4.7 The Future of Economic Development Finance
4.7.2 Potential Issues Facing Communities Involved in
The world of economic development finance, like everything else, will grow increasingly complex in the next decade. Competition will grow
Financial Management of Economic Development g 107
fiercer, the public will continue to expect more for its money, and time horizons will shorten. The global market of communities seeking economic development will result in places offering nearly identical products. These factors appear to indicate a more chaotic world. However, in circumstances such as these, intangible differences may be what separate winners from losers. Increasingly communities will need to broadly define economic development, and include a wide array of quality of life and other aspects of a community.
4.7.2.1 Preparing for Increasing Rapid Change
It is almost cliche´ to speak of increasingly rapid change in society and technology. However, communities must accept this cliche´ and prepare to compete in this new environment. These preparations will encompass the development of sensory, communication, and action skills. Communities must build the sensory organs to be alert to environmental change. How- ever, sensory organs alone will not permit timely and successful responses.
Organizations that can process information promptly and accurately to identify opportunity, and then act quickly will enjoy comparative advantage.
Sound like the private sector? Absolutely!!! Community economic develop- ment efforts, already the most entrepreneurial side of government, will need to become even more skilled.
4.7.2.1.1 Improved sensory skills
Economic development organizations, and governments in general, will need to become better at sensing the environment. Organizations, like nature, can do this is a number of ways: more eyes and ears — a ‘‘herd’’
model; better eyes and ears — the hawk/rabbit model; and better placed eyes and ears — the lookout model. Communities will need to be effective with all three models. Networking in professional associations, geographic associations, and other opportunities such as trade shows will enable com- munication between a greater number of eyes and ears. ‘‘Better eyes and ears,’’ while not sufficient in themselves, will help a good deal, i.e., communities will need to do better with the tools they have. For example, it is amazing to this author the large proportion of city and county gov- ernments that lack subscriptions to the New York Times or Wall Street Journal,two superb avenues to ‘‘better eyes and ears.’’ Communities seldom draw on the large numbers of lookouts from within, e.g., company officers and others who are highly attuned to developments in their industry. A first step toward future success will be for communities to better utilize the available sensory resources.
4.7.2.1.2 Better Processing
All the sensory data in the world will not help unless an organization can cull important information from environmental noise and convert the infor- mation to meaningful action. According to Wurman, Sume, and Leifer, organizations and individuals seldom suffer from a scarcity of information;
more often than not, they have too much information available. In actuality it is not the amount of information, it is an inability to process the information.
Just like ‘‘more eyes and ears’’ help, additional processors help, as long as communication networks are effective. Multiple processors can specialize and squeeze more value (meaning) from the information. The easiest way to gain more and better processors is for an organization to develop the reasoning skills of its members and to reward them for using these skills.
Additionally, organizations need to network with each other and use consulting firms as avenues to increase their processing power.
4.7.2.1.3 Acting on information
Sensing and processing does an animal little good if it freezes in its tracks.
The same can be said of economic development organizations. Streamlined decision making, as long as it does not detract from organizational sensory and processing skills, will be key to survival. Economic development organizations need to aim for a swift, empowered, multifunctional, decision making structure. Economic development organizations with slow reaction times will suffer the same fate that their private sector counterparts suffered in the 1980s, 1990s, and 2000s. If you snooze you lose!
4.7.2.2 Leaner and Meaner Options for Managing Economic Development Finance
Public–private partnerships (PPPs) are the product of decades of evolution.
They came into their own in the 1980s, largely as a response to Federal cuts in urban redevelopment monies (Lyons and Hamlin, 2001). This final subsection identifies PPPs as the best suited structure for rapid and effective economic development and finance decision making.
Management of economic development finance requires organizations that exhibit:
Greatly reduced reaction times.
Higher levels of diverse sources of information.
Ability to adapt and compete with continuously improving competition.
Financial Management of Economic Development g 109
Skills in adapting to a rapidly changing environment.
Capacity to capture greater proportions of externalities.
Only PPPs exhibit the most potential to rapidly develop and meet these five requirements for economic development finance in the near future. PPPs, by involving public and private sector organizations, have the potential to draw on a much broader information base than either govern- ments or the private sector. Additionally, PPPs have rapid access to decision makers in both sectors, thereby cutting information cycle times. PPPs can be comprised of several governments and businesses, serving as the nexus between public finance and private finance, and offering the best of both worlds.
