Ideas in Development

Many argue that we have reached the stage where global competitive advantage is based primarily on the education and skills of the labor force. Other factors such as natural resources and proximity to markets and suppliers are clearly important, but the next leaps forward in productivity and innovation will require more flexible, articulate, thinking workers.

Wise investment in public education is an absolute must for creating a positive business climate. This is not about just throwing more money at education — in the recent past we spent 7.4% of GDP (2005) and 18% of total tax collections on primary, secondary and higher education. There has to be a greater concern over outcomes. We have to improve educational attainment at high school and college levels. There need to be higher standards for graduation so that colleges and employers do not have to provide remedial education. Disparity in attainment levels between rich and poor communities and neighborhoods has to be reduced. States should compete on the basis of the quality of their education rather than on the number of dollars they can divert from education to give away as development incentives.

Physical Infrastructure

Often neglected in the anti-tax debate is the importance of basic services, efficiently and cost effectively delivered, to the creation of a positive business climate. The repair and maintenance of highways and sidewalks, the management and operation of schools, the prevention of crime, the safeguarding of public health, the care of public parks, and so on, are all essential to a community’s quality of life. If tax revenues drop to the point where these services can no longer be adequately provided, an area’s competitiveness declines.

It is government’s responsibility to plan and secure the implementation of new and reconstructed physical infrastructure. Water supply and sewers, roads, public transit, and airports are all critical components of an area’s development capacity and long-term competitiveness.

Regulation

Employment and environmental regulations are the main targets of those wishing to deregulate industry. These are the result of decades of struggle to constrain the more unacceptable aspects of the free market. Regulators often have brought much of the present hostility on themselves. They use overly bureaucratic procedures; focus on compliance rather than finding workable preventive solutions; apply uniform standards regardless of circumstances, cost and size of business; and have created legislative frameworks that encourage duplication and inconsistencies. Business focus groups say it is not the regulations themselves that cause them grief, but the way they are administered. A positive business climate is created by regulators who seek to work with business to achieve acceptable standards, whether in the workplace or in the environment. However, government must do so in a fashion that does not compromise its abilities to enforce the law on behalf of other stakeholders.

Taxation

There has been overwhelming emphasis in recent years on tax competitiveness and tax rates. This diverts attention from the fact that our state tax systems are outmoded, and no longer able to meet acceptable standards of adequacy, efficiency and equity. Revenue systems are increasingly out of step with changes in technology, the economy and demography. The burden of taxation is being shouldered by an increasingly narrow slice of economic activity. States are facing structural deficits that force them to make un-strategic changes in tax levels and bases to make ends meet.

The hallmarks of a competitive system should be reliability, stable and certain revenue generation and consistent rates; balance, a spread across a range of tax sources without over-reliance on any one; equity, a fair system that shields subsistence income from taxation, is progressive, and imposes the same tax burden on households earning the same income; efficiency, easy to understand, minimal compliance costs, simple administration; and accountability, public information on sources and uses of tax revenues, including tax expenditures.

Development Incentives

Given what we have said about the overuse and limited impact of development incentives, why don't we argue for their abolition? The reality is that there is no obvious way to stop the bidding wars. The best we can do is try to curb the excesses and ensure that incentives used are cost-effective. Our advice to economic developers and legislators is twofold. First, act like an investor. Incentives should be treated as venture capital investments in private development projects—sharing risk and returns in a mutually supportive partnership. Second, set clear goals and desired rates of return. Goals will vary from area to area, but might include more jobs, better jobs, changing the industry mix, reducing intrastate inequities, or jobs for the economically disadvantaged. Fiscal responsibility dictates that the investment should be fiscally neutral—the incentive should not be larger than the eventual tax payments accruing from the project. There should be other performance criteria relating to the goals—and these should be enforceable, with all the penalties and recessions that would apply in a venture capital investment.

Modernization and Entrepreneurship

For years, much of economic development has also focused on the “homegrown economy” by providing financial support in the form of grants or low interest loans and advisory services to businesses. The focus tends to be on retaining businesses in a particular area or on encouraging successful entrepreneurial initiative. Millions of dollars of public money have been used in this way, even though the evidence of the real effectiveness of many of these programs may be somewhat thin. Questionable and invariably over-optimistic figures are traded about jobs created and jobs saved. Many initiatives have worked well, but are still under-funded. What is certain is that many states have complicated and confusing arrays of financing and advisory programs. The policy landscape is all the more bewildering because year after year governors and legislators add new programs to respond to yet another perceived problem or gap.

The challenge is to turn these programs into effective delivery systems. These must include public and private providers and address the pressing need for businesses to modernize and to upgrade their technologies so they can be more competitive. What is needed are economic development efforts that pursue the high-road of greater skills, higher productivity, and better wages, and that deliver these development services with greater quality, customer-friendliness, accountability and cost-effectiveness.