Rethinking National Economic Development Policy

Harrison et al. then use this review to build a framework for understanding national economic development policy. The framework has two dimensions, or axes. One axis distinguishes among policies and programs by rationale, i.e. whether there has (at least up until now) been widespread consensus on their continuing importance (they term these continuing activities); whether there is an expectation that the federal government has a proper role to play in managing developmental problems of a temporary or emergency nature (transitional or adaptive activities); and whether certain programs constitute technologically innovative approaches to economic development in which, for well-understood theoretical reasons, the private sector, left to itself, would be unlikely to adequately invest (innovative activities).Along a second axis are the elements of policy-making: program design, finance, implementation, monitoring and evaluation. For any particular program, these may be located at any level of government, from Washington to individual neighborhoods or rural area, within the private or public sectors, or in some combination. Harrison et al. and McGahey agree that more of the current national debate is about the “devolution” of functions from the federal to the local level, and from public to private sectors. The debate is really about altering the location of elements of the policy process, not so much about whether such programs ought to exist at all. Of course, some elements of the current debate do introduce completely new ideas. Thus, for example, there is much current interest in promoting innovative implementation strategies-at every level of government, but especially in states and localities-that stimulate collaborations among business, government, and community leaders. With a new appreciation of the importance of local organizational capacity to the economic development process, a growing chorus of voices is being heard, calling for the introduction of techniques for fostering capacity-building among local economic development intermediaries.There is yet another sense in which the current debates in Washington, dramatic as they seem, nevertheless embody certain themes that are rooted in the past. In both urban and rural areas, and at the regional, state and local levels, there are a number of constituencies for one or another economic development program, or some combination of them. Harrison et al. discuss the special needs and policy histories associated with state and municipal governments, special purpose public and public-private agencies, local business alliances, community development corporations and other community-based organizations, the economic development of American Indian reservations and the special problems of rural constituencies.

Harrison et al. identify four generalized roles for the federal government in sub- national economic development: setting standards, responding to cyclical distress, providing resources to counter structural distress, and what the NAPA (I996) report calls “teaming.” First, when the federal government is engaged in funding development activity it brings a common, uniform set of goals and standards. This is true both in terms of desired outcomes, or goals, and in terms of establishing minimally acceptable performance standards. Second, the federal government is in a position to intervene when a region is experiencing either a fluctuation in its local business cycle or if it is experiencing severe restructuring of an industry that is locally concentrated. This is consistent with a venerable mission of the federal government–helping areas that are experiencing cyclical distress. Third, the federal government can invest long term, patient capital into regional economies to aid their economic transitions and to replenish their economic development infrastructure. This is a response to structural distress. It has become increasingly clear that when a regional or local economy experiences profound restructuring it takes a very long period of time to reestablish its economic base. This process will take a minimum of ten years, and in some resource poor communities a new base may never be found. The fourth role that Harrison et al. identify is learning. The authors point out that the federal government is in a position to provide high quality research, information dissemination and statistics. These are all activities that generate positive spillovers that cannot be easily captured by the market…

Lessons from the States

McGahey’s paper builds on that by Harrison et al. by constructing a federal approach to development policy that reflects the recent experiences of the states. He reviews the three waves of development policy and the impact that the federal system of government has on the structure of development policy. He reasons that while the econon1ic success of nations comes from “sustained investment and innovation in human capital, science and technology, and reforms within enterprises that provide the workforce with a shared stake in the success of business” this does not mean that government can succeed in fostering these investments through a “top-down, rule-bound” bureaucratic apparatus. He asserts that the categorical program approach that has evolved in economic development is too fragmented and unwieldy to be used effectively and that it makes it difficult to hold these many programs accountable. Here, McGahey agrees with the NAPA report that program consolidation and simplification is warranted…

McGahey ends his paper with six principles for reinventing the federal role in economic development that encompass state strategic planning and accountability, yet recognizes the need for national coordination of policy and the requirement to limit competition among states for business that does not enhance productivity. Which McGahey calls “destructive competition.”

