Development policy competition and positive sum growth: incentive competition and its alternatives.

• Author: Feiock, Richard C.

Abstract

This essay directly challenges the assumption that development competition is undesirable by examining how development policy can enhance social welfare. I address the desirability of development competition by demonstrating that the efficiency of development efforts depends upon the types of development programs employed and the context in which governments compete. After discussing the role of government policy competition in general, I examine incentive competition. I argue that, while development competition can lead to zero-sum outcomes, the zero-sum result is a special case. From this perspective, the social benefits resulting from development competition depend on the characteristics of the economic development market. I next examine three alternatives to conventional development strategies: institutional development, human capital development, and social capital development. After describing each of these approaches I argue that they have the potential to create positive sum gains for the states and communities that employ them.

Introduction

For public administration, the 1990s was the decade of competition and markets. Municipal service contracting, voucher programs, and quasi-markets among local governments each captured the attention, and in many cases, the favor of academics and public officials. The perception that competition among government promotes efficiency is now widely held (Lowery 1997; Ostrom, Bish, Ostrom, 1988). Curiously left behind in this rush to embrace the application of markets to government is the competition among states and cities to attract economic development. Competition for development has attracted criticism rather than praise from most quarters. Neil Pierce contends:

From the left, from the center, and from the right, from scholars, economists, and think tanks, the word is the same: There's little gain but immense peril in America's state-eat-state civil war over buying jobs with taxpayers money. The sooner the subsidies to footloose industries stop, the better off we will be (Peirce, 1991).

Critics of markets perceive competition to be destructive. AFSCME describes state and local development programs as corporate welfare. "The current state of economic development is that it pits one government against another and in the process, it hurts government, hurts public employees, hurts taxpayers, and hurts existing business" (Howard, 1994: p.15).

Many economists have joined in the condemnation of government competition for economic development. The hostility of economists state and local development programs is based on the notion that it constitutes an inefficient government intervention into private markets. Local development incentives distort the location decision by inducing business to choose a site that would not minimize production costs. This produces a geographic distribution of new capital investments that is less efficient for the national economy (Burstein and Rolnick, 1995). In 1995, over 100 economists issued a press release calling for an end to targeted business incentive programs (Fisher and Peters, 1998).

The literature on state and local development in political science and public administration acknowledges that development programs can enhance economic welfare, but again, more attention has been directed to their limitations. Development activities may direct public resources to activities that are ineffective or promote narrow special interests. State and local development activities are often portrayed as resulting in zero-sum or even negative sum competition. Such conclusions beg the question of when if ever might state and local development competition be justifies as socially efficient.

While acknowledging that in practice development policy may often have undesirable consequences, I seek to show that when governments compete, state and local development policy can enhance social welfare. This essay address the desirability of development competition by demonstrating that the efficiency of development efforts depends upon the types of development programs employed and the context in which governments compete. After discussing the role of government policy competition in general, I examine incentive competition. I argue that, while development competition can and does sometimes lead to zero-sum outcomes, the zero-sum result is a special case. From this perspective, the social benefits resulting from development competition depend on the characteristics of the economic development market.

I next turn to an examination of the approaches state and local governments use to enhance economic development. Three alternatives to conventional development strategies are identified: institutional development, human capital development, and social capital development. After describing each of these approaches I argue that they have the potential to create positive sum gains for the states and communities that employ them.

Development Competition and the Benefits of Growth

Economists typically assume that development competition distorts market decisions. The approach presented here rejects this assumption. The consequences of development and investment decisions are not confined to those directly engaging in these transaction. The social benefits and costs of growth constitute externalities that are excluded from private investment decisions. This can lead to a mis-allocation of new development in the absence of government intervention. By internalizing these social externalities, state and local development programs have the potential to enhance social welfare.

Market economics charges that any alteration of the distribution of private investments resulting from development policies is inefficient because these policies add "artificial" considerations to business investment decisions. Nevertheless, private markets produce social externalities when all the relevant costs and benefits of development are not included in private investment decisions. Location choices for new development often produce positive or negative externalities for the community to which development is directed. In this context, government inducements to development may internalize externalities such as the value of tax base improvements, additional jobs, higher wages, and consumer goods on the one hand, or congestion, pollution, and inflation on the other. By incorporating salient social costs or benefits into private investment calculus, development policies may in fact enhance the social efficiency of private development decisions.

Social welfare can be enhanced by governments' ability to purchase changes in economic growth that match the expressed preferences of citizens for the social externalities associated with more rapid or less rapid development. Of course, tax dollars are not directly exchanged for economic welfare gains; increased income and employment are indirect consequences of private investments. Governments can induce changes in community welfare that result from economic growth by stimulating or impeding private development.

In addition, many of the direct benefits of development policies go to residents and other businesses not just the targeted firms. For example the $130 million incentive package South Carolina offered to attract BMW included public infrastructure improvements and $50 million for expansion of the Greenville-Spartanburg airport (Fisher and Peters, 1998). Governments provide developmental services and inducements to private firms in exchange for commitments of employment and investment. The benefits of growth, and thus the willingness to pay for economic development, vary and in some instances will be less than the perceived costs. Comparative empirical analysis has consistently demonstrated that development policy varies substantially across states and communities and that this...