Inevitably, more information, faster change, and rapid reaction will result in more mistakes. Mistakes, as any entrepreneur recognizes, are simply a cost of doing business. Governments are generally very unforgiving of mistakes. They get stuck avoiding mistakes at the expense of using mistakes as learning opportunities. This explains why bureaucracies are conservative. Additionally, political systems penalize mistakes, often grossly out of proportion to their severity. Politicians therefore learn to avoid mistakes, cover them up, or to scapegoat them, certainly not what is needed for a learning organization trying to organize and finance deals at an ever increasing pace. As one step removed from government, a PPP management is in a more survivable situation, enabling the organization to take greater risk.
To decrease the negative impacts associated with risk and failure, entrepreneurs seek to spread risk. There are two viable risk spreading options for communities involved in economic development. First, the community can ‘‘broaden its portfolio,’’ i.e., more deals make the risk from any single deal proportionately smaller. Second, bring in more investors, i.e., share an investment with other communities/PPPs. PPPs are well suited to reduce risk in both of these manners. An economic development PPP, unlike a general purpose government, focuses on one key aspect of a community. It is therefore in a stronger position to work many deals at any one time. PPPs are also well suited to spread risk among more parties. They are not bound by the geographic limitations of governments; they can expand territory as needed and work across municipal, county, and even state boundaries. Additionally, they have more ready access to the private sector.
By bringing together public and private sectors, PPPs are in superior position to negotiate deals than would be either sector. Since economic development deals often blend public and private sector monies, the PPP is ideally situated. Additionally, since PPPs are outside of government,
they can negotiate outside the public arena, i.e., they can negotiate in secret, which is far more difficult or impossible, depending on the government.
4.7.2.3 One Final Comment on Environmental Change
Finally, it is fitting for this discussion of the financial management of economic development to come full circle and to revisit the questions posed early in this chapter — what is economic development and how can economic development finance be managed to produce the most positive results? The environmental changes discussed above bring these questions back to the forefront as it becomes clear that, to be successful, communities will need to change they way they did business in the past.
Firms and their operations are increasingly footloose, i.e., their location is less and less determined by some scarce combination of resources.
Capital is free to migrate from community to community, from country to country. Two examples serve to make this point. The classic example is the auto industry. Detroit suffered when the Big Three auto makers lost market share to the Japanese and European firms, as Americans purchased cars built in Japan and Germany. These ‘‘Japanese’’ and ‘‘German’’ cars are increasingly built in the U.S., but not in Detroit, rather in Kentucky, South Carolina, Alabama, and Mississippi. For another example, open any CPU and one is likely to find components manufactured in several countries and assembled in yet another country. This machine may be delivered direct from a foreign factory to our doorstep without ever being touched by any of the vendor’s U.S. based personnel. At a grander scale, corporate investment timelines and payback periods are all shortened. Business guru Tom Peters argues against any sort of corporate long range planning and encourages firms to own as few assets as possible (2003). What does this mean for communities striving to be successful in economic develop- ment finance? The simple answer and the most honest answer — we don’t know yet.
One thing seems certain; the large incentive packages may grow less important. Other factors impacting a firm’s location choices may grow more significant, e.g., community aspects like ambiance, safety and, above all, education. If the name of the game in the 21st Century is value-added, then education is what will separate the superstar communities from the also- rans. World class education systems will likely be at the heart of successful economic development. Developing environments where well-educated, highly mobile workers want to live will also be a key. Thus, when we revisit questions of ‘‘what is economic development and how to best manage the finance of it?’’ we come full circle and arrive back to the broad, holistic definition of economic development.
Financial Management of Economic Development g 111
Note
1. This drive for job creation may lead to accepting creation of jobs at any wage. Creation of excessive numbers of low wage jobs can lead to downward wage spiral, substitution of low wage labor for capital investment, and a long-term decline in economic competi- tiveness and community well-being.
References
Apgar, W. (2003).Accessing Capital for Community Development.Retrieved February 2, 2004 from http://www.harvardred.com/gsd5483m4.pdf Bartik, T. (1991).Who Benefits from State and Local Economic Development
Policies?Kalamazoo: W. E. Upjohn Institute for Employment Research.
Brooks, R. (2002). Big incentives won Alabama a piece of the auto industry.
Wall Street Journal, April 3.
Blair, J. (1995). Local Economic Development: Theory and Practice.
Thousand Oaks: Sage.
