Evidence review (PDF) published in January 2016.
Area based initiatives can have positive impacts on employment and economic growth, but displacement is a concern when it comes to Enterprise Zone policy.
What are area based initiatives?
Area based initiatives (ABIs) are policy initiatives aimed at specific geographical areas, providing a package of support aimed at improving economic, social, or environmental outcomes within that area.
Some ABIs operate at large scales and offer a broad package of support. For example, many EU programmes targeted whole regions.
Others are more focused on a much more specifically defined geography, perhaps just a few square kilometres in size. Examples include Enterprise Zones and Regional Selective Assistance.
ABIs are popular in many countries as a tool for trying to tackle concentrated social or economic deprivation, especially in areas experiencing long term decline. Key elements of ABIs include:
- Tax breaks to firms
- Wage subsidies
- Reduced planning regulation
- Improvements to transport and communications infrastructure.
The rationale: How do area based initiatives deliver growth?
ABIs aim to improve local economic growth by incentivising firms to locate in the area, or by changing the economic conditions, helping firms to grow and develop. Both of these should lead to increases in the availability of jobs and improve productivity.
ABIs can also target households, for example, to improve education outcomes or labour market participation. We have not included these in our work on ABIs, but a number of the studies included in our evidence review evaluate programmes that involve some support for households as part of a wider package of support.
Evidence review: What does the evidence say about area based initiatives?
Our review considered more than 2,100 policy evaluations and evidence reviews from the UK and other OECD countries. It found 58 impact evaluations that met our minimum standards.
We looked for evidence on three types of area based initiatives:
- Enterprise and Empowerment Zones
- EU Structural Funds (such as the European Social Fund and the European Regional Development Fund)
- Other area based business support (such as Regional Selective Assistance)
What the evidence showed:
- The majority of the evidence relates to US Enterprise Zones, US Empowerment Zones, and French Enterprise Zones.
- A little over half the reviews find positive impacts on zone employment. Evidence of employment effects is weakest for US Enterprise Zones and better for US Empowerment Zones.
- Most of the reviews that consider unemployment find positive effects.
- Half of the studies that consider the impact on poverty report positive effects.
- Half of the evaluations that consider wages report positive effects.
- Most of the reviews that consider the number of businesses find positive effects.
- EU support has a positive impact on regional GDP per capita in a little under half of the evaluations that consider GDP effects.
- Half of the studies which look at employment effects show a positive effect of EU support on employment.
- The evidence on a range of other outcomes is mixed (with only one study per outcome).
- Positive impact is bigger in relatively more developed regions.
- Consistent with this, two out of three studies that consider the ‘dose’ (e.g. expenditure per capita) suggest an optimum ‘level’ of treatment.
- More than half of the studies that consider employment report positive effect.
- Only three studies look at unemployment, with all three reporting positive effects.
Where there was lack of evidence:
- Several studies suggest that positive effects for EZs may be driven by displacement from nearby areas. However, we have little evidence on whether overall effects at the wider area level are positive, or whether displacement is the main effect of EZ-type schemes.
- Very few studies look at differences in programme characteristics. As a result, we do not know how characteristics of programmes (e.g. selection, local employment conditions) change effectiveness, including the extent to which they may reduce displacement.
- One study suggests that programmes with fewer target areas are more effective in attracting new jobs and business activity; and that employment growth in existing target businesses is promoted only if programme incentives are tied to hiring requirements. It would be good to know if these findings generalise.
- We have no evidence on the extent to which the different components of spend change the effectiveness of support.
- We have very few estimates for any outcomes of interest other than employment and unemployment.
- There is some evidence that targeting of schemes to firms that provide traded goods and services could make a difference in determining the extent of displacement, but this finding is based on only two evaluations of different schemes.
- In the UK any future devolution of business rates offers an opportunity for local authorities to make their own decisions about using EZ-type programmes to address local economic conditions. However, the relative power of this incentive (which represent a small proportion of business operating costs) should not be overestimated.
- Decision makers need to take concerns over displacement in EZs seriously. If much of the growth within the zone comes at the expense of nearby local areas, then this will mean less (or even no) overall growth at the wider area level. However, even if displacement effects are strong, EZs may play a role in helping concentrate local employment from a number of dispersed sites.
- There are implications for public service provision of more concentrated employment. For example, concentrating employment on a smaller number of sites may help reduce costs of infrastructure provision such as transport, broadband and other services to business.
- Objectives of any area based policy must be very clearly defined, and the more specifically they can be targeted in terms of outcomes the better. The likely impacts of incentives across the targeted area, on adjacent areas, and over time, must be considered in the light of local conditions and objectives.
- We must make progress in the evaluation of the UK-style EZs if we are to say with confidence that they are providing good value for money.
Toolkit: Advice on designing area based initiatives
In addition to the evidence review, we have a policy design toolkit to help you to make informed decisions when designing area based initiatives.
Case studies: Advice on how to evaluate area based initiatives
Evaluating the economic effects of area based initiatives is challenging as they potentially affect multiple economic outcomes in ways that are hard for researchers to disentangle. There are also specific challenges in undertaking high quality impact evaluation. It is fairly easy to understand how we might construct control groups and undertake evaluation for policies targeted at individuals, households or firms. It is harder to do this for policies that explicitly target areas.
One reason evaluation of area based initiatives is particularly challenging is that often these locations will already be experiencing weaker economic growth, which is why they have been targeted by the policy. The effects of these underlying factors (‘selection effects’) must be accounted for if we want to understand the extent to which the area based initiative actually increases growth. Evaluations could, in principle, use randomised control trials to address these concerns but it is hard to imagine situations in which true randomisation would be either feasible or desirable. This means that we need to rely on alternative evaluation approaches to try to address the problem of selection and identify the causal impact of the programme
Another challenge in evaluating ABIs – especially small incentive areas like EZs – is identifying and measuring displacement. Looking only within the zone itself will not tell us if any new activity is displaced from elsewhere. Including the area surrounding the zone is not straightforward because if we draw that surrounding area too tight, we may miss displacement happening in the wider area. But if we draw the surrounding area too wide, it becomes very difficult to detect the beneficial effects of an ABI which may only be seen in a small part of that much larger geography.
To help improve evaluation of area based initiatives, we have five case studies that give examples of how previous policies have been evaluated.
Each evaluation case study has met our minimum standard of evidence, which means it (at a minimum) compares what changed for the places, businesses or individuals that benefited from an intervention with what changed over the same time frame for otherwise comparable places, businesses or individuals that didn’t benefit, or that received a different type of intervention.
The case studies use two different approaches to achieving this comparison. One study uses a randomised control trial (RCT), the gold standard of evaluation, and the others use statistical approaches to try to ‘strip out’ the impact of the other factors that could have affected outcomes in both the beneficiary group and the comparator group.