1. Strategy. The ·foundation of the reinvention would be in long-term economic development strategic plans formulated by the states that include specific goals and measurable outcomes. The federal government should not make project-specific grants, outside of a national technology policy where such grants are warranted.
2. Regional. State strategic plans should be developed by an inclusive process and be regionally focused and have regional advisory boards.
3. Standards. There should be specific, measurable, benchmarked goals and performance outcomes.
4. Productivity Enhancing. Funds should not be used for “smokestack chasing,” or at a minimum, states should publicly report all tax expenditures spent on development activities.
5. Distress. The federal government should have special funds available for distressed areas and promote multi-state cooperation in development areas that span state lines.
6. Statistics. Sub-national economic information and statistics need to be a core part of the federal and state development strategies.

Isserman makes a series of arguments about restructuring federal economic development programs that in many respects parallel those made by McGahey, but he makes his points using slightly different arguments. Isserman states that “although excessive rules and regulations by definition cannot be defended, special purpose categorical programs do make sense from a national perspective. The rules and regulations are intended to make certain that the funds will be used by local governments for the purposes intended by Congress and the federal government. The tension is between the state and local wish for maximum flexibility to use the funds to meet local priorities versus the federal wish for accountability to ensure that the funds will be used for the purposes and beneficiaries intended.” Isserman notes the desirability of block grants in the eyes of state and local governments. However, block grants cannot avoid the tension between the desire for local flexibility and the requirement that the spending both meets national priorities and is spent efficiently. He then contrasts the experience with General Revenue Sharing from 1970 to 1980. a program that had virtually no strings attached to the spending (Isserman terms this an example of “wash our hands” funding on the part of the federal governn1entl with the Community Development Block Grant Program-a program that had some nationally mandated spending goals (Isserman calls this a “tie their hands” block grant). He concludes by deducing that the difference between categorical grant programs and block grant programs in terms of flexibility, funding certainty, and federal requirements is one of degree when there is a national objective to be met with the spending. As an alternative to both categorical and block grant programs, he recommends a federal “shake their hands” block grant where national objectives are met through federal-local investment partnerships…

National Policy Lessons from a Restructured Region

Hill writes about Cleveland metropolitan area and its experience with economic restructuring that began in the mid-1970s. He proposes eight recommendations for national economic development policy from that experience. These are captured under the rubrics: learning, strategy, capacity, leverage and scale, distress, coordination, and accountability. These recommendations complement those made by McGahey.

Hill notes that there are both timing and spatial mismatches that harm the execution of economic development strategies. The time it takes for a regional economy to restructure is much longer than the time horizon of politicians and, increasingly, of corporate leadership. The geographic mismatch is more subtle than the timing problem. As William Barnes and Larry C. Ledebur (1991) note, there is spatial mismatch between two federal systems in the United States– the federal system of government and the federal system of the economy. The federal system of government is a hierarchy that runs from the nation, to states, and then to municipalities. The federal economic system starts at the global level, devolves to the nation, and then drops to functional regional economies– many of which are metropolitan areas. The problem is that metropolitan economies are not representative units of government and it is difficult to invest in the economic good of the region from the levels of state or municipal governments.

The eight principles derived from Cleveland’s experience can be grouped into three broader rationales for federal involvement that address different structural policy failures. The first rationale is the traditional rationale of public goods production. The other two rationales are the mismatch in times (political versus economic) and in federalisms (political versus economic).

The federal government has an advantage in producing knowledge, high quality statistics, and in enforcing national standards of accountability and program performance. Therefore, the first rationale consists of those principles that stimulate the production of public goods or promote accountability. These cover three of the eight principles: learning, leverage and scale, and accountability. The second rational is made up of those principles that address the mismatch between political time and economic development time. This rationale contains two of the principles: strategy and capacity. The last rationale addresses the spatial mismatch between the two federalisms. This encompasses the principles of leadership, distress, and coordination…

Rural America has been the target of federal development investments since the Great Depression. The Tennessee Valley Authority, rural electrification. large scale water projects, and crop subsidy payments were all invented to either stabilize agricultural and resource dependent regions or to provide the infrastructure for developing new economic bases. Much of what is practiced in economic development were techniques invented to mitigate risk or lower costs in declining agricultural areas. Couple these programmatic innovations with major infrastructure investments in highways, water lines, sewers and airports (and possibly air-conditioning) and we can plainly see how the foundation was laid for the integration of formerly agricultural regions into the mainstream industrial economy. The papers written by Glasmeier (1997) and Isserman demonstrate that much of that effort appears to be a success.

