectively and efficiently, while consortia or joint boards appear to be a second-best solution. Experiments in partnership, such as the Ayrshire Economic Forum, the Ayrshire Engineering Group and the networking of the HIE Community Land Unit, illustrate the advantages of improvements to cooperation and trust across the economic landscape of Scotland. In many fields, especially business services and certain types of manufacturing, the agglomeration economies enjoyed by the metropolitan regions such as Barcelona, Frankfurt and Milan point to the need for a higher rank of development agency operating at least at the Scottish level. Calls for more revolutionary reforms threaten to be a distraction in the short term. Continuity and confidence will be fundamental to fulfilling longer-term objectives, especially at a time of devolution to the new Scottish Parliament, compensatory changes in England, European Union enlargement and reductions in Structural Fund support. The experience of successful regions elsewhere in Europe provides evidence that an evolution of the Scottish model of partnership is desirable, if the advantages of this tested approach are applied to economic links as well as to institutional relationships. Maintaining this model will involve the Scottish Parliament in radical intervention in the Scottish economy, especially if it incorporates the principles of accountability, sustainability, subsidiarity and inclusion into its activities. Anything else will appear to be mere posturing.

The experiences of the RDAs in Scotland have been examined under the current regime and under the new Parliament for two particular reasons. First, the Scottish agencies are the models for many of the development institutions across Europe and beyond. Scotland’s extended history of economic problems has meant it has been at the forefront in the establishment of and experimentation with many such initiatives.⁶Scotland's experiences in the area can be seen as a good indication of the likely impacts of the moves to more catalytic and coordinating institutions. Second, and leading from this, the move toward greater autonomy for Scotland will allow a better analysis of the implications of securing control over differing forms of regional governance structures in a way that is not being proposed for the English regions.

Critically, though, the institutional arrangements in other parts of the world, especially the United States, are significantly different. In the United States, local municipalities may enhance payroll and property tax revenues by intervening in the location decisions of firms, and there are much looser controls over the policy instruments of their economic development agencies. This contrast in governance structures and policies can have profound implications for the effectiveness of regional economic interventions. It suggests that attention has to be paid to aspects of the regional economic environment other than cost and physical location factors.

ENDNOTES

1. The House of Commons, 1997
2. Scotland has been an independent sovereign country for much of its history. However, in 1603 the Crowns of Scotland and England were united when James VI of Scotland also became James I of England upon the death of Elizabeth I of England. In 1707, the Act of Union finalized the political union between Scotland and England, which followed legisaltion of that year which united the parliaments of Scotland and England. This Act, passed by the respective parliaments, provided inter alia for the Protestant succession to the throne, for uniform taxation and for free trade between Scotland and England. The legislation preserved the separate Scottish legal, education and ecclesiastical systems. The 1707 Act of Union had a turbulent aftermath. It led to the Jacobite Rebellions under which attempts were made to regain the British throne for the House of Stuart. This ended with the Battle of Culloden, the last battle to be fought on British soil, in 1746, when the uprising was crushed with great brutality.
       Immediately after the Jacobite Rebellion came the Age of Enlightenment, an outpouring of philosophical thought, literature, inventions, architecture and industrial advancement. A critical personality in this period was Adam Smith, whose book The Wealth of Nations, published in 1776, was a major landmark in the history of economic thought. The period also witnessed the beginnings of the age of Watt and others, which provided the basis for the transformation of Scotland from an agrarian economy to the first industrialized nation in the world. There were also advances in agriculture and textiles, and an expansion of trade in the raw materials needed for Scottish heavy industry.
       Although there is a long history of mining of coal and lead in Scotland back to the 13th century, the real development of industry started only after 1750. From this time onwards, increased trade, large scale immigration to the Central Belt of Scotland from the Highlands and Islands and from Ireland, and the introduction of major new industries significantly raised the tempo of Scottish economic life. Clydeside, centerd on Glasgow, became the world leader in the production of coal, chemicals, metals, engineering, shipbuilding and textiles, making it the most prosperous region in Britain. Dundee secured a position as a center for the processing of linen and jute, while Edinburgh expanded on the basis of the iindigenous financial and legal sectors, and established itself alongside Glasgow as a major center of administration and the arts.
       These economic changes led to changes to Scotland's social structure; the population increased from 1.1 million in 1707 to 1.6 million in 1800 and almost 4.5 million by 1900. However, this was accompanied by some of the worst aspects of poverty and deprivation the world has ever witnessed.
       Development continued apace in the nineteenth century, particularly in heavy industry, coalmining, shipbuilding, and engineering. The economy also diversified into medicine, science, accountancy, banking and commerce. Its educational provision and achievements were outstanding by any measure, paradoxically leading to high emigration as Scotland exported its skills and labor force. As described in section 6 below, this rapid advance and inventiveness also sowed the seeds of twentieth century decline. While there was some restructuring after World War II, this was not enough to prevent further decline and peripheralization.
       Building on Scotland's surviving institutions from the Act of Union, an increasing degree of administrative devolution of power was promoted throughout the twentieth century. Nationalist pressure, however, continued to grow culminating in the re-establishment of the Scottish Parliament in 1999. Although the Parliament has limited economic powers, and less power than state legislatures in the United States, further moves are expected in the coming decade. The dynamism in the Scottish constitutional position suggests that again it is an important indicator of the potential economic implications of political and governance changes. In many ways Scotland has diverged from England over the last quarter century in its political thought (a consensual and corporatist culture has coming to dominate Scotland, taking her closer to the European norms) and in its linkages with the rest of the European Union market. These two developments have made Scotland a critical test case in Europe for the adoption of North American policies and forms of intervention within an increasing embracing of a European social partnership approach to managing the economy.
3. Halkier, Danson and Damborg, eds, 1998, Regional Development Agencies in Europe, London: JKP is a collection of essays that elaborate on this topic.
4. However see Chapter 1 of Halkier, Danson and Damborg 1998, for a discussion of this neglect.
5. As discussed here and in Danson and Whittam 1998.
6. See Morison, 198*, and McCrone, 196*, for comprehensive accounts of these developments.

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