Economic Development PolicyPart 1: Introduction

ECON 4480 State and Local Economies

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What is economic development policy?

• Economic development policy consists of efforts by government to encourage new private capital investment in local areas with the goals of:– Direct creation or retention of jobs,– Indirectly creating jobs via the employment

multiplier, – Growing average incomes per capita, and– Enhancing and diversifying the tax base.

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Economic development profession

• An economic developer is one who is engaged in attracting or retaining capital investment in local areas.

• Economic developers are employed mostly by chambers of commerce and state and local governments. TVA has a large number of economic developers.– See Appendix for more about Economic

Developers.

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Policy: Introduction• Federal, state, and local governments have long been

involved in the economic development (ED) process.• Distant ancestors of today’s ED policy include the Society for

Establishing Useful Manufactures, dating back to 1791 in New Jersey.

• The state legislature granted the society a tax exemption, power to condemn property for its own use, and control of much of the supply of water in north New Jersey.

• Society created the nation’s first industrial park on the shores of the Passaic River.

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Policy: Introduction• The more relevant ancestors of current policy date back to

the Great Depression.• During this period, Southern states (in particular) offered

supply-side incentives such as tax relief, low-cost capital, and subsidized plants and land to lure manufacturers away from the industrialized North.

• Following World War II, the South, Southwest, and Far West (collectively, the Sun Belt) experienced the bulk of growth for the United States, attributable in part (perhaps a small part) to economic development efforts.

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Population Growth

• Since 1970, the largest share of U.S. population growth has occurred in the Southeast.

• Also since 1970, growth in the Southeast and Southwest has occurred at the expense of the Mideast and Great Lakes.

• The Far West has accounted for a steady, large, share of population growth for many decades.

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Population Trends

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Population Growth

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Average annual population growth rate 1960-2010

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•Population flat to falling in Rustbelt states.•Sunbelt states gaining population.•U.S.: 1.1%•Tennessee: 1.2%

Employment Growth

• Employment growth has followed a pattern similar to population growth.

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Employment Growth

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Shares of Employment Growth

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Sun Belt produced 53% of the jobs in 2009 for the United States but 64% of the nation’s job growth over the past 40 years.

Per Capita Income Growth 1980-2010

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Average earnings growth 1980-2010

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Growth of per capita transfer payments 1980-2010

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Growth of asset income per capita 1980-2010

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Manufacturing Employment• The goal for much economic development

policy through the 1970s was recruitment of manufacturing jobs.

• Some facts about manufacturing jobs:– The Southeast surpassed the Great Lakes in

manufacturing jobs in 1981.– The Great Lakes and Mideast remain important

players in manufacturing.– Nationally, manufacturing jobs began a steep

decline following the 2001 recession.17

Manufacturing Employment Trends

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Why did industry move South?• A study from 1949 examined the issue of why businesses

were moving South.• The study, based on a survey of firms that made the move,

found two factors of primary importance:– 1) the expansion of the size of the Southern market after

the war due to population growth, and– 2) the abundance of untapped raw materials (minerals,

forests) • The availability of incentives and subsidies was rated less

important by the survey respondents: ‘manufacturers were usually not impressed by local concessions.’

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The First Modern Economic Development Policy – Mississippi

• After the Civil War until the 1920s, cotton was king in Mississippi, as the price of cotton continued to rise.

• The state had no use for new industry; even passed a law to keep it out.

• By the 1920s the state economy began to change:– Erosion and worn out fields,– Farm mechanization cut demand for labor, causing unemployment,– Foreign competition drove down the price of cotton, as European

producers began to recovery following WWI.

• Cotton on its own could not longer provide a decent standard of living for Mississippi; the state needed to diversify its economy.

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The First Modern Economic Development Policy – Mississippi

• As Mississippi adopted new policies, innovations were transforming the national economy:– Rail transportation improved, cutting costs of moving commodities

and goods,– Power transmission lines and natural gas lines were extended,

providing energy to more areas, and– Inexpensive air conditioning was developed, opening the South as an

attractive location for industrial plants.

• Mississippi took advantage of these developments, opening up natural gas fields and developing its electricity transmission systems.

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The First Modern Economic Development Policy – Mississippi

• Two major problems remained:– The state had little industrial or business expertise, and – Little financial capital existed in the state.

• To remedy this situation, the state enacted the Balance Agriculture with Industry (BAWI) program in 1936.– Offered incentives to attract manufacturers from other states.– Allowed cities to issue bonds, prepare sites, build plants for private

firms, and exempt the plants from property taxes for 5-10 years.

• Investment flowed into the state, and by the end of WWII, firms producing glass, textiles, tires, meat products, and ships employed more than 180,000 Mississippians.

• Recall that the state had been mostly agrarian just a few decades earlier.

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The First Modern Economic Development Policy – Mississippi

• Problems began to crop up:– Most of the new jobs were low-skill, low wage plants that

fled offshore at the first hint of unionization.– Local governments were starved for revenue to pay for the

demands of growth, since the new plants did not pay property taxes for 10 years. Funds for growing needs for infrastructure, schools, and public health were scarce.

