Remaking Economic Development

by Amy Liu

An extensive study by The Brookings Institution underscores shortcomings of the traditional approach, highlights successful emerging strategies, and, effectively, shows how Greater Phoenix is positioned for growth 

Economic-Development

The lackluster economy is delivering a humbling lesson about economic development: Top-line growth doesn’t ensure bottom-line prosperity.

Yet, in too many communities, the practice of conventional economic development remains focused solely on the former while the latter is deemed someone else’s responsibility. One sees this in local marketing efforts touting their latest economic successes — new firm relocations, jobs “created,” and expanded private-sector investments.

Indeed, aggregate growth matters. But more growth isn’t always better growth. Firm gains are not the same as worker gains. Ignoring the plight of workers who are under- and unemployed limits future growth.

It’s time to shift and broaden the purpose and practice of economic development to generate continuous growth, prosperity and inclusion.

The power of getting together to promote economic development is to do what markets alone cannot do: influence growth through action and investments. The purpose of economic development should be to put a regional economy on a trajectory of higher growth (growth) by increasing the productivity of firms and workers (prosperity) that raises standards of living for all (inclusion). This brand of economic development can lead to deep prosperity — growth that is robust, shared and enduring.

This generative work must occur within metropolitan regions because metro areas represent the basic unit and geography of the economy — and the nexus of public and private networks that shape regional economic ecosystems and address highly local market failures.

Given this purpose, economic development here refers to the system of economic growth and development in regions. It is broader than the traditional practice of economic development. The system involves not just economic development professionals but also elected officials, employers, workforce and education leaders, and other civic and nonprofit executives. The economic development system includes a wide range of policies and strategies that enable industries, workers and communities to contribute productively to the economy.

There is a great deal of knowledge about how an economy grows. Yet, conventional economic development remains largely misaligned to what matters. It favors recruiting new firms over helping existing firms become more productive and expand. It relies too often on taxpayer-funded incentives geared to one-time job creation, rather than positioning industries and assets for long-term growth. And when regions need to keep an eye on how to proactively respond to global, technological and demographic forces, conventional economic development remains largely reactive, driven by deals in the pipeline.

In short, economic development that improves living standards for only the few undermines current and future human capital, depresses economic demand, and dampens a region’s overall competitiveness and potential for growth.

Why Remake Economic Development?

Embracing a broader vision of economic development is an economic and fiscal imperative. Our nation’s economic competitiveness and social cohesion remain threatened.

First, growth is not assured. U.S. leadership in advanced industries — those that are the most technology-driven and R&D intensive — is slipping. Productivity continues to lag. New business formation and labor force participation rates are declining. Household incomes and wages are stagnant or losing ground for all but the top tier of earners.

The acceleration in globalization, disruptive technologies and demographic change is roiling industries and labor markets, adding complexity and further testing the wisdom and prudence of hanging onto long-standing practices.

When used strategically and in the context of broader objectives, some incentives can bring solid benefits or address key market gaps, such as tax credits to remediate polluted sites or incentives to targeted suppliers that strengthen an existing industry cluster. Many more are questionable in form and focus: tax increment financing to support suburban malls and sports arenas; tax rebates for businesses to move from this town to that and back again; subsidies to build far-flung industrial parks and office towers; tax credits to lure film productions that offer a momentary boost at best. At worst, the prevalent use of tax incentives, coupled with multiple separate taxing jurisdictions in a region, pit jurisdictions against one another in ways that erode value in the economy and drain precious resources away from the people and assets that matter.

Continuous productivity improvements can only occur if gains from economic growth reach more firms and people, particularly those who are underemployed. And inclusion is likely to be more politically and economically successful if it comes through expanding the economic pie rather than by redistributing fixed resources. Thus, growth, prosperity and inclusion are complementary, not contradictory, goals for meaningful economic development.

The Basics of Economic Development

There are two basic components to economic development — engagement with markets and market actors to create growth, and purposeful organizing of the right assets and capacities to improve, sustain and extend that growth to more participants. Thus, leaders need to get both the markets right and the civics right to put their metro areas on the path to deep prosperity.

Getting the markets right: First and foremost, economic growth matters. An expanding economy creates jobs and opportunities for people and firms to maximize their potential. When labor markets are tight, wages are more likely to increase. When there is insufficient aggregate demand, workers are more likely to see wages erode, particularly lower-skilled, minority and younger workers.

How an economy grows matters too. A regional economy can expand simply by attracting more firms and more people into the market. But accumulating more people and a higher job count does not always mean that workers and firms are better off or that regional assets are improving.