Brice, K. (2002).Economic Development Planning and Finance.Retrieved February 2, 2004 from http://www.gsu.edu/wwwpsp/academics/
courses/syllabi/paus4451_fall2002_brice.htm
Carroll, R. and Wasykenko, M. (1994). Do state business climates still matter?—Evidence of a structural change.National Tax Journal47, 19–37.
Cason, M. (2002). Hyundai incentives cost $252.8 million. Montgomery Advertiser,April 5. Retrieved January 3, 2004 from http://www.nasvf.org/
web/allpress.nsf/0/4ce6b8a86f63153a86256b9200467e5?OpenDoc. . . Cason, M., Hendrick, D., and Dugan, K. (2002). Hyundai picks Montgomery:
City gets $1B plant.Montgomery Advertiser, April 2. Retrieved January 3, 2004 from http://www.nasvf.org/web/allpress.nsf/pages/4384
Clinton, W. (1993).Executive Order 12873: Federal Acquisition, Recycling, and Waste Prevention, October 20. Retrieved 3 January 2004 from https://www.denix.osd.mil/denix/Public/Legislation/EO/note17.html Committee for Economic Development (1998). America’s Basic Research:
Prosperity through Discovery, a Policy Statement by the Research and Policy Committee.New York: Committee for Economic Development.
Copeland, L. (2003). Sewer overhauls drive fee hikes.USA Today,October 26. Retrieved January 28, 2004 from http://www.usatoday.com/news/
nation/2003-10-26-sewer-upgrades_x.htm
Dabson, B. and Rist, C. (1996). Business climate and the role of development incentives.Region (Federal Reserve Bank of Minneapolis).June. Retrieved January 8, 2004 from http://minneapolisfed.org/pubs/retion/96-06/
dabson.cfm
Diamond, M., Fisk, W., and Garfinkel, M. (1970).The Democratic Republic:
An Introduction to American National Government (2nd edition).
Chicago: Rand McNally.
Felsenstein, D. and Persky, J. (1999). When is a cost really a benefit? Local welfare effects and employment creation in the evaluation of economic development programs.Economic Development Quarterly,13, 46–54.
Eisinger, P. (1988). The Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States.Madison: University of Wisconsin Press.
Fitzgerald, J. and Leigh, N. (2002). Economic Revitalization: Cases and Strategies for City and Suburb.Thousand Oaks: Sage.
Fitzgerald, S. (n.d.). Foreign trade zones.Bizsites.com.Retrieved February 21, 2004 from http://www.bizsites.com/stateads/FTZ/index.asp
Friar, J. (1999). Economic development incentives: A review and recommendations.Economic Development Review, 16, 3–7.
Gershberg, A. (2003).Capital Markets and Development Finance. Retrieved February 2, 2004 from http://www.newschool.edu/milano/course/sp04/
4319/oldsyllabus.pdf
Good Jobs First (2002).No More Secret Candy Store: A Grassroots Guide to Investigating Development Subsidies.Washington, D.C.
Good Jobs First (2004). Good Jobs First: Promoting Accountable Develop- ment.Retrieved January 30, 2004 from http://www.goodjobsfirst.org Herbert, S., Vidal, A., Mills, G., James, F., and Gruenstein, D. (2001).Interim
Assessment of the Empowerment Zones and Enterprise Communities (EZ/EC) Program.Washington, D.C.: U.S. HUD.
Hinkley, S. and Hsu, F. (2000). Minding the Candy Store: State Audits of Economic Development. Washington, D.C.: Good Jobs First.
Hodge, S., Moody, J., and Warcholik, W. (2003). State Business Tax Climate Index (Background Paper). Washington, D.C.: Tax Foundation.
Hyundai won over by Alabama’s southern charm (2002). FDI (Foreign Direct Investment). April 2. Retrieved January 6, 2004 from http://
fdimagazine.com/news/printpage.php/aid/107/Hyundai_won_over_by_
Alamam
International Economic Development Council (n.d.).The IEDC Professional Development Series. Retrieved January 5, 2004 from http://wwwiedcon line.org/prodev_course_desc.html
Kansas City Area Development Council (2004). Foreign Trade Zones.
Retrieved March 15, 2004 from http://www.smartkc.com/3_locating/
3e_tax_profile/3e14_foreign.htm
Kottler, P., Haider, D., and Rein, I. (1993). Marketing Places: Attracting Investment, Industry, and Tourism to Cities, States, and Nations.