The period before 1950 saw a traditional rural economy dominated by cash crop agriculture or extractive industries, such as mining and forestry. There was a transition, abrupt in the south and southeast, from a purely agricultural or extractive economic base to an industrial base that was triggered by the push of people off of the land by 1nechanization and the pull of low wages and improved highway access to major markets that attracted branch-plant manufacturing to non-urban areas. This low-wage, branch plant, economic base is now challenged by yet lower-wage international production platforms that are benefiting from lower cost transportation and improved telecommunications to the United States.

The rural United States (defined as non-metropolitan counties) is not a monolith. Some sections are among the healthiest most competitive production sites in the nation, while others are consigned to an economic backwater. Neither Glasmeier nor Isserman attempt to categorize the components of the countryside but the outlines of such a taxonomy are implied in their collective writing. Those rural counties that abut metropolitan areas and have interstate highway access are among the most advantaged places in the economy. Those that have exhausted their natural resources (or have resources that are no longer in demand) and are far removed from highways and urban areas are among the most marginalized places in the economy. The bulk of rural American counties lie in the middle of these two extremes. Glasmeier notes that approximately one-quarter of the nation’s rural counties suffer extreme negative economic outcomes that are marked by problems of poverty and poor public health care. They are also resource poor, as indicated by low levels of educational attainment. What distinguishes the worst-off counties is a combination of remoteness, sparse population, and dependence on a single industry. Also important in determining the vitality of a rural community is the availability of infrastructure, the cost of conducting business, and the depth of local leadership.

As Glasmeier notes, part of rural America is “better prepared than ever before to meet the challenges presented by a future of economic globalization.” Yet, other places are “increasingly vulnerable to economic change as the traditional fabric of their community’s economy has been tom by declines in resource-based and manufacturing industries.” Glasmeier points out that those places that are especially deficient in educational resources are at a competitive disadvantage in an economy that is increasingly generating employment opportunities that require high levels of education and skill.

The Glasmeier and Isserman papers have different purposes. Glasmeier surveys the economic progress of the rural portions of the nation, discusses the challenges that economically marginalized rural counties face, and recommends a number of policy reforms based on an extensive literature review that would make federal aid to those places more effective. Isserman’s contribution has two purposes. First, he takes on what he sees as the false dichotomy that is presented by a supposed choice between comprehensive and coordinated funding of rural economic development programs on one hand and “a large number of special purpose, categorical programs” on the other. Isserman argues that federal agencies are able to undertake “successful coordinated, comprehensive development strategies by pulling together and drawing on the special purpose, categorical programs established and preferred by Congress.” He then uses a quasi-experimental research design to look at the experience in Appalachia, where there was purposeful coordination, and contrasts the results with the Mississippi Delta region, where similar coordination was lacking. While Isserman looks at top-down approaches to coordinating existing federal programs, Glasmeier recommends streamlining and consolidation where possible, coupled with a bottom-up approach to coordination…

The EDAC project addressed three specific issues related to community development. What are the special issues of finance and management support required to regenerate a business environment in distressed communities? The paper by Marcus Weiss and Robert Brandwein (1997) catalogs a variety of recent federal policy initiatives that encourage private financial intermediaries to invest in distressed communities. James Jennings (1997) takes a holistic view of community development, and economic development within the framework of community development, in urban African American communities. In so doing he defines a series of policy principles that are somewhat at variance with those provided by Hill. The source of the difference lies in Jennings’ emphasis on both community involvement in decision-making and on locally controlled business establishments. Edwin Melendez (1997) looks at the role ethnic identity plays as social capital in the Cuban enclave in Miami and contrasts these resources with those possessed by Latinos with different ethnic backgrounds in other cities.

