State Economic Development Efforts Need a New Business Model

As I look across the nation, I observe that most state economic development efforts need a new business model--one that relies more on the marketplace for economic development and helps communities and businesses to build global ties and in-roads. Most existing state efforts are under attack and they don't have a plan to respond effectively.

Economic development is clearly political economy. It always has been. Unfortunately, most state economic programs are 75 percent political and 25 percent about economics. Just the opposite should be true.

Here is exactly what is happening. Most state development agencies are at the mercy of the governor's office and state legislature. They have been created for the most part to serve political purposes. Is it little wonder they cannot provide sufficient evidence of their "economic impact," when they have been created to primarily have a political impact? It comes as no surprise to me that these organizations are as vulnerable as they are right now. Does this really surprise you?

We need new models of state economic development. The new models should be 75 percent economic and 25 percent political. The marketplace already drives economic development. Only a fool would actually believe that government drives economic development. Government drives just one thing in society--politics! My estimate is that 75 to 80 percent--and in some cases even more--of what happens in state and local economies is driven by the national and global marketplaces. The real issue deserving our attention is how do we focus the vast majority of our economic development resources on that 20-25 percent that we can influence in some positive fashion?

Michigan is an interesting case in point for us to learn from at the moment. The state-run Michigan Economic Development Corp. is tentatively scheduled to get $35 million less in annual funding beginning in October. There's also a movement in the Michigan Legislature to cut the funding even more sharply or eliminate the agency altogether. Go here to read about the Michigan situation.

While most Michigan local economic developers support MEDC, the Midland-based Mackinac Center for Public Policy, which has a fair amount of pull among Republicans, who hold the majority of seats in the Legislature, says the state agency is doing more harm than good because it benefits a few businesses at the expense of others. "If they create jobs in Battle Creek, that means somewhere else a job had to be destroyed," said Michael LaFaive, fiscal policy director of the Mackinac Center. In my judgment, the MEDC does a pretty good job at what it does, given the nasty economy we've had over the past three years, the War in Iraq and other external events that have crippled economic activity in most places.

Funding attacks on both state and local EDOs are commonplace across the country. Some of these attacks are probably well-deserved since the organizations in question are not getting the job done, especially the highly politically-driven organizations. In many other cases, these assaults are totally unwarranted.

The truth is that most economic development organizations don't really know whether they are making enough of a difference to justify their budgets. Most still have not instituted effective performance monitoring and assessment systems. Until this occurs, these organizations are going to remain under attack.

Most economic developers at this very moment are spending more time trying to justify their budgets than spending time developing their local economy. In this sense, it is a terrible time for everyone everywhere.

I just returned from the California Association of Local Economic Development (CALED) annual conference and listened to the debate about the future of California's state economic development agency. Major cutbacks have occurred and some say the California Department of Technology, Trade and Commerce should be eliminated. For being a highly regulated state, California remains a huge economic generator for itself and other states. California has exceedingly complex state and regional economic environments to contend with. These complexities parallel those of many nations across the world.

Budget cuts are the case in many other states. Ohio officials barely survived an assault on their state incentive programs--that fight is far from over. Ohio's economy remains in recession and our state development agency needs a new more performance-based strategy to guide its future efforts. At the same time, Ohio has exceeded many people's economic expectations over the last decade, in part because it has followed an aggressive economic development approach.

Money is only part of the issue I hear in the current debates about economic development. We need to pay attention to two others: 1) ideology; and 2) the perceived value of economic development.

The debate in Michigan is clearly an ideological battle about whether government should play a role in economic development, or whether we should simply step aside and let the market decide. Similar ideological movements are afoot in other states. The conservatives are trying to make a point right now about the inability of government to contribute much to our economic progress through economic development policies and programs. This is an ideological debate, reflecting George Bush's "cowboy economics." What do the conservatives say should be done instead? They say simply cut taxes and get government ot of the way. That's not enough!

As far as I am concerned, both the conservatives and liberals are wrong about economic development. Neither has a viable answer. I think we need to take the best from both camps and fashion a strategy that makes much needed business climate improvements and also refocus and strengthen state and local economic development programs that really matter. I agree with the conservatives that we need state business tax policy reform. I disagree with those who are unwilling to see the necessity of a state and local government role in supporting and stimulating economic development. I agree with those who also say that many existing economic development programs do not make enough of a difference. The economic development field is full of ineffective programs and initiatives that get carried from one budget to the next without adding anything of real value to local economies, businesses or people.

We need to focus greater attention on the "value" issue. Economic development organizations need to become economic value chain managers. They need to change what they do and how they do it. That is the speech I gave at the CALED meeting earlier this week. Email me if you would like a copy of the presentation. Don's email: dtia@ix.netcom.com.

There is no one-size-fits-all solution to these problems. Each state must design a program that addresses its own problems and opportunities. I do see three common issues that need to be addressed in all states however. These are:

1. Make the shift from being 75 percent "political" to being 75 percent "economic." Most state development agencies need to become public-private partnerships with greater attention to how the market can be encouraged to stimulate economic development.

2. Institute real performance monitoring and measurement systems that focus on goals and outcomes. Most programs do a bare minimum job and fail to challenge states, regions and communities to achieve more.

3. Raise the level of collaboration and teamwork within and between states. Move away from the "zero-sum" model of economic development and move to a new model that allows us to account for economic results across states and not just within state borders. We need to pay more attention to the national and global economic "wholes" that sustain all of us.

If we do these three things and nothing else, future budget justifications will be a lot of easier.