New York: Free Press.
Labyrinth of incentives (2002).Foreign Direct Investment.Retrieved January 3, 2004 from http://www.fdimagazine.com/news/printpage.php/aid/187/
Labyrinth_of_incentivesUnited_
LeRoy, G. and Slocum, T. (1999). Economic Development in Minnesota:
High Subsidies, Low Wages, Absent Standards. Washington, D.C.:
Good Jobs First.
Financial Management of Economic Development g 113
Levy, J. (1990). Economic Development Programs for Cities, Counties and Towns (2nd edition).New York: Praeger.
Lyons, T. and Hamlin, R. (2001). Creating an Economic Development Action Plan: A Guide for Development Professionals (revised and updated edition). Westport: Praeger.
Mikkelson, B. and Mikkelson, D. (2002).Hello Submarine. Retrieved March 2, 2004 from www.snopes.com./legal/kentucky.htm
Library of Congress (n.d.). Rise of Industrial America, 1876–1900:
Railroads in the Late 19th Century. Retrieved February 2, 2004, from http://memory. loc.gov/learn/features/timeline/riseind/railroad/
grants.html
National Association of Development Organizations (n.d.).EDFA.Retrieved March 1, 2004 from http://www.nado.org/edfs/index.html
National Association of State Development Agencies (n.d.) Statewide Public-Private Partnership Economic Development Organizations.
Retrieved Feb ruary 25, 200 4 from http://www.nasd a.com/
statewide_public_private_partner.htm
National Conference of State Legislatures (2003). State Economic Develop- ment. Retrieved January 15, 2003 from www.ncsl.org/programs/econ/
topics.htm
National Conference of State Legislatures, Budget and Revenue Committee (2003). Unfunded Mandates Imposed—As of April 16, 2003. Retrieved March 3, 2004 from http://www.ncsl.org/standcomm/scbudg/budgman- dates03.htm
North Carolina Department of Commerce (2004). What Are the Economic Benefits to Zone Users? Retrieved March 1, 2004 from http://www.
exportnc.com/ftz/benefits.sap
Peirce, N. (2002). Corporate handouts: A call for accountability.Seattle Times.
August 19, 2002.
Peters, T. (2003). Re-imagine!: Business Excellence in a Disruptive Age.
New York: DK.
Porter, M. (2000). Location, competition, and economic development:
Local clusters in a global economy. Economic Development Quarterly, 14, 15–34.
Recycled Paper Coalition (2000). Buy Recycled: Recycled Paper. Retrieved January 8, 2004 from http://www.papercoalition.org/PaperFactSheet.pdf Reese, L. (1992). Local economic development in Michigan: A reliance on the
supply-side.Economic Development Quarterly, 6, 383–393.
Reese, L. and Fasenfest, D. (1999). Critical perspectives on local economic development policy evaluation. Economic Development Quarterly, 13, 3–7.
Reese, L. and Fasenfest, D. (1997). What works best?: Values and the evaluation of local economic development policy.Economic Development Quarterly, 11, 195–207.
Reich, R. (2000). The Future of Success: Working and Living in the New Economy.New York: Vintage Books.
Rose, I. (2002). Status of Gambling Laws — Part 2: Georgia — Maine.
Retrieved January 21, 2004 from http://rose.asinocitytimes.come/articles/
980.html
Sherman, M. (2003). State calls in Hyundai pledges.Montgomery Advertiser, July 26. Retrieved January 4, 2004 from http://www.montgomeryadver- tiser.com/specialreports/hyundai/StoryLocalincent26w.htm
Stucki, H. (1998). Shell buildings as development tools.Economic Develop- ment Review,16, 55–56.
Sublett, M. and Walk, F. (1994).Location.Retrieved February 11, 2004 from http://www.lib.niu.edu/ipo/iht19402.html
University of Southern Mississippi (n.d.). Master’s Program in Economic Development. Retrieved February 18, 2004, from http://www.usm.edu/
ecodev/pages/masters.htm
University of Southern Mississippi and ACCRA (2003). Economic Development for the New Economy. Retrieved January 5, 2004 from http://www.usm.edu/growingbusiness/execmasters/
U.S. Census Bureau (2003). Federal, State, and Local Governments:
Governments Integrated Directory. Retrieved February 2, 2004 from http://www.census.gov/govs/www/gid2002.html
U.S. General Accounting Office (1999). Community Development: Extent of Federal Influence on Urban Sprawl Is Unclear.Washington, D.C.
