Let’s avoid boom-to-bust strategies

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I have argued for what I call “simple rules” for economic development. For the most part, these rules are non-prescriptive, but they do advocate limited actions by public officials. Yet many of us want to do something to promote the economic development of the region. We have pent-up energy and some financial resources to direct at the laudable goal of regional economic development. To my knowledge, there are at least three high-profile ongoing initiatives that have regional economic development as their ultimate goal.

I admit that my prior articles have been a bit vague on exactly what can be done from a public policy perspective to promote and enhance economic development. This is only because the existing research on the engines of regional economic growth is also quite vague. Only in the past decade or so have scholars attempted to pin down causal factors that promote economic development. And it is only in the past few years that theoretical models have enabled testing various initiatives for their relative impact on regional economic development.

I will attempt in this article to relate some of the more robust findings concerning the causal factors associated with regional economic development. To begin, we must recognize that public policy intervenes on pure market forces for three primary reasons:

to promote competition and prevent monopoly;

to compensate for market failures;

and to provide public goods (such as roads).

Recently, some have argued that innovation is a public good. That is, since innovation within a regional economy generally leads to job creation, wealth creation and regional economic resilience, it can be regarded as a public good.

Public policy can promote innovation to great extent by ensuring that innovators have opportunities to enjoy the economic benefits of their creations. That is, public policy that limits taxes and regulations, streamlines legal processes associated with venture startup and growth, and protects intellectual property will be most effective in promoting innovation.

Public policy can also promote innovation by ensuring that programs targeting entrepreneurs use appropriate success metrics. Research indicates that many intervention programs aimed at promoting entrepreneurship too often are evaluated by the number of people served (quantity) rather than their potential to succeed (quality).

Another important line of research has investigated whether public policy should promote regional industrial specialization or diversification. Those who advocate industrial specialization can readily point to the many regions that historically have been known for their concentrated production of one type of good or another. Detroit and the automobile industry, or Pittsburgh and the steel industry are two 20th-century examples in the United States. More recently, Harvard’s Michael Porter has advocated “industry clusters” as the most efficient way to generate regional growth.

On the other hand, those who advocate industrial diversification point to the boom and bust nature of regions that have become overly dependent on one type of industry. Advocates of this point of view have their pick of examples, with recent evidence of the decimation of the once-thriving metropolis of Detroit. Diversification also enables sharing of knowledge between industries, which has proven to be an important source of innovation. That is, knowledge-sharing leads to innovation where technologies in one industry are applied to problems in another.

The debate between those who advocate specialization and those who advocate diversification has led some to conclude that regions should focus on promoting both industrial clusters and diversity. Either approach as an exclusive strategy limits a region’s ability to leverage its endemic natural advantages on the one hand, and its ability to withstand economic downturns on the other.

As the initiatives to promote economic development move forward here in our city, it is advisable to keep these twin strategies in mind. Fighting with other regions to attract biotech or cleantech or whatever-tech companies only makes sense if the region has substantial existing resources upon which companies in the target industry can build.

It has been my contention that the region’s natural amenities are among its most potent comparative advantages. As such, building an economic development strategy centered in part on attracting and growing ventures that can leverage that boundless amenity may lead to sustainable economic growth. Whatever we do, we should take care not to attempt to re-invent square wheels. Policy perspectives that pay attention to the emerging research may spare us from another foray into economic development that goes from boom to bust.

Tom Duening is director of the Center for Entrepreneurship in the College of Business and Administration at UCCS. He can be reached at tduening@uccs.edu.

One Response to Let’s avoid boom-to-bust strategies

  1. To begin, we must recognize that public policy intervenes on pure market forces for three primary reasons:
    to promote competition and prevent monopoly;
    to compensate for market failures;
    and to provide public goods (such as roads).

    Community fiber as a public good……

    William P. Murray
    June 12, 2010 at 8:36 am