Achieving deep prosperity requires improving the productive capabilities of businesses and people in the region. That requires building strong ecosystems for core industries, improving productivity and engaging in trade — the market foundations from which growth, prosperity and inclusion emerge.

Clusters and regional ecosystems: In today’s technology-fueled global economy, advanced industries comprise the most important clusters in a region. As the nation’s most R&D- and STEM-intensive sectors, advanced industries — such as aerospace, medical diagnostics and data processing [industries that have been a targeted focus for economic development in the Greater Phoenix area] — are most likely to endure and thrive in the future. These highly innovative sectors blur the distinctions between production and services, as software and digital offerings increasingly are components of manufactured goods that include cars, phones and televisions. Given their global relevance, advanced industries generate the bulk of the nation’s patenting and exports.

Further, wages in advanced industries have grown steadily since 1975 while all other industries have stayed relatively flat. Half of the jobs in advanced industries do not require workers to have four-year college degrees.

Economic development is most effective — and cost-effective — when it focuses on improving the shared assets that support clusters and advanced industries, rather than providing subsidies and solutions to individual firms.

Ignoring intra-regional disparities and concentrated poverty can drag down a region’s overall economic potential, as well as perpetuate cycles of disinvestment in certain areas, primarily central cities but increasingly older suburbs as well.

Productivity: There is a broad consensus that productivity gains are the primary source of growth in any economy. Federal Reserve Chair Janet Yellen put it simply: “Over time, sustained increases in productivity are necessary to support rising incomes.”

The income and higher earnings generated from increased productivity can be recycled through the economy in several forms. One is as increased wages that workers spend at local stores, restaurants and other firms. A second is as new investments in the productive capacities of firms, equipment and workers, and the formation of new businesses. And a third is as higher tax revenues that pay for more of the public goods on which prosperity depends — infrastructure, education and transportation — as well as other improvements in quality of life.

Economic development must create the conditions that enable firms in distinct clusters to be more productive, so they generate higher value from each input. There are three ways that regions can increase productivity: by helping firms and industries innovate and invest in R&D and technology (including those supplied by other firms), by helping industries access skilled labor or invest in training, and by improving the industry mix in the region to include more innovative, higher-value sectors of the economy.

Meanwhile, state and regional leaders must anticipate and manage the tensions that result from the “creative destruction” that comes with productivity improvements. New technologies that increase productivity, such as faster computing or robotics, will eliminate certain tasks. They can also create new demand for workers with specialized skills and boost the productivity of existing workers. This highlights the need for leaders to build in mechanisms for continuous investment in people, their skills, and their mobility and access to new occupations.

Trade: Like a business that grows through sales, regional economies grow and expand through trade. Productivity gains bear fruit when industries and firms sell highly specialized goods and services to customers outside of the local market, injecting new income into the region.

Thus, economic development should prioritize the needs of a region’s traded sectors, including aligning and investing in the assets prized by their leading industries. It should also include facilitating international trade, which is particularly important in today’s hyper-integrated global marketplace.

As with technology, the globalization of supply chains and capital comes with risks. Globalization tends to favor highly productive firms, skilled workers and innovative regions. In addition, trade doesn’t make sense for all firms, as entering and sustaining relationships in international markets requires a great deal of capital and specialized skills. In fact, studies have found that firms that are at least mid-sized or larger are most likely to benefit from exporting.

Getting the civics right: Getting the economics of economic development right is crucial, but it is also insufficient. The civics must be right, too. For economic development is, fundamentally, a civic enterprise and a civic process: the work to organize and implement initiatives that engage stakeholders and partners to achieve long-term goals.

The path to getting the civics right varies for each metro area. So much is predicated on a region’s unique history, culture, circumstances, leadership and institutional capacity. The process is rarely linear but emerges organically, steered and shaped by networks rather than handed down by government or business hierarchies. And the work is more complex the higher the region’s aspirations.

But, more and more, leaders in economic development are tired of what one calls “episodic excellence and persistent systems failure.” They are searching instead for insight and evidence to deliver more systemic change with significant and enduring results.

Visible and Networked

Undertaking transformative economic change requires developing a sense of urgency and high visibility. That starts with an economic narrative grounded in hard data and clear-sighted assessment of the region’s competitive strengths and weaknesses — gauging how it really stacks up in the global economy and where there are challenges and market failures to address.

