Primer on Economic Development

Part I, Economic Foundations

(An informal look, with special reference to Portland, Oregon)


Economic development discussions always involve the recruitment of foreign companies and the creation of jobs for a local population.  These topics refer to the region’s external flows: companies and people flowing in and out.  We're concerned about growth inside the region, so why this focus on what’s outside the region?

We will use a thought-experiment to answer this question.  A sealed, closed-loop economy may be possible in principle, with no immigration, emigration, or external trade, and with everyone consuming locally produced goods and services. However, even the population of such a utopia will age.  If they have not had babies in a steady, reliable fashion, labor shortages will ensue.  This disruption to a delicately balanced economy may put it in a fatal tailspin.  

What’s more likely, of course, is that someone will decide to move in or out; it’s a free country, after all.  Or a local will decide he just can’t live without a certain consumer product that’s made only in Hong Kong.  

How to pay the Hong Kong producer for this item?  One answer, often used throughout history, is to export unprocessed natural resources.  This has always resulted in the same outcome: makers of “high value-added” manufactured goods always enjoy such pricing power over natural resource producers that the latter end up impoverished, or colonized.  In the modern world, economic colonization means foreign ownership of landmark buildings and resorts, and the snapping up of homegrown businesses by outside concerns.  (This is why there are no corporate headquarters to speak of in Oregon.)

Wealth could increase in a closed-loop economy, as local innovations augment the productivity of local enterprises.  (Closed-loop does not necessarily mean “subsistence.”)  In this case, cash or local manufactured goods can be exchanged for manufactured goods from Hong Kong once external trade commences.  But Hong Kong and other regions can innovate as rapidly as our utopia, or more so, meaning that the race to innovate has been joined.  The more innovative the region, the more its value-added exports are valued by foreigners. More export revenue accrues to the region, increasing the region’s ability to import nifty goods, support local social services and develop local infrastructure.

This is why economic development officials emphasize growing jobs in the export sector. (Low labor cost can substitute for innovation, for a while, but not in Portland.  The U.S. is a low-wage country compared to Sweden or Germany, but sky-high in cost compared to China, and Oregon has a higher minimum wage than many other states.  Advantage can also be maintained in the short run by having an over-valued currency.  Only nations, though, can revalue their currency - not states or municipalities.)

In the modern world of taxation, only very rich closed economies would have even a snowball’s chance of maintaining their isolation.  They cannot circulate the same dollar indefinitely in the local region.  In fact, if the federal and state tax rates sum to 33%, the dollar can only circulate three times before it’s all gone.  (That math is not quite right, but it’s not far wrong.)  Economies close to subsistence (read Nichols’ The Milagro Beanfield War) can be stable for centuries, but inevitably succumb to colonization when taxed.  If, that is, the tax dollars do not come back to the region through federal programs and rebates.  Capturing those programs can be an essential part of an economic development program.

Milagro Beanfield War is set in New Mexico.  New Mexico has enjoyed local federal expenditure far in excess of the taxes it has sent to Washington.  This is because of the huge federal laboratories at Sandia and Los Alamos.  The labs, of course, do not employ many former subsistence farmers, but hire highly educated scientists.  Wealth “trickles down,” but New Mexico has a very skewed income distribution - that is, much income inequality.  The state’s population is not of a revolutionary temperament.  But where similar economic conditions exist in Africa and the Middle East, there is violence in the streets.  (New Mexico is similar to Oregon in that it has a tiny population and a huge land area, and half the population is concentrated in/near one city.  Significantly, though, Oregon has no large federal laboratories or military installations.)  It is generally believed that social stability is served by a less-skewed income distribution, and this is why, for example, many politicians have striven to create a Mexican middle class near the U.S. border.

Income inequality can be ameliorated by redistribution, i.e., taxing the rich to feed the poor. This does not seem to be popular with Oregonians; we have a Sizemore but no Robin Hood.  In any case, redistribution reduces the economic surpluses that are available for investment in innovation.  Moreover, additional unemployed individuals are free to move to Oregon, and a new round of redistribution would be needed, and the economy would spiral downward.  

Huge income inequality on the one hand, and radical redistribution on the other are both unattractive and unstable. A more palatable path is that of opportunity: a socio-economic mobility that gives the less skilled/favored a chance to gather education, training, and wealth.  Ideally, the upwardly mobile feel they have a stake in the social order, and in moving up the economic scale, they make room for other ambitious immigrants.  Immigrants may come to Portland with or without a job.  Unemployed arrivals can either increase Portland’s wealth by filling a labor shortage, or decrease it by demanding social services, or both.

Educated in-migrants, of which Portland attracts many, may start their own businesses, resulting in job growth.  We must, though, recognize the difference between a small businessperson and a true entrepreneur.  Conventional small businesses cut the existing economic pie into smaller pieces, sending that ever-diminishing dollar round and round. Entrepreneurs innovate (products, services, manufacturing methods, or business processes), thus making the whole pie bigger, via increased productivity and via increased exports.  (Footnote: A new small business that does not innovate - say, a convenient dry-cleaning outlet - can still enhance the community’s productivity by reducing trips and traffic.  After a saturation point, however, one more dry cleaner will do little but reduce the income of the others.)

One problem with defining economic development involves the idea of “quality of life.”  It would be simpler to exclude this notion from the economic development discussion, and focus only on what can be measured by numbers of jobs and dollars.  However, let us first look at the maquiladoras on the Mexican border.  These companies offer mainly low-paying jobs that are attractive only to single people. Young singles migrate from hinterland villages, send most of their wages home, and return home with their savings after they’ve socked away enough to get married.  None of those wages, except for food and rent, are spent in the border towns, and it shows in the towns’ substandard infrastructure.  Criminals prey on these youngsters who do not enjoy the close protection of their families.

If the quality of life were better in Laredo and Matamoros, if there were public investment in infrastructure and private companies offering “family-wage” jobs, families would come to those towns and stay, and in a feedback process, the local economy and society would become ever more attractive.  Giving locals a reason to spend locally is good.  Reducing outward cash remittances is almost as good as reducing imports, and that is almost as good as increasing exports.

Thus, sustainability is not a new-age notion at all. Exports of value-added goods and services sustain a region.  Every region needs its own export strategy. Japan has concentrated on goods, sending us cars and electronics; Switzerland on services, re-insuring our insurance companies and hosting our numbered bank accounts (well, yours, maybe, not mine).  The U.S. has “exported” higher education, attracting the tuition payments of the foreign students who come to America for the best education.

These are the reasons that bringing in wealth from outside the region is the key to every region's economic development strategy.

©2004, General Informatics LLC


Coming next:
Part II, Economic Development Defined
Part III, What is Technology-Based Economic Development?
Part IV, Do Economic Development Programs "Work"?
Part V, Measuring Progress and Success in Economic Development

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