An institutionalist take on state activism in economic development: a theoretical framework.

• Author: Wilson, James J.

Abstract

This article explores theoretical aspects of state activism in economic development to address specific gaps in the literature. I content that state economic development is a complex and dynamic phenomenon which can not be adequately conceptualized nor modeled using ad hoc classification systems, taxonomies, nor conceptual frameworks. Instead, I propose a theoretical framework which has two principal governmental functions. Each function is defined by a typology of four policy types which are theoretically grounded and organized within an institutional framework. This theoretical system addresses the limitations of efforts to account for foundational economic determinants of state development and to assess both the linkages between policy types as well as the linkages between state economic development and institutions. The narrow and often competing perspectives of previous studies can present a distorted picture of state activism in economic development. This study seeks to present a clearer and comprehensive description of this phenomenon.

Introduction

State governments have a lengthy history of pursuing strategies to develop their economies (Wood, 1993). This activism is perhaps more extensive than many people realize (Anderson, 1989). One can trace its development from the current "entrepreneurial" strategies (Eisinger, 1988) to the "smokestack chasing" of the 1930s (Hopkins, 1944) back to the building of roads, canals, and later railroads in colonial times (Goodrich, 1965), from which the beginning of any investigation of state economic development should be rooted (Burkhead, 1989: p. 41). Yet, while state activism in economic development is well established, research on development strategies is still in a formative stage (Kalleberg, 1986). Theoretically speaking this policy domain may still be considered terra incognita.

Theoretical research on state economic development can be categorized into four distinct levels: ad hoc classification systems, taxonomies, conceptual frameworks, and theoretical systems (Parsons and Shils, 1962). An ad hoc classification system is the most rudimentary of theories. It consists of arbitrary categories constructed to describe and organize empirical observations. Examples of ad hoc classification systems in the economic development literature would be the works of Plaut and Pluta (1983) and Bingham and Bowen (1994). The next level of theories are taxonomies. Typologies constructed under this theoretical model have carefully crafted definitions, are closely aligned to the empirical world, and are often interrelated. However, taxonomies only describe empirical phenomena, they do not offer explanations. Berman and Martin (1992) and Reese (1993) provide examples of taxonomies of development programs.

Conceptual frameworks are more sophisticated theories than lower level classifications because they provide explanations and predictions for empirical observations. Still, the explanatory and predictive powers of conceptual frameworks are limited because their propositions are not deductively derived. Development studies within this tradition would include the works of Eisinger (1988) and Fosler (1992). The highest level of theorization, according to Parsons and Shils, is theoretical systems. In addition to combining taxonomies and conceptual frameworks they offer descriptions, explanations, and predictions about a phenomenon in a systematic manner. They also do not limit the scope to particular aspects, however much need there is for careful study the sub-systems themselves (Spengler and Allen, 1960).

State economic development is a complex and dynamic phenomenon which can not be adequately conceptualized nor modeled using ad hoc classification systems, taxonomies, nor conceptual frameworks. Spengler and Allen (1960) argue that any theory of state economic policy which fails to recognize all relevant sub-systems and their interaction is inadequate (pp. 7-9). This suggests "... the necessity of ... a more complete statement of what is necessarily involved in any theory of economic policy (Samuels, 1966: p. 2)." Accordingly, this article develops of a theoretical framework for state activism in economic development. It is intended only to highlight the complexity of relevant factors and their interrelationship while at the same time casting them in an institutional framework which can help explain the structuring of various policy types as well as the shifts between policy strategies.

Limitations of State Economic Development Theory

The majority of studies on state activism in economic development fall into one of the first three theoretical levels. Although these types of theoretical models are useful, they have several weaknesses which I outline here.