– Some unscrupulous plants moved to the state only long enough to enjoy the tax-free status, then moved out.

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The First Modern Economic Development Policy – Mississippi

• The Mississippi ED policy was the most comprehensive financial incentive policy at the time, but proved to be a mixed blessing.

• The policy accelerated industrial diversification, but trapped the state into low-wage jobs and sub-standard tax revenues to pay for growth.

• And, the state remained the poorest in the nation. But that is not the end of the story.

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The First Modern Economic Development Policy – Mississippi

• Mississippi moved beyond industrial recruitment as the primary economic development tool in the 1980s.

• The state has emphasized investments in primary and secondary education, and is promoting research and development efforts.

• Until the early 1980s, states had not considered education policy as part of economic development policy.

• Today, states are focused on improving human capital as part of a more general strategy of improving the overall context of business development and job growth.

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Policy: Introduction

• Federal, state, and local governments have long been involved in the economic development process.

• Their roles have changed over time; in recent years, less of a Federal role and more of a local government role.

• The evolution of development policy can be summarized in three waves.

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Policy: Introduction• First wave: Smoke-stack chasing

– Emanating out of the Great Depression– Policies based on the notion of export-based growth: attract

capital from other areas, and build up the export base industries.

– Led to competition among states based mostly on cost criteria.

– States offered direct payments and subsidies, including cheap land, subsidized loans, tax breaks, and training subsidies.

– Growing states (south and west) attracted footloose firms from old industrial areas (northeast and midwest).

– Tended to focus on recruiting manufacturing firms.27

Policy: Introduction• First wave: Smoke-stack chasing

– Outcomes: a community tended to grow according to the ability of a single firm or single industry to grow.

– Focus was on jobs, just about any jobs.– “Shoot anything that flies, claim anything that falls’ was

the mantra of industrial recruiters.

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Policy: Incentives• Major question about incentives: would the

manufacturers have moved south anyway, without the incentives?

• What does ‘incentive’ mean? An incentive is an offer of something of value in return for behavior that would not otherwise have occurred.

• If the behavior would have occurred anyway, then the offer of value is not an incentive, but a reward.

• Rewarding firms instead of incentivizing can be an expensive way to structure an economic development policy.

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Policy: Introduction• Second wave: Homegrown development (1980s-2000s)

– By the 1980s, attention shifted somewhat from recruiting to retaining and expanding existing firms and creating incentives for growing new local firms.

– The shift occurred because industrial recruiting became very expensive, competition among states fierce, and the number of relocating firms fewer (more competition for a shrinking pie).

– Policy in this period focused more on increasing the demand for jobs, as opposed to supply-side considerations in the first wave of policy.

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Policy: Introduction• Second wave: Homegrown development (1980s-2000s)

– Policies offer indirect firm-level assistance:• Business incubators (shared roof and support resources for

businesses startups)• Technical assistance for small- and medium-sized businesses

(business plans, marketing plans, feasibility plans)• Expansion of workforce training programs,• Loans at below market rates (Industrial development boards

associated with a local government can issue bonds (borrow) free from Federal income tax; proceeds can be used to lend to a firm or to purchase land and equipment for a firm),

• Enterprise zones (establishes tax incentives for a specific neighborhood or community), and

• Tax Increment Financing (discussed at length later on).

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Policy: Introduction• Third wave: Institution building strategies (2000s-)

– Builds on both first-wave and second-wave policies.– Institution building gets at establishing the ‘soft

infrastructure’ for economic development.– These policies involve collaborations and networking

between and among businesses, local governments, and universities.

– The aim is to foster the development of new industrial clusters that are able to compete in the global environment.

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Policy: Introduction• Third wave: Institution building strategies (2000s-)

– States are concerned with the overall performance of the state economy, not just with specific sectors or firms.

– The goal is to boost productivity and competitiveness, thereby generating income growth and boosting the standard of living for state residents.

– Focus is on ‘quality’ jobs; those that pay well and are located in growing, competitive industries.

– The third wave policies may be regarded as providing the context, or background, for the development of globally competitive industries.

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Third Wave• States are, in effect, choosing to pursue an industrial policy:

the focus of resources in a few carefully-selected industries instead of policies that assist specific firms.

• Nations such as Japan, Singapore, Taiwan, and Germany have long adopted economic planning and industrial policy.

• The United States has resisted this trend, but individual states and sub-state regions are moving this direction.

• The reasons for the shift to third-wave policies have to do with globalization, the growing importance of knowledge, and increased competition.

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Third Wave• The third wave states use a strategic plan as a framework for

the use of resources.• These plans have four features:

– 1) both private and public sectors are involved in all phases of the process,

– 2) priority is given to retention and expansion of existing firms in targeted industries, as opposed to recruiting,

– 3) the plans aim at building a new base of small, fast-growing knowledge-based firms, and

– 4) the plans are linked to funding sources and ongoing program evaluation.

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