INTRODUCTION
Strategies and Tools in Economic Development Practice provides a comprehensive review of the strategies and tools used in the field by economic development practitioners. Strategies are described in terms of their potential to promote development by affecting the factors of production - land, labor and capital - or their ability to lower operating costs for firms. For each strategy discussed, an example is included to demonstrate its application in the field. At the end of this study, a logic model is presented to illustrate the anticipated short-term and long-term outcomes of each strategy as well as the elements that produce positive results.
The study is organized in chapters around the three traditional building blocks of the economy: land, labor and capital. The importance of these concepts lies in understanding how economies work. Also known as the factors of production, land, labor and capital describe the "ingredients" required to make the products that drive a local economy. The demand for land, labor and capital is driven by the demand for products; this connection is commonly overlooked in the economic development literature. Economic development strategies too often focus on increasing the supply of land, labor and capital while failing to recognize the other side of the equation. Demand for the factors of production can only be increased if there is increased demand for the products made by firms in the region.
While many economic development programs try to promote economic growth by affecting land, labor and capital markets, an increasing number seek to support or attract business by reducing the operating costs of firms. The increased mobility of businesses has led to greater reliance on business assistance and incentive programs as tools to compete with other locals.
Economic development can be thought of in terms of exogenous versus endogenous policies. Exogenous, by definition, means to "originate externally." Exogenous policies attempt to bring about economic growth by drawing demand for local factors of production from outside the region. The most obvious examples of such policies are industry targeting and firm recruitment, often referred to as "smokestack chasing."
Endogenous policies seek "growth from within." This refers to strategies that build on existing strengths within the region to generate economic growth. Endogenous policies include cluster strategies, technology-based economic development and entrepreneurial development strategies. Experts recommend a diverse investment portfolio - one that includes multiple economic development strategies. Yet the focus should be on strategies that build upon a region's assets. Effective policy builds on strengths rather than work from weaknesses.
Economic development programs should be directed at countering market failures. Market failure results when private markets fail to achieve economic efficiency (the point at which maximum benefits are derived from a given amount of resources). There are multiple reasons why inefficiency might occur, including failure to account for externalities or provide public goods. In some cases, benefits to society exceed benefits to private individuals or firms.
Private actors will invest only to the extent they capture benefits; benefits that accrue to society - beyond the individual or the firm - are not considered in investment decisions. For instance, if a firm develops a new technology, the benefits may extend to other firms, yet those benefits will not be considered investment decisions. This leads to underinvestment and provides justification for public policy intervention.
Market failure is a necessary by-product of public goods. Public goods provide benefits that cannot be withheld from those who have not paid for them. Consumption of public goods is not rival (consumption by one does not prevent consumption by another), and public goods are not excludable (consumption cannot be withheld from individuals). The classic example of a public good is national defense. Consumption of national defense by some does not prevent consumption by others; if some were to invest in national defense, all would benefit, including those who did not pay. That is the reason national defense is financed by tax dollars. These characteristics discourage private sector investment and result in less than optimal production as viewed by society, thereby justifying public expenditure to provide the good or service.
Policy intervention can also be justified when private markets simply do not exist. Economic development funding is often used to establish new markets for goods or services. The critical point is that economic development resources should not substitute for private sector investment, but rather compensate for explicitly identified private market failures.
In addition to economic efficiency, a common objective of economic development policies and programs is more equitable distribution of economic benefits. In many cases, markets operate efficiently, but fail to meet goals relating to equity. In other words, investment may not be distributed among neighborhoods or municipalities in a manner that is perceived to be fair. In fact, this is likely to occur since there are costs associated with doing business in lagging regions that do not exist in economically healthy regions.
Public policies often seek more equitable distribution of private sector resources by encouraging investment in distressed areas. However, there are additional ways that economic development policies and programs can reflect equity goals. For example, inequitable investment can occur if the market redlines a particular region, meaning that the private sector underinvests in a particular region because of risk perceptions about the viability of that region versus another.
Economic development policies can be used to counter the effects of such perceptions. Policies and programs also pursue equity goals when they attempt to cushion the impact of economic blows or offset the impact of structural or cyclical changes in the economy that result from secular changes in the economic base of specific regions. Finally, economic development policies address equity because the political system is based upon geographic representation. By necessity, political actors will promote policies that reflect their perception of an equitable distribution of resources and either protect or invest in their electoral districts. Equity may be an appropriate goal for economic policies, but there is reason to take caution. Equity goals promote a logic of investing in "worst first" - targeting resources toward the most distressed areas. However, this has proven largely ineffective in practice. It is important to build from strength to address weakness rather than investing directly in areas of weakness.
There is considerable debate about the appropriate role for policy intervention in private markets, yet the number and types of economic development programs continue to grow. This can be interpreted to mean that political and market realities are driving program creation. The following sections discuss various economic development strategies and tools as efforts to affect land, labor and capital markets, as well as to lower operating costs for firms. While an attempt has been made to place economic development programs within this framework, it should be noted that many programs attempt to influence multiple markets.