Static Representation of State Activities

An obvious limitation of extant development theories is that they provide only stagnant, short-term analyses of state activism. It is important to emphasize that the "... capacity of state institutions to correctly read prevailing economic forces and reorient state economic strategy accordingly" is not static (Fosler, 1988: p. 8). Over time and across states, it is demonstrably dynamic. In addition, for a long time, scholars have continued to be preoccupied with the issues of the moment. Researching "hot topics" appeases practitioners that are dissatisfied with broad abstract theories that may appear to have no immediate relevance. The problem with this practice is that long-term guidance is marginalized.

Parochial Theoretical Perspectives

Studies employing these theories are also characterized by parochialism. Scholars evaluate state development policies from various narrow and competing theoretical perspectives. The results have been contradictory findings and mixed conclusions regarding the efficacy of state activism in economic development (Mavima, Wilson, and Feiock, 1997). While some researchers conclude that development policies indeed have positive economic effects (e.g., Aschauer, 1997; Bartik, 1991; Dye, 1980; Feiock, 1991; Storm and Feiock, 1999; Jones, 1990; Newman, 1983; Olson, 1982), others find these programs have no effect (Bingham and Bowen, 1994; Brace and Mucciaroni, 1990; Plaut and Pluta, 1983; Smith and Fox, 1990; Tompkins and Bowman, 1990). Still others argue that there are benefits, but they are negligible, at best (Ambrosius, 1988; Hanson and Berkman, 1991; Leicht and Jenkins, 1994; Turner, 1996).

Inadequate Conceptualization

Perhaps the most serious weakness of these models is the inadequate conceptualization of state economic development with respect to the lack of substantiated theory. Ironically, researchers are not hesitant in introducing new theories; there is an ample supply in the literature. What concerns scholars such as Trogen and Feiock (1996) is that "in trying to understand the economic development process we are not confronted by a lack of a theory, but instead a multiplicity of theoretical models. Yet, in many cases, the theory underlying empirical examinations of the effects of development policies is assumed, or is not made explicit (p. 4)." Grant, Wallace and Pitney (1995: p. 136) go further to argue that the "... undertheorization of economic development strategies, as well as the essentially ad hoc nature by which many measures of economic development policy are constructed" is a major shortcoming in the literature.

It should be clear that, although such theoretical research may provide fascinating reading and important insights, it does not, however, facilitate systematic study and analysis. In fact, this work offers little scope beyond the economic cost and benefits of individual programs or policy types. This myopic tunnel-vision approach to state activism in economic development has fragmented initiatives resulting in diluted policy content (King, 1992), in addition to frustrating scholars' attempts to "read" wholesale shifts in policy direction (Immergut, 1992).

Theoretical Framework for State Economic Development

I develop a theoretical framework of state activism in economic development using constructs from the extant literatures on growth theory, economic policy, and international development. These constructs are then organized within an institutional framework.

Theory Construct

Although scholars disagree about a number of issues concerning economic growth (1) such as whether a specific factor of production is exogenous or endogenous, or if growth rates converge or diverge, or how best to allocate resources, there is broad consensus about what determines growth (Amacher and Ulbrich, 1992). (2) The growth theory literature suggests there are four interrelated determinants: (a) capital investment, (b) technological advancement, (c) labor investment, and (d) improved organization.

Capital Investment: Theories underlying capital investment (3) posit that by not consuming all resources today, the economy frees up resources for investment to be used for manufacturing goods and services in the future. The accumulation of physical capital increases the society's output capacity. Surplus production can be reinvested in manufacturing activities, which, in turn, results in greater surplus, and so on (Goldsmith, 1995).

Studies on capital investment find that it has an irreducible function in the growth of an economy. Scott (1992) argues that physical capital appears to be a far more important determinant of economic growth than neoclassical theory suggests. Brierly and Costello (1996) examined state economic environments and conclude that although capital, labor, and technology were largely determined exogenously, states still exerted some influence over these factors, which all significantly impacted growth rates. Also, Di Pietro, Sawhney, and Jampani (1993) found that capital and labor significantly impact growth rates in a cross-country study.

Technological Advancements: As important as the accumulation of capital is to...