U.S. General Accounting Office (2000).U.S. Infrastructure: Funding Trends and Opportunities to Improve Investment Decisions.Washington, D.C.
U.S. Department of Housing and Urban Development (2003).Tax Incentive Guide for Businesses in the Renewal Communities, Empowerment Zones, and Enterprise Communities.Washington, D.C.
Wisconsin Public Service Corporation (n.d.). Tax Incentives and Benefits.
Retrieved January 28, 2004 from http://www.wisconsinpublicservice.com/
business/bcd_tax_incentive.asp
Wisconsin, State of (n.d.). Wisconsin Business Incentives. Retrieved 4 February 2004 from http://www.wisconsin.gov/state/core/wisconsin_
business_incentives.html
Wolman, H. and Spitzley, D. (1996). The politics of local economic development.Economic Development Quarterly, 10, 115–150.
Wright, R. (2002). Hamilton Unbound: Finance and the Creation of the American Republic.Westport: Greenwood Press.
Wurman, R., Sume, D., and Leifer, L. (2000). Information Anxiety 2.
New York: Que.
Financial Management of Economic Development g 115
Chapter 5
Annual Budgeting and Long-Range Planning: Is There a Fit? — Lessons from Three Case Studies
YILIN HOU, Ph.D.
Department of Political Science, University of Georgia
JUN MA, Ph.D.
College of Politics & Public Affairs, Zhongsan University, People’s Republic of China
Public budgeting is concerned with the allocation of financial resources.
As such, it is technical but heavily loaded with politics. Of this technical- political bi-partite structure, politics has often drawn more academic attention because it is very complicated, and thus more interesting and holding more explanatory power of the budgeting process. Aaron Wildavsky’s work is a good example among the vast amount of literature on the politics of the budgetary process. Any study of the technical side has to refer to the political side also because one simply ‘‘. . .cannot take politics
117
out of budgeting’’ (Donohue, 1982, 62). Nonetheless, the technical side is also fascinating and sophisticated, deserving due examination. This chapter focuses on one aspect in the technical side — the relationship between budgeting and planning. As Allen Schick put it, the format of budgeting is
‘‘more a product of bureaucratic than of political influences’’ (1971, 195).
Planning is one of the three basic functions of public budgeting (Schick, 1966, 1998) but in the vast budgeting literature (which is mostly of and about developed countries) it is mentioned much less frequently than the other two functions. In the American budgeting literature, planning is studied much more in the period from WWII to the Great Society (mid- to late-1960s) and the early 1970s. Since the late 1970s, planning is more referred to as strategic planning. Even when planning is mentioned, the tone is sometimes more negative than positive, as a ‘‘communist approach’’ to national economic planning (Richard Brown, 1978).
In developing and transitional countries, however, planning has been noticed to be much more important, though not successful in implementa- tion. (Caiden and Wildavsky, 1974). In fact, even in developed countries, limitations of the annual budget cycle have drawn some attention to multi-year perspectives (Caiden, 1981; Forrester, 1991; Guajardo, 2000;
Boex, Martinez-Vazquez and McNac, 2000; and Hou, forthcoming), which is closely linked to planning. There have been famous experiments in the U.S. in the 1960s with the Planning-Programming-Budgeting System (PPBS);
more recently some European countries paid more attention than before to planning; the World Bank has been promoting the Mid-Term Expen- diture Framework (MTEF). This chapter examines the relationship between budgeting and planning, assuming that well balancing this relation and incorporating planning into budgeting, or vice versa, is very significant because budgeting as an administrative instrument plays an indispensable role in improving governance capacity for all types of countries.
A detailed study of the relationship between annual budgeting and medium- and long-term financial planning carries great potential in making a theoretical contribution to existing literature, and practical contribution to improving policy implementation in developed and developing, as well as transitional, countries. This chapter starts with a general framework for analysis of this relationship. The next three sections examine three cases that represent three models of the interaction between budgeting and planning.
From each case, the chapter tries to draw lessons and merits. The conclusion offers further discussion and policy recommendations.
The three cases for analysis in this chapter are China, the state of New York, and the City of Sunnyvale, California. To some readers, this choice may seem odd: they are not at the same level and are far off from each other in their respective size of population and economy. The choice, however, can seem reasonable if we consider the (un)availability of ‘‘good