Financing Community Economic Development

Marcus Weiss and Robert Brandwein analyze the federal role in catalyzing private sector investment within communities that have been undeserved by conventional financing sources. Their paper considers the historic roles played by federal agencies, bank regulators, local and state government, regional authorities, community-based development organizations, national intermediaries and public-private partnerships in the commercial development of poorer communities. Coordinating among such a diverse set of institutions is a problem frequently encountered in the practice of economic development. Convincing private investment institutions that sufficient credit enhancements and business support programs exist to mitigate risk remains an important problem.

During the last three decades, federal agencies have used a mix of grant and lending programs to stimulate the growth of entrepreneurship and business formation in distressed areas. In a number of instances federal funds have flowed directly to cities or states that have created their own programs or funded other local institutions to operate either revolving loan funds or to provide management support. In other cases people have applied directly to operators of federally supported programs for some combination of business planning assistance, low-interest loans, or even equity capital…

While Weiss and Brandwein are concerned with financing business activities in distressed communities in general, James Jennings addressed development in low income African American communities. He presents a series of four recommendations for place- based development strategies in minority communities that act as a counterpoint to mobility strategies that Jennings calls “flight strategies.” Jennings asserts that community development requires an integrated approach that cuts across “functional arenas” such as health, education, housing, public policy and economic development, or at a minimum coordinates activities in these areas. These amount to “place-based” development strategies that address structural problems of inner-city communities. Jennings is making a statement that community development should be the public policy goal and that economic development is a component of community development. Jennings emphasizes the need for government officials and community representatives who engage in economic development activities to foster relationships with their counterparts (at the professional, political and bureaucratic levels) in education, public safety or health as a way of sustaining community development.Jennings then reviews several federal inner-city development initiatives. The first discussed is the federal Empowerment Zone program. The second is a program that attempts to rehabilitate federally-owned housing while facilitating the transfer of ownership to low income residents. This is HUD’s Demonstration Disposition Program. Jennings also analyzes recent efforts by some advocates to market the “competitive advantage” of inner- city business locations that also contain under-served markets with populations that have significant consumer purchasing power.From these reviews Jennings distills four policy principles for the development of primarily African American inner-city communities.

1. Local Business. The generation and expansion of community-based business is a key component to effective economic development.
2. Comprehensive Community Development. Planning effective economic development for inner cities requires a framework that includes housing, public safety, and health, among other considerations.
3. Participation. The participation of citizens and grassroots organizations in decision-making about economic development strategies is critical.
4. Discrimination Matters. Elimination of racial discrimination in housing, banking, and insurance sectors are critical components…

The Role of Social Capital in Urban Latino Communities

In his “Case Study of Economic Development Processes in Latino Communities,” Edwin Melendez considers the structure of small business assistance for urban Latino communities. In his analysis, Melendez considers how approaches to business development in Latino communities have shifted focus from working with more established firms to investing in proposals for start-up investments from entrepreneurs interested in opening up in disadvantaged communities. Melendez acknowledges that concentrating on smaller entrepreneurs in distressed areas has typically resulted in higher loan default and business failure rates than do assistance programs targeted to more established minority-owned firms.

Additionally, Melendez suggests that federal initiatives to promote small business in distressed areas are unlikely to produce sufficient capital formation and employment to sustain the economies of inner city areas, even though they may be valuable as “placed based” interventions in their own right. Melendez is implicitly asking: How can finance capital be supplemented to bring business in distressed communities up to viable scale? He indicates that the answer lies in the latent social capital found in ethnic and racial solidarity. This is, after all, a traditional development asset of ethnic communities throughout American history. Governmental strategies that link expanding industries and firms to the employment and entrepreneurial resources of ethnic and racial communities can have an important redistributive function in closing what Melendez calls the “growth equity divide.”…

WHITHER THE FEDERAL ROLE IN ECONOMIC DEVELOPMENT POLICY?