In Phoenix, planning for what evolved into its ambitious Velocity strategy — a metropolitan business plan, initially incubated by the Greater Phoenix Economic Council, focused on guiding the Greater Phoenix region into a shift from a consumption-based economy, positioning it as an economy based on innovation and technology — got underway slowly, as organizing the civics took precedence. Moving into implementation, the region has refreshed its governance structure, expanding the circle of active partners and renewing commitment to carry out the plan.

Leading transformative change in economic development depends on relationships and trust. It requires navigating complex relationships and collaborations among a wide variety of stakeholders and across multiple boundaries, including jurisdictional boundaries.

Aspects of collective impact apply to regional economic development, such as the need for shared agendas, goals, and performance metrics to keep the work focused and to hold partners accountable.

Transparency and inclusion are essential to building the trust required for ongoing collaboration and partnership at the scale of the region. And regions pursuing deep prosperity have learned that it requires deliberate steps to ensure that regional efforts deliver inclusive outcomes.

The work to put a region on a higher growth trajectory never stops. Regional leaders must balance tangible and visible progress against shorter-term goals with the recognition that the vision is long term, requiring constant adaptation as conditions and leadership changes. It also remains a work in progress, with much exploration and experimentation still to be done to deliver new insights, new techniques, new finance tools and new business models to get the civics right.

 

The Actions: Five Principles

Too many economic strategies remain highly fragmented and transaction oriented, resulting in narrow short-term wins: A firm recruitment here, a tax break for a new retail center there. A career academy opening without a connection to a nearby community college-industry partnership in the same field. Limited public resources stretched to support duplicative, uncoordinated or small-scale efforts.

The work to put a region on a higher growth trajectory begins with getting the markets and the civics right, but applying these basic principles in practice is not easy. The actions to achieve the fuller promise of economic development to generate growth, prosperity and inclusion fall into five broad categories, reflecting the combined power of good economics and good governance.

Set the right goals

Expand the scope and metrics of economic development to reflect a more foundational and holistic understanding of how to expand the economy and opportunity. Set long-term goals that go beyond traditional headline economic indicators to achieve more robust measures of regional growth, productivity and inclusion while also setting shorter-term metrics to monitor progress.

Grow from within

Prioritize established and emerging firms and industries; invest in the ecosystems of innovation, trade, talent, infrastructure and governance to support globally competitive firms and enable small businesses to start and grow in the market.

Focus on strengthening assets that enable a region’s distinctive industries to flourish and grow from within, rather than rely primarily on marketing to recruit individual firms from elsewhere.

Boost trade

Facilitate export growth and trade with other markets in the United States and abroad in ways that deepen regional industry specializations and bring in new income and investment. Being a trading economy requires strengthening what a region does best — growing from within by engaging globally.

Invest in people and skills

Incorporate skills development of workers as a priority for economic development and employers so that improving human capacities results in meaningful work and income gains.

The skills of workers and level of human capital in a region are critical factors in determining the competitive position of firms and the path to growth, prosperity, and inclusion. People produce value for firms, formulate the ideas that underpin innovation, produce and apply the latest technologies, raise productivity and interact with customers to create the new products and services that drive today’s knowledge economy.

The focus on skills is a growing priority for economic developers, increasingly cited as a high priority in recent surveys of the members of the International Economic Development Council. Smart strategies better align workforce development with economic development, leveraging new state and federal policies that set those directions and facilitate employers ramping up training and reshaping public systems through collaboration and co-investment.

Connect place

Catalyze economic place-making and work at multiple geographic levels to connect local communities to regional jobs, housing and opportunity. Markets — industrial, labor and housing — are regional, but the people and assets that matter to markets are local.

To create the market lift that raises incomes and opportunities for as many people as possible, economic development should focus on regional scale solutions to support strong, innovative industry clusters. But working solely at the regional level and measuring progress against that geography can miss stark disparities in opportunity, such as rising concentrations of poverty in suburban neighborhoods and lagging investments in central cities. A large body of research shows that persistent intra-regional disparities, racial and economic segregation, and low-density sprawl can drag down a region’s overall economic potential and widen inequality.

Amy Liu, vice president and director of the Metropolitan Policy Program, is a national expert on cities and metropolitan areas adept at translating research and insights into action on the ground. As director of the Metro Program, which Liu co-founded in 1996, she pioneered the program’s signature approach to policy and practice, which uses rigorous research to inform strategies for economic growth and opportunity. Liu has worked directly on such strategies with scores of public- and private-sector leaders in regions around the country, including Chicago, Kansas City and Phoenix.

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