Wednesday, September 9, 2009

Defining Economic Development

EDD member Pam Mundo of Mundo and Associates, Inc, has asked that our blog pose two timely questions for this week’s post:
  1. What is Economic Development?
  2. What incentives (other than money, refunds or abatements) should economic developers provide to encourage new investment in a community?
Jurisdictions across the country have tried a myriad of different economic development strategies in recent decades, with varying degrees of success. Traditional local economic development strategies, including industrial recruitment, have remained important tools for many states and municipalities. Lingwen Zheng, (Master’s of Regional Planning ’09, Cornell University) authored this year’s winning paper for the Economic Development Division’s scholarship award - “Trapped in the Race to the Bottom: Who is Using Business Incentives Now?” In the paper Zheng argued “these development strategies [business incentives] have become so persuasive that local governments find themselves in competition with each other to offer business incentives for self-defense, which essentially catalyzes an unhealthy ‘race to the bottom' in economic development policy. This can lead to a process of destructive inter-local competition, with one result that quality of life concerns of residents are often overlooked.” Zheng’s paper found that while staff time devoted to business incentive strategies at local governments decreased between 1994-2004, that those local governments still heavily dependent on business incentive strategies “perceive more intense inter-local competition and face a declining local economy and lower tax base.” (APA Economic Development Division members can read the full paper and its many fascinating insights in the Spring 2009 issue of the News and Views, on our division website).

It is my personal view economic development practice has a tendency to be captivated by short-term trends, many of which perhaps do not yield long-term benefits for local economies. I studied the outcomes Arizona’s well-known 1990s cluster policy, in Tucson, Arizona, which I found were much more limited and somewhat different than what had been initially anticipated. In this decade Richard Florida’s creative class theory captured the attention of many policy makers, but it is yet to been seen how the application of his ideas to local policy lead to positive economic development outcomes. One program I’ve been impressed with recently is South Carolina’s Centers of Economic Excellence, which leverages private investment with state matching funds (coming from lottery proceeds) to make targeted investments in facilities and positions for Centers of Economic Excellence at three state universities. These investments are in academic disciplines that are highly focused, have a potential direct impact on state economy through the generation of spinoffs or other methods, and in which the state has the potential to develop a comparative advantage.

Of course, all of these theories and strategies (and many others that I’ve failed to mention here) involve the use of government funds, as incentives, matching funds for various investments, or other government investments to catalyze local economic development.

So what is your experience with economic development? What do you think constitutes “real” economic development? Are business incentives true economic development if they are essentially used to poach businesses from one location in the country to another? How have some of the major economic development trends in recent years been applied in your locality? What incentives outside the use of government funds can encourage local economic development? Please feel free to discuss not only the economic development practices that I’ve mentioned, but any relevant ones with which you are familiar.


  1. Economic development is the nurturing of the unique resources of a community for the purposes of creating and maintaining a sustainable system of exchange.

  2. Economic Development is the addition of wealth or income to a defined geographic region. Usign incentives is poor policy as it is short term. Most companies and businesses who use incentives to relocate or genrerate a new operation use the incentive sand after they expire seek to move on. The reason an incentive has to be used is becuase there is something about that community that requires incentivizing. Perhaps it's the the economic environment?

  3. As an economic development consultant, I often evaluate the economic and financial impacts of incentives. Increasingly, such incentives are simply "capitalized" into the project virtually as of right. That is, developers or property owners effectively increase the value of their property by the value of the incentive and/or artificially raise their costs to "prove" that that the incentive is necessary. As Shana indicates, this creates short run mismatches between real economic development and shifting economic development.

    I'd prefer that the same value be used by the public sector to create and sustain the best possible infrastructure to support business growth and expansion. Better roads, bridges, communications networks, redundancies in utilities, schools, streamlined red tape, etc. if that "business climate" is outstanding--and supported by taxes willingly paid by the businesses--then any worthwhile business will not need cash incentives, indeed won't even seek them. They will simply want to be in your outstandingly managed community.