It is difficult to predict the ultimate programmatic and bureaucratic structure of the federal government’s economic development efforts. There will be pressure to mix community development and economic development goals together in any future program; these pressures should be resisted to maintain program accountability. There will be much discussion on the form that federal grant-making will take, block versus categorical grants. The NAPA report, and many of the contributors to the EDAC effort, recommend a combination of improved inter-agency coordination and program consolidation where possible. While this is desirable in its own right, the political cost will be high and the result will be minor reform, not fundamental rethinking of federal economic development policy within a federalist framework. Rethinking federal economic development policy is based on a careful definition of economic development, establishing a firm rationale for federal intervention, and developing a set of principles for guiding policy development.

In the end, neither development practitioners nor academicians interested in economic development will reshape federal development programs—this will be up to Congress and the Administration. What will emerge should be a very flexible program of investments that can be coordinated at the local level with a high degree of accountability and long term performance benchmarking. The local programs should reflect a high degree of state and local match and be placed within a context of a long term strategic plan that addresses both community and economic development needs.

There are both practical and theoretical reasons why the federal government took the lead in economic development policy making—as all theorists agree should be the case when it comes to income redistribution. Where it is not the obvious or best leader the national government is usually a valued, frequently indispensable, and often quite innovative, partner. Contemporary political efforts to eviscerate the federal role in economic development policy, popular though they may momentarily seem, are bound to fail. And it will be the partners and beneficiaries of these policies—private businesses, state and local governments, community organizations, and the citizenry at large—who will ultimately call for the reinstatement of the national government as leader or partner: just as they have in past periods of U.S. history…

This does not mean that economic development policy should not be thoroughly re-examined. Indeed, state and local officials, business and labor groups, and scholars have been re-examining policies and experimenting with new options with increasing vigor throughout the last fifteen years. But very little of this ongoing debate and experimentation seems to have penetrated into the Washington debate over economic development policy…

Most economists have argued that such efforts add nothing to national prosperity, and may in fact diminish it encouraging costly competition among states and localities (Luger 1984; White, 1986). Expenditures by states and localities that only shift economic activity from one section of the country to another are hard to justify in terms of adding net value to the national economy…

…But the “reinventing government” concept also rests on a historical argument about large organizations and bureaucratic practices, and this argument is important when considering how to reform economic development policies. If the problem is simply inadequate fiscal means, then either new funds must be raised, or some activities must be cut back. This is the perspective reflected in much of the current policy debate in Washington, which is driven more by concerns about levels of public spending, and less about how programs and policies are implemented. Many of the advocates of “reinvention” concentrate instead on how programs are delivered and policies are carried out.

In this view, large top-down organizations characterized mass production economies and their public institutions from the mid-1930s on. Bureaucratic practices, a rigid command structure between workers and management, and tightly defined rules of operation and behavior produced standardized outputs. This mass production economy was seen to be a model of success, and many of its lessons were adapted to the public sector.

In the most sophisticated view, growing international economic competition driven in part by the ability to produce higher-quality goods through flexible production technologies outcompeted the older, rigid private companies, leading to a wave of restructuring, downsizing, and economic turmoil that continues to sweep through the private economy. But because government institutions were insulated from such competitive pressures, they have been slower to change. Instead, they clung to their rule-bound procedures, instituted in an earlier era when accountability was assumed to be achieved by limiting autonomy and flexibility, and creating tight procedural rules.

In economic development, states often have engaged in destructive or wasteful competition for economic benefits. This is particularly problematic when considering the new emphasis on regional economies” which often spill over state boundaries. Although the role of state governments will continue to grow in any new era of economic development, the history of federalism and block grants provides some cautions about giving them unrestricted authority…

Any proposal to reform economic development programs must confront these difficult issues…

Efforts to narrowly target economic distress, and bring poor regions into an otherwise well-functioning market economy, were good ideas in their time. But economic development today requires continuing and inclusive strategies, programs and policies developed at the right level for implementation, constant information, and a long-term focus. The federal government can and should learn from the mistakes of the past, and build on the successful experiments and lessons that have been learned from over 15 years of state and local experimentation in a rapidly changing global economy.